I have no particular sympathy for Governor Chris Christie in his current political travails. But the notion that he or his aides committed a federal crime is ludicrous, and the New Jersey U.S. Attorney's rash public announcement of a criminal investigation is a shameful example of DOJ's continuing politicization. Oh, I know, everyone commits a federal crime every single day. It's what makes America great. But I'm talking about a real crime, that a real prosecutor would seriously tackle. Contrast Paul Fishman's aggressive stance with DOJ's spectacular non-reaction to the fraud-induced 2008 financial crisis. How pathetic.
Category: Investigations
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In the current New York Review of Books, Judge Jed Rakoff presents the most thoughtful, balanced analysis I have seen to date regarding DOJ's failure to prosecute high-level executives at elite financial institutions in connection with the recent financial crisis. Appropriately entitled, The Financial Crisis: Why Have No High Level Executives Been Prosecuted?, Judge Rakoff is careful not to point fingers, rush to judgment, or even allege that fraud has definitively been established. And that's a big part of the DOJ's problem. How can you establish fraud if the effort to investigate it has been haphazard and understaffed from the outset? Rakoff is someone worth listening to. An unusually thoughtful federal district judge, he has presided over many significant securities and bank fraud cases, served as chief of the Securities Fraud Unit in the SDNY U.S. Attorney's Office, and worked as a defense attorney. Oh yeah. He also hates the Sentencing Guidelines.
Among the many theories Rakoff posits for the failure to prosecute what, it bears repeating, only may have been fraud, are two that I take issue with. These investigations were apparently parceled out to to various OUSA districts, rather than being concentrated in the SDNY. Judge Rakoff believes that the SDNY would have been the more logical choice, as it has more experience in sophisticated fraud investigations. This may be true as a general proposition. But the most plausible historical fraud model for the mortgage meltdown-fueled financial crisis is the Savings & Loan Scandal of the late 1980s, so successfully prosecuted by DOJ into the mid-1990s. The SDNY had very little of that action.
Judge Rakoff also notes the government's role in creating the conditions that led to the current crisis as a potential prosecution pitfall. But this did not stop the S&L prosecutors from forging ahead in their cases. Back then, virtually every S&L criminal defendant claimed that the government had created that crisis by establishing, and then abandoning, Regulatory Accounting Principles, aka RAP. (One marked difference between the two scandals is that the S&L Scandal was immediately met with public outrage and a sustained Executive Branch commitment to investigate and prosecute where warranted. The sustained Executive Branch commitment has not happened this time around, for whatever reason.)
But these are minor quibbles and Judge Rakoff is spot on in most of his observations.
Judge Rakoff is right to reject the "revolving door" theory of non-prosecution. Any prosecutor worth his salt would love to make a name for himself, and would definitely enhance his private sector marketability, by winning one of these cases. Judge Rakoff also correctly notes that these cases are hard and time-consuming to investigate.
The judge's most salient point has nothing to do with the various theories for DOJ's failure to prosecute. Instead, it is his observation that there is no substitute for holding financial elites responsible for their major criminal misdeeds. The compliance and deferred prosecution agreements favored today are simply a cost of doing business for most big corporations. What's worse, in the current environment, DOJ is giving a walk to elite financial actors and simultaneously prosecuting middle-class pikers with a vengeance that is sickening to behold. The elite financial actors may not have committed criminal fraud, but many of them bear heavy responsibility for the ensuing mess. It is so much easier for DOJ to rack up the stats by picking the low hanging fruit.
The one thing Judge Rakoff cannot do, and does not try to do, is answer the question of whether criminal fraud occurred in the highest sectors of our financial world. The answer to that question can only be supplied, at least as an initial matter, by the AUSA in charge of each investigation. And if no prosecution occurs, you and I are unlikely to ever know the reason why.
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Business Week has the story here. Former BDO Seidman CEO Denis Field, represented by Sharon McCarthy of Kostelanetz & Fink LLP, was acquitted on all seven counts he faced. Paul Daugerdas, former head of now-defunct Jenkens & Gilchrist's Chicago office, was convicted on seven of 16 counts. The original convictions against Daugerdas and Field were thrown out by SDNY Judge William Pauley after a juror's misconduct was brought to light.
