Executives at Risk: Fall 2022
White Collar Alert
Executive Summary & Key Takeaways
As the global pandemic subsides and business adjusts to a new normal, we present our Fall 2022 report on significant developments in white collar cases that have impacted corporate executives in recent months. We hope that the developments and analysis presented assist companies and executives in assessing and responding to risk of corporate wrongdoing.
Highlights and key takeaways include:
- In U.S. Department of Justice (DOJ) cartel investigations, there has been an increased focus on localized procurement bid-rigging schemes as larger, cross-border investigations have declined and the Procurement Collusion Strike Force (PCSF) gains steam.
- DOJ has suffered significant defeats in trials against executives in criminal price-fixing cases involving the poultry and labor sectors, which has prompted the Antitrust Division to recalibrate and strengthen its rosters to potentially be more trial ready in 2023.
- There has been heightened focus on holding individuals accountable for corporate wrongdoing by both the DOJ through the new Monaco Memo on corporate enforcement, and by the U.S. Securities & Exchange Commission (SEC), through expanding claw backs of executive pay.
- The Second Circuit dealt a further blow to DOJ's attempts to hold a former Alstom executive liable on Foreign Corrupt Practices Act (FCPA) charges, holding that the government had failed to prove an agency or employee relationship existed between the British citizen and Alstom's U.S. subsidiary because it lacked authority over his employment and compensation.
- The expanding sanctions against Russia following its February 2022 invasion of Ukraine have been followed by additional charges, including against U.S. individuals.
We also report on significant cases involving allegations of prosecutorial overreach, an uptick in extraditions related to cryptocurrency charges, and noteworthy sentencings of corporate executives.
Noteworthy Policy Developments
DOJ's New Corporate Enforcement Guidelines Highlight "Individual Accountability": On September 15, 2022, Deputy Attorney General (DAG) Lisa Monaco issued a memorandum setting out "Further Revisions to Corporate Criminal Enforcement Policies," following on her October 28, 2021 memorandum setting out "initial revisions" to those policies. The Memorandum provides prosecutors handling corporate criminal matters with guidance on several topics, including on "individual accountability." The Memorandum states that the "first priority in corporate criminal matters is to hold accountable the individuals who commit and profit from corporate crime." The guidance describes the importance of timely disclosure by corporations of "facts and evidence about individual misconduct" for corporations to receive cooperation credit. It also states that prosecutors "must strive to complete investigations into individuals—and seek any warranted individual criminal charges—prior to or simultaneously with the entry of a resolution against the corporation." Finally, where investigations in foreign jurisdictions are conducted concurrently with domestic criminal investigations, prosecutors must make a case-specific determination that "there is a significant likelihood that the individual will be subject to effective prosecution" in the foreign country before declining to pursue charges in the U.S. and "should not be deterred" from seeking charges "just because an individual liable for corporate crime is located outside the United States."
By tying individual accountability to a corporation's cooperation credit, the Memorandum exacerbates tension between companies and their executives when it comes to government investigations of corporations. You can read further on the Monaco Memorandum in our recent alert here.
Actions Against Individuals
Cartel & Government Contracts Fraud
Despite Trial Setbacks, Antitrust Division "Won't Back Down" on Cartel Enforcement: The Antitrust Division has suffered significant trial setbacks in several of its major cases this year. In the poultry price-fixing investigation, which we covered in Executives at Risk Summer 2021, a jury acquitted all five individual defendants in United States v. Penn, 1:20-cr-00152 (D. Colo. June 2, 2020) following a five-week trial in Colorado district court that ended in July 2022. This trial came after two trials of 10 individual defendants ended in mistrials. DOJ dropped charges against five of the 10 individual defendants in an effort to improve its chances of victory but still could not secure convictions in the third trial.
The Antitrust Division has likewise suffered trial losses in two of its labor market collusion cases, challenging the Division's untested policy of pursuing these cases criminally. In April 2022, a Texas jury cleared both the owner and the director of a therapist staffing company of all antitrust charges in DOJ's first criminal wage-fixing trial. The jury in United States v. Jindal, 4:20-cr-00358 (E.D. Tex. Dec. 9, 2020) instead convicted the owner, Neeraj Jindal, of the narrow charge of obstruction of justice following an eight-day trial. As previously reported in December 2020, Jindal became the first individual to be charged under the Antitrust Division's new policy of pursuing labor collusion criminally, a theory which has been untested in court until now. Only one day after DOJ's trial loss in Jindal, the Division took another blow when a Colorado jury acquitted a dialysis provider and its CEO of all charges that they conspired with competitors not to hire each other's employees, known as a "no-poach" conspiracy, following a two-week trial.
