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ABA Section of Business Law


Business Law Today

Nobody Looks Good in Orange
Keeping Your Client and Yourself Out of Prison
By Mark Rankin and Thomas Kay
Criminal defense attorneys usually get called in to clean up a mess that's already been created—our client has allegedly committed a crime and has either been charged or soon will be. Often, we would like to say: "You should have called me before you did that—I would have advised you not to do it!" Unfortunately, few make that early phone call to counsel.

As business lawyers, you may not realize the myriad ways in which your clients—and you—can get into serious trouble. And you don't even have to mean to do anything wrong to run afoul of the law (or at least make somebody at the Department of Justice (DOJ) think that you did so).

This all may sound alarmist, but it's true. In recent years, prosecution of white collar crime has increasingly become the focus of the DOJ and its 93 United States Attorneys Offices, often with severe consequences for attorneys and other professionals. For example, Samuel Israel, cofounder of now-defunct hedge fund Bayou Group, received a 20-year sentence for his part in inducing investors to pour over $450 million into Bayou Funds. U.S. District Judge Colleen McMahon stated that Israel's sentence was intended to send a message that "people who commit crimes while wearing a tie do not get a break," but will be "punished severely." "White collar crimes are every bit as heinous, if not more so, than every other type of crime," the judge said.

In August 2005, Chalana McFarland, a now-disbarred closing attorney and first-time offender, received 30 years in prison for her role in a mortgage fraud scheme that netted more than $20 million through inflated mortgages throughout metropolitan Atlanta. McFarland was convicted at trial on 170 counts, including conspiracy, bank fraud, wire fraud, mail fraud, identity theft, fraudulent use of Social Security numbers, money laundering, obstruction of justice, and perjury. U.S. District Judge Thomas W. Thrash Jr. also ordered McFarland to repay nearly $12 million lost by companies and individuals.

Not only has the prosecution of business crime increased, but so have the incidents of lawyers finding themselves charged with federal offenses. An attorney for over 30 years in San Francisco, Nikolai Tehin received a sentence of 170 months for stealing settlement funds his firm received on behalf of clients. He was convicted by a jury in the Northern District of California in October 2005 of six counts of mail fraud and nine counts of money laundering for stealing over $2 million from his clients.

In June 2008, a federal jury in Ohio found attorney Darrell Crosgrove guilty of conspiracy to commit mail fraud, wire fraud, and money laundering. Crosgrove took part in a multimillion-dollar scheme that fraudulently collected fees and membership dues from real estate agents and appraisers with the false promise that they would receive malpractice insurance coverage if they joined the nonprofit Noble Group and American Real Estate Association. Crosgrove faces 12 to 15 years in prison under federal sentencing guidelines and maximum possible sentences of five years for the fraud conviction and 20 years for the money laundering conviction. These days, there can be no mistake that attorneys have a target on their backs.

While prosecutions have steadily increased, sentences in federal white collar criminal cases have skyrocketed in recent years. In 2003, the United States Sentencing Commission significantly increased guideline penalties as directed by the Sarbanes-Oxley Act of 2002 to show support for Congress's efforts to get tough on "corporate crime and serious fraud offenses." Specifically, the commission substantially modified U.S. Sentencing Guidelines Manual (USSG) section 2B1.1, which covers economic crimes such as embezzlement, fraud, deceit, and other forms of theft. To punish and deter offenses with "large scale victimization," section 2B1.1(b)(2) was amended to provide "an additional two level increase, for a total of six levels, if the offense involves 250 or more victims." In response to serious corporate scandals that caused monstrous losses at the beginning of the decade, the commission also expanded the loss table at section 2B1.1(b)(1), which increases sentences significantly. An enhancement of 28 levels for offenses causing losses exceeding $200,000,000 was adopted, while an enhancement of 30 levels was adopted for offenses causing losses exceeding $400,000,000. These enhancements translate to about five additional years behind bars. Enhancements of two to six levels were enacted across the loss table for less substantial losses. The Sentencing Commission also added section 2B1.1(b)(13), an enhancement which targets officers and directors of publicly traded companies.

The gavel in white collar crimes has clearly morphed into a hammer of epic proportions. Massive corporate scandals causing devastating effects on the American worker and the circus of media coverage have contributed to the cause. This article explores the ways in which business and real estate lawyers and their clients may find themselves in trouble and the various arrows within the DOJ's quiver.

