ABA Section of Business Law
ABA Section of Business Law
Business Law Today
May/June 1998
Mr. Corporate in a pinstriped suit — almost
OK, maybe the stripe could be a little different for your unwary business client
By FRANK C. RAZZANO and ERIC BENSKY
Razzano, a partner at Dickstein Shapiro Morin & Oshinsky LLP in Washington, is chair of the Criminal Laws Committee of the Business Law Section. Bensky is an associate at the same firm.
Most business lawyers deal in the rarefied atmospheres of mahogany conference rooms and walnut-paneled offices advising clients on the legal and tax ramifications of important business deals. They represent the movers and shakers of our society — men and women of talent and status. Rarely do they or their clients enter the tawdry realm of criminal courtrooms, probation offices and prisons. However, with increased criminal prosecution of white-collar crime, it is inevitable that at least one or more clients during the course of a career will have the trappings of position, class and prestige dismantled by a grand jury investigation or a criminal prosecution. Therefore, it is essential that the business lawyer understand which scenarios may lay his or her clients low and when to refer them to a criminal lawyer. Here are 10 common situations that may place your armor-plated clients in the dock:
Insider trading — Your most important client invites you to a lavish dinner party to celebrate his recent good fortune. He just made a quarter-million-dollar windfall trading the stock of a recently taken-over company. You ask about his good luck, and he explains that, while you were in the office last Saturday, he was on the golf course. On the eighth hole, a club member told him that his company was about to be acquired in a friendly tender offer that had not yet been announced, and that he would be receiving a "golden parachute," which would allow him to retire in Palm Springs and play golf every day.
First, tell your client to cancel the party and to keep his mouth shut because he has serious exposure to criminal liability for trading on inside information. He will argue that he did nothing illegal and that you're just trying to rain on his parade. After all, he didn't bribe anyone to get the information or steal it from confidential files. He merely acted on idle conversation during a friendly game of golf.
You might try explaining that insiders, like his golfing buddy, are forbidden by their fiduciary relationship from personally using undisclosed corporate information. Nor may they give such information to an outsider, such as your client, to exploit for personal gain. An outsider who acquires inside information that he knows or should know has been made available in breach of a fiduciary duty assumes the same duty to the shareholders as the insider owes, that is, to disclose or abstain from trading. Your client will argue that is just legalese and that his golfing partner breached no duty. After all, it was just idle conversation, and his golfing partner gained nothing from disclosing the information. You should explain that whether his golfing partner directly benefited is not necessarily determinative. If a trier of fact finds that the insider's purpose was to make a gift of valuable information, then he breached a fiduciary duty. Thus, your client's career, all his worldly possessions, and his liberty now ride on how a trier of fact views that conversation. Was the insider motivated by a desire to benefit your client or was he just bragging?
Does your client think a jury will have any sympathy for him? He knew his friend was boasting and shouldn't have been talking about the matter. He knew or should have known that the information was confidential. Yet, he acted on that information to benefit himself. Finally, tell your client that, even if he is not found liable for insider trading under SEC Rule 10b-5, because his friend merely breached a confidence and not a fiduciary duty, he still faces prosecution under Rule 14e-3, which outlaws trading without disclosure while in possession of material information known to be nonpublic and derived from an officer, director, partner or employee of a bidder or target of a tender offer.
At some point, your desperate client will interrupt and say that the government would have little interest in prosecuting him. After all, he pays his taxes, he has a wife, a family and a dog. He is not a criminal! Explain that, until last summer, the parameters of insider trading had not been fully defined by the courts. Nevertheless, during the 1980s, 98 people were prosecuted for insider trading in New York City alone. When he claims that they were all Wall Street professionals, say that the list includes a dentist, an engineer, a cab driver, a receptionist, a newspaper reporter, a former secretary of the Air Force, a policeman, a broadcaster, a psychiatrist and proofreaders. Finally, explain that, even if he avoids criminal prosecution, he faces the prospect of a long SEC investigation, and possibly a civil enforcement action seeking not only the return of the money he made, but treble damages. Conclude your conversation by referring him to a criminal defense lawyer with experience in these matters.