Despite these trial losses, the Antitrust Division has pledged that it "won't back down" in its efforts to crack down on cartel conduct. Assistant Attorney General (AAG) Kanter stated at a University of Chicago conference in April that "I'm here to declare we are not part of the chickens--t club. . . . We're going to continue to bring the cases. We're not backing down." In September, the Division dismissed charges against two of the five individuals in United States v. Norman W. Fries, Inc., 1:21-cr-00168 (D. Colo. May 19, 2021), a poultry pricing-fixing case based on nearly identical allegations as Penn, in advance of an October 31, 2022 trial date in the same courthouse. DOJ's track record in labor collusion investigations may soon look up – the first individual to plead guilty plea in a no-poach case is expected to enter his plea in January 2023 in United States v. Hee, 2:21-cr-00098 (D. Nev. Mar. 30, 2021).
The Division's renewed commitment to enforcement of cartel laws bears out by the statistics AAG Kanter cited in a September speech. According to Kanter, the Division secured 20 criminal indictments between November 2021 and September 2022 and end 2021 with 146 pending grand jury investigations, the most in 30 years. The Division's efforts to fulfill its self-described "righteous" mission to enforce criminal antitrust laws are also evidenced by the its continued hiring spree, which has resulted in the poaching of at least five partners and a dozen lower-ranked attorneys from big law firms — including Kanter's prior firm, Paul Weiss — since Kanter was nominated in July 2021. This hiring surge suggests that DOJ is ramping up to be trial-ready in 2023.
Procurement Bid-Rigging Charges Pick up Steam but Remain Small and Localized: In 2022, the vast majority of individual charges secured by DOJ's Antitrust Division have involved small-scale, domestic procurement bid-rigging schemes. These bid-rigging charges stem from DOJ's PCSF, which was created in November 2019 and tasked with identifying, investigating, and prosecuting antitrust crimes in the government procurement process. We have reported on the PCSF's actions extensively here, here, here, and here. All told, the PCSF has obtained at least 10 indictments and eight guilty pleas of executives in procurement collusion cases, most recently related to construction, commercial flooring (in McCulloch, Commercial Carpet Consultants, and Watson), small business set-aside, and military vehicle refurbishment contracts (in Leveritt and Stephens) with government agencies. Notably, the Antitrust Division's sole trial victory in 2022 is attributable to the PCSF. In January, a jury convicted a former Contech Engineered Solutions LLC (Contech) executive of conspiring to rig bids and submit false certifications for more than 300 aluminum structure projects for the North Carolina Department of Transportation over a nearly 10-year period. The Contech executive was sentenced to 18 months in prison in September. These charges and convictions suggest the PCSF is gaining momentum and shifting its focus from training government and industry personnel to investigating and indicting suspect antitrust violations.
The Antitrust Division — through the PCSF — has only charged one individual in one cross-border cartel investigation in 2022. In March, two South Korean nationals were indicted for allegedly conspiring to rig bids and fix prices in connection with Department of Defense installations in South Korea. It remains to be seen whether the Division will be able to successfully prosecute these individuals given that they remain abroad and have not voluntarily come to the U.S. to fight the charges. As we have previously reported, the Antitrust Division has not succeeded in securing charges in a major, international investigation since the closure of the global auto parts and LIBOR investigations.
Defense Counsel Challenges Antitrust Division Practice of Interviewing Witnesses Without Counsel: On several occasions over the past couple of years, defense counsel has challenged the Antitrust Division practice to interview witnesses in cartel investigations without counsel present. However, it is not clear that courts generally are receptive to these arguments. In July, James Clayton Pedrick, a cement sales executive indicted in September 2020 for allegedly conspiring to fix prices and rig bids in the ready-mix cement industry, filed a motion to suppress evidence relating to, or in the alternative, to dismiss a separate charge against him for making false statements to government officials. Pedrick argued that the Antitrust Division violated his Fifth Amendment rights when federal agents interviewed him, albeit voluntarily, prior to his indictment without counsel present despite allegedly knowing he was represented in a related civil case. Pedrick's statements during the interview formed the basis of the false statement charges against him. The Antitrust Division opposed the motion, arguing that the "no contact rule" under the rules of professional conduct only applies to contacting individuals whom attorneys know are represented in the specific matter in which the individual is represented by counsel. Because prosecutors had no actual knowledge that Pedrick was represented in the criminal case, as opposed to the related civil qui tam matter, the "no contact rule" did not apply, DOJ argued. The Court has yet to rule on Pedrick's motion.