Money Laundering—Not Just for Mobsters Anymore
When representing clients in business and real estate transactions, counsel is often asked to hold funds in escrow or otherwise handle a financial aspect of the business at hand. Seems innocent enough, but in this context an attorney can't be too careful to know exactly what kind of "business" his client is in.

The federal money laundering statutes—18 U.S.C. §§ 1956 and 1957—were designed to attack crime by preventing criminals from enjoying the fruits of their illegal labor. Congress's intent in enacting the money laundering statutes in 1986 was to fill a discrete gap in the criminal law by preventing the hiding and reinvestment of proceeds derived from criminal activity. More specifically, these laws were meant to target drug traffickers and mobsters. Nevertheless, the DOJ increasingly uses the money laundering statutes to prosecute white collar defendants.

The popularity of money laundering charges in business crime cases can be attributed to two things. First, a money laundering conviction under 18 U.S.C. § 1956 carries a maximum sentence of 20 years in prison, three years of supervised release, and a $500,000 fine or twice the value of the laundered funds, whichever is greater. Under USSG § 2S1.1(b)(2)(B), a conviction under § 1956 automatically increases the term of imprisonment applicable to the underlying offense. Each count of money laundering under 18 U.S.C. § 1957 carries a maximum statutory penalty of 10 years in prison, three years of supervised release, and a $500,000 fine or twice the value of the laundered funds, whichever is greater. A conviction under § 1957 also lengthens the prison term under the sentencing guidelines. USSG § 2S1.1(b)(2)(A). And under USSG §§ 2S1.1(b)(2)(A) and § 2B1.1(b)(1), the value of the laundered funds enhances the base offense level and thus greatly increases the prison sentence of defendant if convicted. There are additional enhancements under § 2S1.1 that apply if the court finds that the defendant was in the business of laundering money, involved in other serious crimes, or the offense involved sophisticated laundering. These are considerable sentences given that other criminal statutes popular in white collar prosecutions may carry only a five-year maximum penalty.

Second, money laundering, at least pursuant to § 1957, is relatively easy to prove in the business context. The defendant need only have conducted a financial transaction with funds that he or she knew were the proceeds of criminal activity. The value of the criminally derived property must be greater than $10,000, and the monetary transaction must occur within the United States or outside the United States by a U.S. person. Section 1957 permits the government to bring money laundering charges that it otherwise could not under § 1956 because there is "no intent to promote" or "knowledge of a design to conceal" element incorporated into § 1957. A simple bank deposit, or moving funds from one banking institution to another, is sufficient for a § 1957 money laundering conviction. It is really that simple.

The lesson: be careful handling clients' money and facilitating business transactions. Understand your client's business and the transaction at issue in your representation. It is not enough to stick your head in the sand when you suspect something is awry, as "deliberate ignorance" (or "willful blindness") makes you guilty as charged. Consider the classic jury instruction in this area:

One with a deliberate antisocial purpose in mind . . . may deliberately 'shut his eyes' to avoid knowing what would otherwise be obvious to view. In such cases, so far as criminal law is concerned, the person acts at his peril in this regard, and is treated as having 'knowledge' of the facts as they are ultimately discovered to be.
United States v. Jewell, 532 F.2d 697, 700 (9th Cir. 1976) (quoting R. PERKIN, CRIMINAL LAW 776 (2d ed. 1969)).

Mail and Wire Fraud—A Wide Net
"Money makes the world go 'round," as they say—but mail, e-mail, wire transfers, and FedEx packages keep the business world spinning and business and real estate lawyers steadily employed. Without much thinking about it, lawyers set into motion a flurry of mail and wire activity in representing their clients. This is yet another reason to make it your business to know your clients' business.

Few laws cast a wider net upon the business world than the federal mail and wire fraud statutes, which can be found at 18 U.S.C. §§ 1341 and 2510. Mail fraud, for example, essentially only requires that there have been a fraud and a mailing. The mailing must only loosely relate to the fraud—e.g., the fraud does not have to depend upon the mail for success. Nor does the defendant have to actually do the mailing—it just has to happen at some point, even after the fraud is complete. Prosecutorial and judicial expansion of the statute has almost reached the point that one could be guilty of mail fraud by merely passing by a mailbox on the way to commit the fraud. And there are perhaps no nonviolent federal crimes with penalties so severe. Mail fraud and wire fraud carry a maximum statutory penalty of 20 years imprisonment and a fine of $250,000, or both. The same principles and penalties apply to wire fraud, only the jurisdictional hook is the use of telephone, Internet, or bank wire facilities.