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We live in an age of massive arrogance, misconduct and lawlessness–individual, governmental and corporate. In the realm of federal criminal investigations, as each new outrage reveals itself, a federal law enforcement flak is trotted out to announce that "this program is entirely legal" or "you can trust us not to abuse our power" or my all-time personal favorite, "we have always done it this way."
"We have always done it this way," is particularly pernicious, because, generally speaking, the longer a practice has been engaged in by law enforcement, the more likely it is to be unlawful. This is because such practices typically begin inside of law enforcement agencies without the benefit of legal advice and review by DOJ prosecutors. The prosecutors find out about these practices in after-the-fact, incremental, and desultory fashion and often do not pay attention to, or care about, the unconstitutional or improper nature of said practices.
"We have always done it this way," as an excuse for impropriety, can also be false. What is really meant is "we have always done it this way since 9-11, because now we can pretty much do whatever we want." The original Stellar Wind warrantless wiretapping program and various forms of parallel construction are good examples of this phenomenon. These questionable practices go on until some person with integrity, sanity, and authority, a Jack Goldsmith or a Donald Verrelli, steps forward to remind everybody that the emperor has no clothes.
This post will be the first in an occasional series about current improper and/or "worst practices" taking place within federal law enforcement.
One such practice is the composite interview report. Federal law enforcement agents are required to write interview reports of the witness interviews that they conduct. The most common report is the FBI 302. Prosecutors read and rely upon these reports in conducting their investigations. These reports are often handed over to the defense as potential Jencks material (witness statements, usually of a testifying case agent) or Brady/Giglio material (statements containing exculpatory or impeachment information). The vast majority of such reports are records of a particular interview at a particular place and time.
But a composite interview report purports to document several interviews occurring over an extended time period. A key witness might be interviewed six times during the course of a year. The composite interview report memorializes in one document the information obtained in all of the interviews without revealing what particular statement was made in which distinct interview.
What is wrong with this practice? The accused does not get an accurate picture of the interview subject's story as it evolves, which it inevitably does. Take the following example. Jane Doe, a key government witness in a bank fraud prosecution, is interviewed nine times between 2007 and 2009. The 16-page composite interview report presents an overall narrative of what Jane allegedly told the agents. According to the composite interview report, Jane said that the defendant told her in 2006: "I am scared about the government's investigation. I don't look good in stripes."
The problem is that Jane did not reveal this tidbit until the seventh government interview. That Jane sat through six government interviews without revealing this highly incriminating statement by the defendant says a lot about her credibility. A good defense attorney will have a field day with this information on cross. But the defense attorney does not know about this information because the composite interview report will not pinpoint when Jane revealed the defendant's bombshell admission. The Giglio material gets hidden through the format of the composite report.
Assume further that Jane's seventh interview occurs two weeks before the new bank managers are about to announce a major layoff. These same managers are cooperating closely, and regularly, with the FBI and FDIC in an effort to avoid having the bank shut down. Perhaps Jane is becoming a better witness, because she wants to become indispensable to the FBI and have the agents put in a good word for her with bank officials. A composite interview report will reveal nothing about the crucial timing of Jane's key disclosure.
In the above hypothetical, the prosecutor is still duty bound to reveal that Jane did not remember the defendant's admission until her seventh interview. Why? Because the tardy nature of Jane's revelation weakens her credibiltiy as a witness and is therefore impeaching and exculpatory. But what if the prosecutor does not know the precise timing of Jane's bombshell, because he is only looking at a composite report? Or, what if the prosecutor participated in the interview, but does not remember or focus on the tardiness of Jane's recollection, because he is only reviewing the composite report? What happens is that the material exculpatory information gets buried–a constitutional violation.
In reality, the prosecutor may be directing the agents to file a composite report for the precise purpose of limiting exculpatory disclosures. Hiding exculpatory evidence seems to me to be the whole point of the composite interview report. Even if he is not explicitly directing the agents to create a composite 302, the prosecutor implicitly ratifies the composite 302 by tolerating its creation. Any AUSA worth his salt will have no problem directing the case agent to prepare individual interview reports of each interview session. The case agent does not technically work for the prosecutor, but as a practical matter he takes orders from the prosecutor regarding the conduct of the investigation. As an AUSA, I would have never tolerated a composite 302, as described above, for one moment.