Similarly, in September 2021, Ryan Hee, the former manager of a healthcare staffing company who was charged in March 2021 with conspiring with competitors to fix wages for nurses and entering "no-poach" agreements, sought to dismiss the indictment against him after learning during discovery that three DOJ prosecutors had listened in to his pre-indictment, voluntary interview with Federal Bureau of Investigations (FBI) agents. After this fact was disclosed, Hee filed a motion to dismiss asserting that he was represented, and therefore, that the DOJ prosecutors had violated his constitutional rights by allowing the FBI agent to interview him without counsel present. The government disagreed, emphasizing in its opposition to the motion to dismiss that the interview was voluntary, and that the prosecutors' involvement — even that which is unknown to the interviewee — did not constitute a violation of their ethical obligations. The Court deferred ruling on the motion to dismiss and ordered an evidentiary hearing to hear testimony from the interviewing agent which, after several continuances, is set for January 20, 2023.
While courts have not yet ruled on the motions in the above-described cases, a court declined to find that DOJ had violated the rules of professional conduct by seeking the interviews of foreign pharmaceutical executives represented by counsel in the generic drug investigation. In July 2021, Glenmark Pharmaceuticals and Teva Pharmaceuticals, pharmaceutical companies charged with fixing prices of generic drugs in July and August 2020, respectively, sought emergency injunctive relief from a Pennsylvania district court on the grounds that the Antitrust Division had improperly used the international treaty process to compel foreign executives to submit to interviews by Indian authorities at the Division's direction and with DOJ prosecutors present. In its brief, Glenmark argued that it had notified DOJ that company counsel represented the foreign executives and DOJ gave Glenmark no notice of the compulsive interviews. The Antitrust Division opposed the motion, arguing that it had no knowledge that the foreign executives were represented at the time that it contacted Indian authorities to seeking to interview the executives, and that it had requested that Indian authorities not proceed with the interviews unless their counsel was present. The Division also disputed that the interviews would be compulsory. The Court ultimately rejected the request to block the taking of non-custodial interviews of the represented executives, in part, because it concluded that the interviews were voluntary.
FCPA, Bribery, and Money Laundering
Second Circuit Upholds Acquittal of Former Alstom Executive After Finding Lack of Agency Relationship: In August, the Second Circuit upheld the acquittal of Lawrence Hoskins on FCPA charges holding that the government failed to prove an agency or employee relationship existed between Hoskins and Alstom's U.S. subsidiary. Hoskins, a British citizen who was employed by Alstom's U.K. subsidiary and worked in France as the Area Senior Vice President for the Asia region, was charged for his involvement in a scheme to bribe Indonesian officials to obtain a $118 million power station contract. As a non-U.S. citizen who was not employed by a U.S. company and did not enter the U.S. during the relevant period, Hoskins was not directly covered by the FCPA. The Second Circuit previously held that Hoskins could not be held liable as a co-conspirator or accomplice, so the DOJ next pursued FCPA charges based on an agency theory. As previously reported, a jury initially convicted Hoskins in November 2019 on both FCPA and money laundering charges, with the FCPA charges based on a finding that Hoskins was an agent of Alstom's U.S. subsidiary. However, the judge did not agree that Hoskins was an agent of Alstom's U.S. subsidiary and entered a judgment of acquittal as to the FCPA charges. On August 12, 2022, the Second Circuit upheld this acquittal. Focusing on the element of control, the Second Circuit found that Alstom's U.S. subsidiary lacked authority over Hoskins's employment and compensation.
The decision limits the DOJ's ability to use agency theory in FCPA cases, particularly with respect to foreign executives. This may encourage the DOJ to rely more heavily on other charges, such as money laundering, when pursuing future cases involving bribery schemes. However, it is unclear how much the Second Circuit's opinion will cause the DOJ's future charging decisions to depart from past practices as the DOJ has long relied on money laundering and other statutes, particularly when it may be difficult to satisfy the jurisdictional requirements of the FCPA.