Currency transactions — Your client calls and says that she has received a certified letter informing her that she is being audited by the Internal Revenue Service. You ask whether there is any cause for concern. She says no: She reports all her income and her deductions are legitimate. She reminds you, however, that she and her husband, who have since reconciled, were having marital troubles about five years earlier. To create a nest egg in case of a divorce, she took several trips during which she deposited a total of $60,000 in after-tax dollars into a Swiss bank account. She tried to keep each deposit below the $10,000 reporting requirement, but was not always successful. You then ask if she reported the foreign bank account on her tax returns or if she filed any currency reports when she took the money out of the country. She says that she did not because reporting the money on her joint return would have alerted her husband to the account, and filing the currency reports would have alerted the IRS to the omission in her tax returns.
When you tell your client to see a criminal lawyer, she protests that the account is unrelated to any criminal conduct. She earned the money lawfully and paid taxes on it. Explain that the Currency and Foreign Transactions Reporting Act requires her to report the movement of $10,000 or more of currency into or out of the United States and to disclose on her federal income tax returns any interest in a foreign financial account. While your client might argue that she only intended to deceive her husband, not the government, acting without any purpose to evade the reporting requirements is not a defense to a currency reporting violation.
Bank fraud — Your client, who recently acquired the local National Hockey League franchise, calls and says that he has received a grand jury subpoena to produce all his financial records, as well as all records relating to the acquisition of the franchise. You ask if he knows what this is. He says no, then pauses and says that a loan officer at the bank that financed the acquisition suggested editing his admittedly impressive financial statements to overcome the loan committee's initial squeamishness about financing the deal. He then recalls that the loan officer was recently dismissed amid accusations that he was accepting money to help borrowers obtain loans. But, your client assures you, he never gave the loan officer a penny.
When you give him the name of criminal defense counsel, your client will undoubtedly say: "There you go again being a nervous Nellie. If I had your attitude, I'd still be selling vacuum cleaners door to door." He will insist that the bank will not lose any money and that the loan is fully collateralized. He also will tell you that the bank would have made the loan without his fluffing up the financials, and, in any event, the loan officer knew about it. Being as patient as you can, try to explain that lack of loss is irrelevant to a prosecution under 18 U.S.C. § 1014 for making false statements for the purpose of influencing any action by a federally insured institution. Whether the bank was actually influenced by the fluff and whether the loan officer knew about it are irrelevant as well.
When he argues that the Department of Justice wouldn't prosecute such a case, tell him that whether to prosecute is discretionary and his life now hinges on whether he meets a sympathetic hockey fan who likes his stewardship of the team or a mad dog prosecutor who is looking to make a name for himself. Health-care fraud — You get a call from your friend, the doctor down the street, who tells you that she has received a grand jury subpoena. She brings it over and you see that it orders her to produce all records of patients she has referred for MRI tests at a diagnostic facility where she holds a limited partnership interest that she received for referring patients to the facility.
Your friend will blanche when you tell her that accepting the limited partnership interest has probably exposed her to charges of violating the Medicaid/Medicare Anti-Kickback statute, the mail fraud and wire fraud statutes, and even the money-laundering statute.
As your friend sees her life pass before her, you must explain that she not only faces a trial and jail sentence if convicted, but that she may also lose her medical license. Even if she does not lose her license, or if it is reinstated after a period of time, she still faces mandatory exclusion from Medicare or state health programs because she received payment for referrals. In the world of medicine today, such a ban is an economic death sentence.
Mail fraud — You have worked extensively in the past with one of the wealthiest proxy solicitors in the United States. He calls and you expect another fine lunch at Spaggo's. Instead, he tells you that he is being investigated by the U.S. attorney's office for inflating time charges on client bills. He says he is outraged by the investigation because his clients knew the time charges were not intended to be accurate. They insisted on time-based rather than flat fees in order to show shareholders that real value was obtained for each dollar. His clients will testify that they gladly would have paid a flat fee in the same amount. Therefore, they really lost nothing and there was no fraud.