For multiple acts of fraud, the government may bring charges under the Racketeer Influenced and Corrupt Organizations Act (RICO). RICO, 18 U.S.C. §§ 1961, et seq., was enacted by Congress in an effort to target organized crime. Like many federal criminal statutes, courts have since approved of the government's use of this law to go after everyone from drug dealers to lawyers.

The point is this—on a daily basis, business attorneys and their clients are responsible for numerous mailings, e-mails, and electronic funds transfers. If the client's activities are fraudulent, each such instance is a federal crime that may land your client—and you—on the wrong side of a federal indictment.

False Statements and Cover-ups
Once federal agents are on a trail, they will begin interviewing witnesses. Naturally, when two guys in blue suits and red ties show up flashing badges, people understandably get nervous. The key is to understand how things can go wrong—and that you, as the attorney, will likely be interviewed.

18 U.S.C. § 1001 makes it a federal crime to "knowingly and willfully" falsify, conceal, or cover up a material fact, make a materially false statement, or make or use a false writing or document knowing the same. This statute is broadly worded. It is generally used against people who lie to federal investigators or who file false documents with government agencies. Making a false statement carries a maximum statutory penalty of five years imprisonment and a fine of $250,000, or both. I. Lewis "Scooter" Libby Jr., the former chief of staff to Vice President Dick Cheney, is the highest profile example of someone convicted of this offense in the last couple of years. Libby was convicted of four felony counts, including making a false statement to the Federal Bureau of Investigation (FBI), in March 2007. Martha Stewart famously found herself in federal hot water for the same offense.

The point is that it is a federal crime to simply make a single false statement to the government, e.g., the investigating law enforcement or regulatory agent. Even if you and your client have done nothing wrong, the false statement itself may form the basis of a criminal charge. Martha Stewart and Scooter Libby learned this the hard way. A few important lessons can be learned from the mistakes of others.

First lesson: advise your clients that they should consult an attorney before answering any questions from law enforcement. People think that they can talk themselves out of trouble—but rarely succeed. Most of our clients are smart—or think they're smart—and therefore truly believe that they can talk themselves out of anything. Instead, they usually only succeed at getting themselves into deeper hot water and provide the government with the information it needs to prosecute. Moreover, many facts are open to interpretation or subject to lapses in memory. By answering questions under the stress of a surprise visit from the FBI or Securities Exchange Commission, your client may simply get it wrong—and be accused instead of lying.

Second lesson: follow this advice yourself.

Third, if your clients decide that speaking with law enforcement or prosecutors is in their best interest, make sure they do so with counsel present. As their counsel, one of your top priorities before a sit-down is to find out the government's position as to your client's role in the investigatory matter. Is the client being viewed merely as an information witness or a target? Investigators are not necessarily going to provide this information. However, communications between investigators and counsel and counsel and client often shed light on whether or not the client is in the spotlight.

Fourth, the client needs to know whom he or she is doing business with on daily basis. If something appears suspicious, the client needs to address any suspicions and follow up with counsel. The client needs to understand the proverbial ostrich with its head in the sand is no defense against many federal regulations.

Finally, refraining from a transaction and informing the authorities when a red flag arises, spares headaches and possibly criminal charges.

Conclusion
The practice of law is fraught with dangers big and small. We all concentrate on providing the best representation possible for our clients, while at the same time juggling family, bar and civic activities, and the business of running a law practice. In the times of Enron and WorldCom, and astronomical sentences for white collar offenders and their counsel, making sure that we and our clients do not get into criminal legal trouble should be added to all of our to-do lists. So, keep your eyes open to your clients' business and how you assist in the cause, lest you both find yourselves in the Feds' crosshairs.

Rankin is an associate at Carlton Fields in Tampa, Florida. His e-mail is mrankin@carltonfields.co. Kay is an associate at Jung & Sisco, P.A., in Tampa. His e-mail is tkay@jungandsisco.com.

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