NGO President and His Assistant Plead Not Guilty to Bribery Charges: In September, Cary Yan, the president of a New York-based non-governmental organization (NGO), and his assistant, Gina Zhou, pleaded not guilty to FCPA, money laundering, and conspiracy charges. The charges were announced days before, on September 2, 2022, when Yan and Zhou were extradited to the U.S. from Thailand. They were initially arrested in Thailand at the request of the U.S. in November 2020 and previously indicted in August 2020, based on allegations that they bribed government officials in the Marshall Islands in exchange for supporting legislation that would create a semi-autonomous region within the Marshall Islands known as the Rongelap Atoll Special Administrative Region. It is alleged that Yan and Zhou planned to use the semi-autonomous region to attract investors to business and development projects that would be operated at least in part through the NGO. The court initially entered a limited unsealing of the indictment, allowing the otherwise sealed indictment to be shared with "foreign and domestic law enforcement and other government authorities" to facilitate the arrest of Yan and Zhou.
Businessman Indicted for Allegedly Bribing Venezuelan Officials to Obtain Inflated Contracts: In August, Rixon Rafael Moreno Oropeza was indicted for his alleged involvement in a scheme to bribe officials at Petropiar, S.A., a joint venture between Petróleos de Venezuela, S.A. (PDVSA), Venezuela's state-owned and state-controlled oil company), and an American oil company. In exchange for the bribes, Moreno allegedly obtained substantially inflated multi-million-dollar procurement contracts with Petropiar. As part of the scheme, Moreno also allegedly paid $1 million to a Venezuelan government official in exchange for installing a specific individual in Petropiar's procurement division, to whom Moreno also later paid bribes in exchange for procurement information and contract assistance. The DOJ claims that Moreno ultimately received over $30 million in proceeds from his Petropiar contracts.
Financial Asset Managers Indicted for Laundering Over $200 Million in Bribery Scheme: In July, Ralph Steinmann and Luis Fernando Vuteff were indicted for allegedly laundering the proceeds of a bribery and currency exchange scheme involving PDVSA. According to the affidavit made in support of the June 12, 2022 criminal complaint, after other individuals paid bribes to Venezuelan officials in exchange for a foreign currency loan contract with PDVSA that allowed those involved to capitalize on a favorable exchange rate, Steinmann and Vuteff were retained to launder the bribery proceeds and open accounts for at least two Venezuelan officials to facilitate the transfer of funds. As noted in the DOJ's press release, Steinmann and Vuteff allegedly laundered more than $200 million in the scheme, which involved approximately $1.2 billion in total. Vuteff was initially arrested in Switzerland before arriving in the U.S. on August 18, 2022. Vuteff is awaiting arraignment and Steinmann remains at large.
Securities and Accounting Fraud
SEC and DOJ Signal Expanding Clawbacks of Executive Compensation: For 20 years, the SEC has had the authority to require CEOs and CFOs to reimburse their companies for certain compensation, bonuses, and gains from stock sales if the company is required to restate its financials resulting from misconduct pursuant to Section 304 of the Sarbanes-Oxley Act of 2022 (SOX 304). While the text of SOX 304 allows for strict liability, historically, the SEC generally has only enforced clawbacks from CEOs and CFOs if that executive was himself involved in the misconduct. During an industry conference in September, however, Sam Waldon, Chief Counsel of the Division of Enforcement, announced orally at an industry event that the SEC intends to require clawbacks in all restatement cases, even when neither the CEO nor CFO has been involved in the misconduct that led to the restatement, arguing that it is ultimately up to those executives to ensure that their system of internal controls will work to prevent restatements.
This summer, the SEC signaled its willingness to claw back compensation of non-implicated C-Suite executives in two matters. First, in June, the founder and former CEO of Synchronoss Technologies agreed to reimburse the company for more than $1.3 million in stock sale profits, bonuses, and a return of certain company stock earned during the year following the release of the financial statements that were ultimately restated, notwithstanding that he was not involved in the underlying conduct. In August, the former CEO and two former CFOs of Granite Construction were required to return a total of more than $1.9 million to Granite as a result of the issuer being required to restate its financials.