Of course, case agents usually take handwritten notes of each interview report. Why can't the prosecutor solve his Brady/Giglio composite interview problem by reviewing these notes and turning over any Brady/Giglio materials to the defense? Because prosecutors rarely do this. Most of them are under the incorrect impression that handwritten interview reports never need to be turned over to the defense once they are "incorporated" into a final 302. But this is only true if the final interview report includes the Brady/Giglio material contained in the rough interview notes. And the composite interview reports that we have been discussing, by their very nature, hide Brady/Giglio material.
Many prosecutors never even review agent interview notes, simply assuming that the agents will transfer all relevant information from the notes to the final interview report. But agents are not trained or programmed to decipher exculpatory information. Some piece of information that is unimportant to the agent, might be critical to the seasoned criminal defense attorney. For example, the timing of Jane Doe's recollection in relation to her fear of an impending layoff, and the significance of that timing, is not likely to even register with the typical case agent or federal prosecutor. They are simply not hard-wired to look for such impeaching information, and would in all sincerity be shocked to be accused of hiding it. This professional myopia would not be a problem, in our hypothetical case, if there were nine interview reports for Jane Doe's nine interviews. The diligent defense attorney would have learned about the proposed layoff through case investigation and would immediately recognize the added potential significance of Jane Doe's belated bombshell. She not only forgot about the defendant's supposed confession through the first six interviews, but conveniently remembered it in time to help stave off her forced retirement. All of this is lost, if her interviews are compressed into a composite 302 that does not account for the nuanced changes in Jane's story from interview to interview.
When you step back and think about it, in addition to all of its other problems, the type of composite interview report that I have been discussing is an inherently false and artificial document. It is not in fact a report of a law enforcement interview. It is a narrative report of several different interviews that distorts those individual interviews by failing to identify what was asked and what was said in each particular interview session.
The composite interview report as I have described it is a sham and a disgrace. No ethical prosecutor should tolerate it. No ethical FBI SAC should tolerate it. James Comey should not tolerate it. Astonishingly, current FBI policy does not explicitly prohibit the use of composite interview reports. This must change.
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According to the New York Times (Deal Book), the Federal Housing Finance Agency has announced its own $4 billion dollar settlement with JPMorgan Chase, covering the bank's sale of mortgage-backed securities to Fannie Mae and Freddie Mac in the period (2005-2007) leading up to the financial crisis. FHFA's original suit alleged that JPMorgan Chase, and predecessor entities Bear Stearns and WAMU, sold mortgage-backed securities to Fannie and Freddie without sufficiently full disclosure of their risky nature. This FHFA settlement was supposed to be part of the broader $13 billion dollar tentative settlement that has been the subject of so much public speculation in the past week. Apparently FHFA got tired of waiting for the broader deal to be finalized. Here is the signed settlement agreement and FHFA press release, posted on FHFA's web site. Under the terms of this particular settlement agreement, JPMorgan Chase pointedly does NOT admit "any liability or wrongdoing whatsoever, including, but not limited to, any liability or wrongdoing with respect to any of the allegations that were or could have been raised in the Actions." Further, "[t]he Parties agree that this Agreement is the result of a compromise within the provisions of the Federal Rules of Evidence, and any similar statutes or rules, and shall not be used or admitted in any proceeding for any purpose including, but not limited to, as evidence of liability or wrongdoing by any JPMorgan Defendant." Deal Book reports that the broader non-FHFA portion of the $13 billion tentative settlement includes fine payments "to prosecutors in California." I had not heard this before today. Hard to believe that any fines will be paid to prosecutors by JPMorgan Chase unless such fines are part of a final agreement to shut down the ongoing federal criminal investigation being run out of California.
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This story just in from the Wall Street Journal (subscription required).
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The DOJ issued a press release today telling of "a program that will encourage Swiss banks to cooperate in the department's ongoing investigations of the use of foreign bank accounts to commit tax evasion." The release also notes that "Switzerland will encourage its banks to participate in the program." A joint statement was agreed upon by the DOJ and Swiss Federal Department of Finance." (see here). The program excludes those presently under investigation. It offers others a non-prosecution agreement under a list of terms that include, "cooperat[ion] in treaty requests for account information," "agree to pay substantial penalties," and "make a complete disclsure of their cross-border activitites." The press release notes that
"banks seeking a non-prosecution agreement must agree to a penalty in an amount equal to 20 percent of the maximum aggregate dollar value of all non-disclosed U.S. accounts that were held by the bank on Aug.1, 2008. The penalty amount will increase to 30 percent for secret accounts that were opened after that date but before the end of February 2009 and to 50 percent for secret accounts opened later than that."