Such rationalizations are common among white-collar criminals, who cannot face the reality that they have violated one of the most ancient commandments — "thou shalt not steal." Ask your client why it was necessary to shroud his fees in a cloak of inflated time charges. When he says it was just to mollify the shareholders, ask him if he thinks it is all right to deprive shareholders of material knowledge by misrepresenting the nature of transactions.
The U.S. attorney's office will assert that his actions denied shareholders of the "right to control" how corporate assets are spent, a recognized property right under the mail fraud statute, as well as of the right to monitor and police the behavior of the corporation and its officers. If a jury agrees, then you and your client both might need to wait a while for your next expensive lunch together.
False statement — While sitting at home having a lovely dinner with your spouse, an FBI agent knocks on the door and inquires about a former associate who has applied for a position at the Department of the Treasury. Your firm had terminated the associate four years earlier because it suspected him of stealing $15,000, although the firm never reported the matter to the state bar or the state authorities. Not want-ing to hurt the associate (or to subject yourself to any charges of slander), you avoid telling the FBI agent about the incident and give the former associate a generally good review.
Believe it or not, your benign motives may subject you to federal prosecution. Under 18 U.S.C. § 1001, anyone who, "within the jurisdiction of the executive, legislative or judicial branch of the government of the United States, knowingly and willfully . . . makes any materially false, fictitious or fraudulent statement or representation" can be imprisoned for up to five years (and fined).
Imagine your horror when, several weeks after your visit from the FBI agent, you bump into one of your former partners, who tells you that he feels bad for having cost the former associate the Treasury job by telling an FBI agent that your firm had fired the applicant because of the theft allegations. Suddenly, your fate may hinge on whether federal prosecutors wish to come after you for having misled the FBI (thereby needlessly prolonging its investigation into the applicant's background). If they do, several seemingly mitigating factors will not help you. For example, although you made your comments during an informal discussion, most courts have long held that even unsworn oral statements can ground liability under Section 1001. Nor does it matter that the government did not hire the applicant despite your comments. The statute does not require the government to have been defrauded or to have suffered any financial loss.
Therefore, actual reliance is not necessary so long as the statements had the capacity to influence a determination that needed to be made. Your positive review likely meets that test, particularly in light of the fact that the government decided not to hire the applicant after speaking with your more candid former partner.
Bribery — A rural district in your state has very few doctors. As a consequence, foreign medical school graduates may practice under temporary permits while studying for the state licensing exam. The state legislator who represents this rural area introduces legislation that would grant the foreign doctors permanent medical licenses. When the legislator stands for reelection, he approaches a lobbyist for the foreign doctors and explains that his reelection campaign is expensive, and that he hasn't heard from the doctors. He shows the lobbyist documents showing his campaign debts and says: "I've promised to help you. I'm gonna work to do that. You understand what I mean." The doctors subsequently contribute $30,000 to the legislator's campaign. After his reelection, legislation granting the foreign doctors permanent licences is enacted. Now, a grand jury has begun an investigation of the state legislator for possible violations of the Hobbs Act, which outlaws extortion. The legislator, who comes in to see you, claims that the money was a legitimate campaign contribution that he inadvertently forgot to report on his campaign disclosure forms.
You explain that, while a quid pro quo is necessary for conviction under the Hobbs Act when an official receives a campaign contribution, the government may prove that quid pro quo through evidence that the public official knew the payment was made in return for his official act. A jury may view the legislator's protest that he forgot to report the contribution as an excuse to conceal the contribution's true character — a bribe.