The SEC's approach appears to have been coordinated with the DOJ. A few days after Mr. Waldon's announcement, DAG Lisa Monaco announced that the DOJ will, in assessing a company's compliance system, consider whether or not the company includes and enforces clawback provisions in its compensation system. This new policy statement suggests that an even broader array of executives will be subject to clawbacks in connection with any action by the DOJ.
SEC Crypto Unit Expands, Brings First Cryptocurrency Insider Trading Case: In May, the SEC announced that it would double the size of the special unit dedicated to bringing enforcement matters in the cryptocurrency space. In July, the unit brought its first-ever crypto insider trading case and sued a former Coinbase manager and two others for alleged insider trading of several different crypto assets. The SEC alleged that the former Coinbase executive repeatedly tipped off his brother and a friend when the platform was about to list certain crypto assets to trade on the exchange. The listing then caused the price of the various crypto assets to rise, and the three traders earned more than $1.1 million in ill-gotten gains on the transactions. The three individuals were also criminally charged, and in September, one of them pled guilty to conspiracy to commit wire fraud. This case confirms the government's commitment to asserting broad jurisdiction over the cryptocurrency space, which SEC Chair Gary Gensler has called the "Wild West." This case raises key questions about which crypto assets should be considered securities and how the SEC draws that line.
Economic Sanctions and Export Controls
Russian Tycoon Charged with Export Violations Involving Sanctioned Aircraft: Following Russia's invasion of Ukraine in February 2022, the U.S. implemented significant new sanctions on Russia, including new U.S. export controls that effectively prohibit the majority of Russian-owned or -controlled aircraft from traveling to Russia. The U.S. Department of Commerce (Commerce) is actively sanctioning aircraft and their Russian owners/operators who violate these U.S. export controls. In May 2022, Commerce identified a 787 Dreamliner purportedly owned by Russian business magnate Roman Abramovich as likely in violation of U.S. export controls, the second time a supposed aircraft of Abramovich has been so designated. The designation puts the public on notice that provision of any service for the aircraft requires U.S. government authorization.
Then, in June, in the first action of its kind, Commerce issued a charging letter against Abramovich for allegedly violating U.S. export controls involving flights to Russia by the same two aircraft. Abramovich faces potential penalties including monetary civil penalties and denial of export privileges. In the related press release, Commerce's Bureau of Industry and Security (BIS) stated that the action "provides notice to the world of our commitment to enforce those controls aggressively in a transparent way…" and that "Russian oligarchs such as Abramovich will not be permitted to violate U.S. export regulations without consequence." The U.S. has also obtained warrants to seize the two aircraft at issue, which have a combined value of more than $400 million. According to an announcement, Commerce "will continue to take swift action to deny Russian airlines and oligarchs the means to continue to operate aircraft in violation of U.S. export regulations."
U.S. Television Producer Indicted for Helping Russian Businessman Develop Media Outlets: In March, a U.S. television producer was criminally indicted for sanctions violations after allegedly supporting a sanctioned Russian national establish and develop media outlets in Russia, Greece, Bulgaria, and elsewhere. According to his indictment, former Fox News producer John Hanick worked as a TV producer for the Russian businessman Konstantin Malofeyev from 2013 to 2017, while Malofeyev was designated on the U.S. Department of the Treasury's Office of Foreign Assets Control's (OFAC) Specially Designated Nationals and Blocked Persons List (SDN List) in 2014. Hanick was provisionally arrested in February 2022 and is currently detained in the U.K. facing potential extradition to the U.S. In a press release, the DOJ described the indictment as the first-ever criminal indictment for sanctions violations arising from Russia's 2014 annexation of Crimea. In April, Malofeyev, who is not a U.S. person, was charged with violating U.S. sanctions by "causing" a U.S. person (i.e., Hanick) to violate U.S. sanctions. In addition to employing Hanick as a TV producer, Malofeyev also allegedly used him to assist in sanctions evasion by transferring a $10 million investment that Malofeyev held in a U.S. company to a non-U.S. business associate. While Malofeyev remains at large, the $10 million investment has been seized and U.S. prosecutors are seeking forfeiture of the funds.