It will be interesting to see how many banks come forward to obtain a non-prosecution agreement. And if they do, will the disclosures result in tax prosecutions of individuals within the U.S.
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FBI Special Agent Reginald Reyes' affidavit supporting DOJ's search warrant application for Fox News Reporter James Rosen's Google email account was ordered unsealed in November 2011. But it wasn't actually unsealed by the DC U.S. District Court's staff until late May of 2013. In other words, the affidavit was only unsealed several days after AG Holder testified that, "[w]ith regard to potential prosecution of the press for the disclosure of material, that is not something that I have ever been involved in, heard of, or would think would be a wise policy." Once the affidavit and search warrant application were unsealed, it became clear that Holder's testimony was inacurrate, as he had personally authorized the search warrant application. See here for yesterday's post on this issue.
DC Chief Judge Royce Lamberth is not happy about his staff's failure to unseal the affidavit and related documents. Here is Chief Judge Royce Lamberth's 5-23-2013 Order expressing his unhappiness.
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“Well, I would say this. With regard to potential prosecution of the press for the disclosure of material, that is not something that I have ever been involved in, heard of, or would think would be a wise policy.” Attorney General Eric Holder testifying under oath before the House Judiciary Committee on May 15, 2013.
"For the reasons set forth below, I believe there is probable cause to conclude that the contents of the wire and electronic communications pertaining to SUBJECT ACCOUNT, are evidence, fruits and instrumentalities of criminal violations of 18 U.S.C. [Section] 793 (Unauthorized Disclosure of National Defense Information), and that there is probable cause to believe that the Reporter has committed or is committing a violation of section 793(d), as an aider and abettor and/or co-conspirator to which the materials relate." FBI Special Agent Reginald B. Reyes' May 28, 2010, Affidavit in Support of Search Warrant Application for Fox News Chief Washington Correspondent James Rosen's Google email account. The warrant was authorized by Attorney General Holder.
Note than in addition to identifying "the Reporter" as a probable aider, abettor and/or criminal co-conspirator, the affidavit explains that the Department of Justice is not bound by the Privacy Protection Act, otherwise prohibiting warrants for First Amendment work product, precisely because "the Reporter" was "suspected of committing the crime [18 U.S.C. Section 793(d)] under investigation."
There is no doubt that AG Holder gave false testimony to House Members under oath. He is an idiot if he did so intentionally, and he isn't an idiot. What should Holder have done to fix this mess? Corrected the record, of course. In the immortal words of Richard Nixon, "that would have been the easy thing to do."
Holder should have said: "Dear Representatives Goodlatte and Sensenbrenner. I screwed up. My testimony to you is now inoperative. I forgot that I authorized this affidavit, which clearly identifies a 'Reporter' as somebody under investigation for a crime. I did not intentionally try to deceive you. My statement was careless and overbroad. Please accept my apologies."
But the Attorney General apparently cannot not bring himself to do anything as straightforward as that. Instead he spends days sending out spinmeisters, most recently, and regrettably, Deputy Assistant AG Peter Kadzik, as reported here by Sari Horwitz in today's Washington Post.
How sad. Can you imagine anything like this happending under Attorney General Griffin Bell? Bell, a genuine protector of our civil liberties, most likely would have nixed the supboena in the first place. But if Bell had authorized it, he never would have shied away from the ensuing controversy or hidden behind his DOJ underlings.
Mr. Holder has received his fair share of undeserved, demagogic criticism from the kooky right. He deserves what he's getting now.
Here is a copy of the Reyes Affidavit.
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Two news items today highlight that the white collar area continues to be a key component of the criminal justice system. In Atlanta we see a Fulton County Grand Jury issuing indictments for claims that an alleged test cheating scandal involves criminal activity. See Michael Winerip, NYTimes, Former Atlanta Schools Chief Is Charged in Testing Scandal.
And the headline of the Tampa Bay Times is FBI Raid Signals End of Universal – an article describing the FBI raid of Universal Health Care.
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MattBray.net 