Election-law violations — A client calls and says that she is extremely enthusiastic about a candidate for the U.S. Senate whom she thinks will be great for the state. She explains that, in order to get around the silly election-contribution limits, she has given $1,000 bonuses to 10 of her employees on the express understanding that they, in turn, will make $1,000 contributions to the candidate's campaign. After politely suggesting that the client take you off the speaker phone, you advise her to retain counsel who has practiced before the Federal Election Commission (F.E.C.) and who, therefore, hopefully will know how to head off future criminal charges. You explain that one can be held criminally liable for making contributions in excess of $1,000 in any one year to a U.S. presidential or congressional candidate. Then, before your client can protest that she only contributed $1,000 in her name, you add that the $1,000 ceiling includes contributions that one indirectly makes through intermediaries, such as your client's employees. Moreover, the contributions need not even go to the candidate directly; checks written to, for example, the marketing firm that produces the campaign ads would suffice. To make matters worse, because one also may not contribute campaign funds in the name of another person, your client could be charged with that offense as well.
Your client, no longer focusing on the outcome of the Senate race, asks whether she should be concerned about the fact that she arranged for similar contributions to the same candidate when she ran for Congress four years earlier. Her initial relief on hearing you say that the election laws are subject to a three-year statute of limitations quickly vanishes when you add that the government still could prosecute her under either the conspiracy or false statement statutes, both of which are subject to a five-year limitation period.
For example, because the candidate's campaign treasurer must report the source of all contributions to the F.E.C., and because your client's scheme caused a portion of the treasurer's reports to be false, the government could convict her of aiding and abetting a false statement to the F.E.C. if it proves that she knew of the treasurer's reporting obligations, attempted to frustrate those obligations, and knew that her conduct was unlawful. Worse yet, the false-statement provision carries a greater maximum penalty than the election law statute does, and the government can choose which statutory scheme it wishes to use.
Conspiracy — The president and sole owner of a local construction company comes in and says that, unbeknownst to him, two of his vice presidents conspired to bribe a government official in order to obtain a contract. While he had no knowledge of the bribe, he is worried because he recalls that, one day when he was walking down the hallway, he stuck his head into one of the vice president's offices, where the contracting official happened to be seated. He recalls the vice president saying: "John, meet Joe from the Defense Department. He is the guy I gave that thing to." At the time, the president didn't know what "that thing" was, and he merely passed off the remark because he was busy. He now wants to know whether that remark could implicate him in a crime.
You start by explaining that Judge Learned Hand described conspiracy as the "darling of the modern prosecutor's nursery." A conspiracy is an agreement to accomplish a criminal objective. But the agreement need not be express, and the government can establish its existence from the defendant's words and actions and from the interdependence of the activities and persons involved. In other words, a jury can infer a conspiratorial agreement from circumstantial evidence, such as the vice president's remark. While the president will argue that the remark meant nothing to him, some courts have upheld convictions based on "slight evidence" connecting a defendant to a conspiracy.
You then explain the invidious nature of modern criminal prosecutions. They rely on informers who trade their freedom for information about other people's roles in either the crime for which they are being prosecuted or other criminal activity. So, what your client has to fear most is that the vice president will fabricate a story about his participation in the crime. While your client may protest his innocence, if one of the vice presidents trades him for a reduced sentence, there may be little anyone can do to help. Tax evasions — A client comes in seeking tax advice. Over the past few years, it seems he has been living the high life and spending every dollar he received. While he always filed accurate tax returns, he never paid the taxes that he owed. As a result, the IRS placed a levy on his assets to recover the unpaid taxes. In response, he ceased using his personal bank accounts and instead deposited and withdrew money from his wife's account and his business account. While he wants to settle up with the IRS, he recently learned that it has referred the matter for criminal prosecution.
Section 7201 of the Internal Revenue Code imposes criminal liability on proof of an existing tax deficiency, an affirmative act constituting an attempt to evade or defeat payment of the tax, and willfulness. You must tell the client that his use of his wife's account and his business account will be viewed as an attempt to conceal his ability to pay taxes or an attempt to remove assets from the reach of the IRS, which would establish evasion even though he accurately filed and reported his income. While your client may have viewed taxes as just another bill he couldn't pay, the IRS takes a dim view of nonpayers and often acts accordingly.
In short, one easily can imagine encountering one or more of the 10 scenarios described above during the course of a legal career. To be prepared for that occasion (or occasions), even business lawyers should be familiar with these 10 crimes that they or their clients are most likely to be accused of committing.