3D Printer Companies Under Investigation for Exports of Sensitive Aerospace and Defense Drawings to China: Three related 3D printing companies in the U.S. are under investigation for allegedly unlawful exports to China of sensitive controlled drawings received from their customers. The drawings, which apparently had export control markings, included controlled satellite and rocket technology as well as technical data for military submersible vessels. According to Commerce, a single corporate officer for the three companies – Quicksilver Manufacturing LLC, Rapid Cut LLC, and U.S. Prototype Inc. – was involved in the unlawful exports. Although unnamed by Commerce, other news reports identify that person based on corporate records as Peter Lamporte, who is an executive at all three companies. Commerce has imposed a Temporary Denial Order (TDO) on the three U.S. companies while its investigation is ongoing. One of the more powerful civil sanctions that Commerce can impose, the TDO suspends the companies' ability to participate, directly or indirectly, in any export transactions for an extendable period of 180 days. The TDO and press release urge customers of the companies to review whether they provided any controlled technology or technical data to the companies. The case was highlighted by Commerce as an example of the agency's focus on violations tied to China in its June 2022 announcement concerning its new, stricter enforcement policies.
False Claims Act (FCA), Kickbacks, and Other Fraud
DOJ Shows Renewed Interest in Fraud-on-the-FDA Theory: In June, the DOJ Civil Division filed a statement of interest in United States ex rel. Cairns v. D.S. Med. LLC, 42 F.4th 828 (8th Cir. 2022), a qui tam complaint filed in the Southern District of Florida based on the alleged sale of products adulterated and misbranded under the Federal Food, Drug, and Cosmetic Act. The DOJ asserted that conduct giving rise to a regulatory violation can also lead to FCA liability. This theory, commonly known as "fraud-on-the-FDA," is premised on the idea that when a company's fraudulent conduct in a regulatory filing induces the government to enter into the contract, a subsequent request for payment can later give rise to FCA liability if the request relates to the original fraud. The DOJ filed several similar statements during the Obama administration but abandoned the approach during the Trump administration, going as far as seeking dismissal in 2019 of a case asserting fraud-on-the-FDA. Though the court ultimately disagreed with the DOJ and dismissed the underlying case, the DOJ's June 2022 statement may signal that the Department is again willing to intervene in federal cases to pursue the theory. Companies and individuals operating in highly regulated areas should take note of the DOJ's (apparent) renewed interest in pursuing FCA theories of this kind.
Court Heightens Requirement for Anti-Kickback Violation: In July, the Eighth Circuit issued a decision in United States v. D.S. Medical LLC heightening the requirements for plaintiffs to establish FCA liability based on an Anti-Kickback Statute violation. A plaintiff must now show that, but for the illegal kickbacks, the claims for reimbursement from the federally funded program would not have included the items or services that were the subject of the kickback. The Eighth Circuit's decision creates a circuit split on the evidence needed to prove falsity in such cases, with the Third Circuit rejecting the theory in United States ex rel. Greenfield v. Medco Health Sols., Inc., 880 F.3d 89 (3d Cir. 2018) in 2018. Only time will tell if other Circuit Courts of Appeal will follow the Eighth Circuit and, ultimately, whether the circuit split on this issue will be resolved by the Supreme Court.
Trump Organization CFO Pleads Guilty to Tax Evasion Scheme: In August, the Manhattan district attorney announced the guilty plea of Trump Organization CFO Allen Weisselberg to 15 felony counts, including tax fraud, grand larceny, and conspiracy. Weisselberg admitted he conspired with his co-defendants (the Trump Corporation and the Trump Payroll Corporation) to omit over $1.76 million in off-the-books income from his individual income tax returns, improperly receive bonuses identified as non-employee compensation, and hide his New York City residence to avoid local taxes. The Trump Organization and Weisselberg were indicted in July 2021 in the New York Supreme Court as part of an ongoing investigation by the Manhattan District Attorney into former President Trump's business dealings. Weisselberg's plea deal, which requires him to testify against the Trump Organization at a trial scheduled to begin in late October 2022, will likely limit his prison sentence to five months, in addition to payment of almost $2 million in back taxes, interest, and penalties.
Owner of Florida Staffing Companies Sentenced to More Than 24 Years for Tax Fraud: In August, Mykhaylo Chugay, owner of a number of staffing companies throughout Florida, was sentenced to more than 24 years of incarceration after being convicted of defrauding the Internal Revenue Service (IRS) out of $25 million in taxes between August 2007 and July 2021, in addition to immigration and money laundering crimes. According to the sentencing papers, Chugay and his co-conspirators facilitated the employment in the hospitality industry of non-resident aliens who were not authorized to work in the U.S. and failed to pay taxes for the employees. One of Chugay's co-conspirators pled guilty and was sentenced to four years. Another is scheduled to go to trial in December.
Executive of Corporate Bitcoin Buyer Sued for $25 million in Avoided Taxes: In August, the DC Office of the Attorney General sued Michael Saylor, co-founder and Executive Chairman of corporate Bitcoin buyer MicroStrategy Incorporated, seeking to recover more than $25 million in unpaid income taxes, plus penalties. The Attorney General's complaint, filed against Saylor and MicroStrategy Inc., alleges violations of DC's FCA and tax code. According to the complaint, Saylor has avoided paying taxes since 2005 by claiming to be a resident of other, lower-tax jurisdictions while living in a DC penthouse and keeping multiple yachts on DC's riverfront. The case allegedly initiated from a confidential whistleblower complaint filed under DC's FCA in April 2021. Though the federal FCA has a carve out for false statements made in tax documents, many states (and Washington, DC) do not have the same restrictions, resulting in an increasing number of tax fraud enforcement actions from attorneys general under the state FCAs.
Charges Dismissed Against Two Businessmen After FBI Belatedly Discloses Potentially Exculpatory Evidence: As reported in our FCPA Summer Review 2022, in June, the U.S. District Court for Massachusetts dismissed a superseding indictment against two businessmen, Joseph Baptiste and Roger Richard Boncy, with prejudice. As we discussed previously, in 2019, Baptiste and Boncy were both convicted of corruption-related charges in connection with a port development project in Haiti. Baptiste and Boncy allegedly solicited bribes from undercover FBI agents, who presented themselves as potential investors in the project, with the goal of directing the bribes to Haitian government officials. The convictions were tossed out in March 2020 because Baptiste's trial counsel provided ineffective legal assistance. A retrial was scheduled for July 5, 2022. However, the DOJ moved for dismissal after the FBI belatedly disclosed text messages regarding calls that occurred between Boncy and an undercover FBI agent on December 19, 2015. Recordings of the calls had previously been destroyed, but the text messages indicated that Boncy had confirmed certain payments would not be used for bribes. The DOJ announced the dismissal as being in the "interest of justice."
Government Dismisses Charges Against CFO, CCO in Lead-Up to Trial After Conceding Failure to Include Exculpatory Information in Interview Notes: In August, the DOJ moved to dismiss fraud charges against the COO and CFO of Celadon Group Inc. (Celadon), an Indiana trucking and transportation company, after the CFO's attorneys raised allegations that the government's notes of their client's pre-indictment FBI interview (FBI 302) omitted exculpatory denials of wrongdoing and misattributed statements to the CFO. In the lead-up to trial, the government filed a motion in limine seeking permission to elicit at trial incriminating statements Bobby Peavler, the CFO, had allegedly made during his interview. Following briefing, in which Peavler's counsel questioned the FBI 302's accuracy, the Court held a two-day evidentiary hearing to make findings regarding what was actually proffered during the interview. Before the Court made its findings, Peavler filed a motion to dismiss the indictment, questioning not just the accuracy of the FBI 302 but other government interview notes produced during discovery in the case. The Court authorized the "unusual remedy" of pretrial depositions and later concluded that the government's "proffer statement [was] not entirely accurate and [was] in some ways distorted." The government filed its own motion to dismiss the indictment against both defendants less than a month later, which the Court granted in September.
Prosecutorial Failures Lead to New Plea Deal with No Jail Time for Former Real Estate Exec Who Participated in $500 Million Mortgage Fraud Scheme: In August, a Western District of New York court vacated a real estate executive's guilty plea for conspiracy to commit bank fraud after a broader bank fraud case fell apart due to allegations of prosecutorial misconduct. Kevin Morgan, the nephew of real estate mogul Robert Morgan and former vice president of Morgan Management LLC (Morgan Management), originally was indicted in May 2018 on several bank fraud-related charges totaling more than $9.5 million and pled guilty to one count of bank fraud in December 2018. Morgan agreed to cooperate with the government against his uncle in a broader investigation in return for a sentencing recommendation below the U.S. Sentencing Commissions guidelines range of 30-37 months. Subsequently, in May 2019, prosecutors brought a 114-count superseding indictment against Morgan's uncle and three other executives, accusing the uncle of orchestrating a $500 million scheme to defraud investors, banks, federally backed mortgage lenders, and insurance companies.
The case against Robert Morgan broke down after the Court concluded that prosecutors had mishandled discovery by repeatedly missing deadlines to review and share materials, thus violating the Speedy Trial Act. The Court dismissed the charges against Robert Morgan and his alleged co-conspirators in October 2020. As a result, prosecutors also offered Kevin Morgan a revised plea deal under Federal Rule of Criminal Procedure 11(C)(1)(c) in which he agreed to plead guilty to a misdemeanor charge of bank larceny and the government agreed to recommend a sentence of no jail time. The revised guilty plea was filed with the court in August 2022. Kevin Morgan's sentencing is set for Oct. 20, 2022.
Extradition & Extraterritoriality
Uptick in Extraditions for Cryptocurrency Fraud Charges: In August, the DOJ announced the extradition of several individuals facing charges related to the illicit use of cryptocurrency, all of whom have entered not guilty pleas. Latvian national Ivars Auzins was extradited to face fraud and conspiracy charges in the Eastern District of New York. He was indicted in July 2021 for his alleged involvement in a scheme involving companies that "purported to offer valuable investment opportunities, solicited investments and then effectively disappeared." According to the DOJ, individuals "transferred at least $7 million in digital assets" to these companies. Russian national Alexander Vinnick was extradited from Greece to the Northern District of California to face charges filed in January 2017, stemming from his alleged operation of a cryptocurrency exchange used to launder $4 billion in criminal proceeds. Another Russian national accused of cryptocurrency money laundering, Denis Mihaqlovic Dubnikov, was extradited from the Netherlands to the District of Oregon to face allegations that he laundered $400,000 in ransomware attack proceeds using cryptocurrency.
These successful extraditions follow on the DOJ's February appointment of its first Director of the National Cryptocurrency Enforcement Team (NCET), which was "established to ensure the department meets the challenge posed by the criminal misuse of cryptocurrencies and digital assets."
Atlanta Official Sentenced to 14 Years in Pay-to-Play Scheme: In September, former City of Atlanta Director of Human Services, Mitzi Bickers, was sentenced to 14 years in prison and was ordered to pay $2.9 million in restitution after being convicted at trial of taking bribes to steer government contracts to city contractors in exchange for $2.9 million in bribes. The government argued for a sentence of 292-365 months consistent with Probation's recommendation. Bickers objected to several enhancements in the Presentence Report, including arguing that her office was not a "high-level decision making or sensitive position," and that she did not have a leadership role in the offense, but rather was merely one of three co-conspirators. Bickers's co-conspirators, Elvin Mitchell and Charles Richards, both of whom pled guilty, received sentences of just 60 months and 27 months, respectively.
Hedge Fund Executive and Trader Plead Guilty to Fraud, Avoid Prison Time after New Trial Granted: In April, Anilesh Ahuja, co-founder of the hedge fund Premium Point Investments (PPI), and PPI trader Jeremy Shor both pled guilty to overstating asset values at PPI and were sentenced to time served, after their initial convictions and prison sentences were overturned. In 2019, Ahuja and Shor were both convicted of securities fraud for inflating the net asset value of Premium Point, at times by over $200 million according to the indictment. In December 2021, a judge in the Southern District of New York (SDNY) ordered new trials for Ahuja and Shor after Freedom of Information Act (FOIA) requests by the defense revealed that SDNY prosecutors revised statements of cooperators. The defense had been prevented from arguing at trial that prosecutors revised statements after prosecutors provided assurances to the court that they had not made such revisions.
Editors: Katherine E. Pappas, Ian A. Herbert, Lauren E. Briggerman
Authors: Maame Esi Austin, Sarah Barney, Alexandra Beaulieu, Connor W. Farrell, Calvin Lee, Cody Marden, Helen Mitsuko Marsh, Alexandra S. Prime, Jesse Schwab, Caroline J. Watson
Contributors: Kirby D. Behre, Nicole Gökçebay, Sandra M. Hanna, Timothy P. O'Toole, Joseph A. Rillotta, Alex L. Sarria
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