latinode, otro angulo

8/6/2019 Latinode, Otro Angulo

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www.eeraw.com December 2009

White Collar and Corporate

Investigations Newsletter

in this issue1 Of Telephones and Corruption in Latin America: How a

Bribery Case Involving a Florida Company Contributed to the

Fall of the Government in Honduras

4 Ninth Circuit CDT Ruling Has Major Implications for Seizures

of Computer Information

5 Attorney Spotlight: Jeremy D. Frey

7 News and Noteworthy

8 Federal Honest Services Fraud Law at the Crossroads

10 First Circuits Textron Ruling Raises New Concerns about

Vitality of Work-Product Doctrine

Of Telephones and Corruption in Latin America:

How a Bribery Case Involving a Florida Company Contributed to

The Fall of the Government in Honduras

In the re-dawn hours o a Saturday in ate June 2009,miitary troos bearing automatic weaons and arrest

warrants rousted Honduran President Manue Zeaya romhis bed. Hours ater, the troos escorted Zeaya, sti cadin his ajamas, rom the country. Te head o congress andman next in ine or the residency, Robert Micheetti,setted into the tie-rooed residentia aace in downtownegucigaa. As this disute simmered over the summer,some caed the events a cou, resuting rom Zeayas ushor a reerendum on his abiity to seek re-eection. Othersbranded the events an iega seizure o ower rom ademocraticay eected resident. But ew reaized the roein these dramatic events o a oweru U.S. anti-corrutionaw that has drasticay changed the nature o internationa

business.

Tis aw, the Foreign Corrut Practices Act (FCPA),rohibits businesses and ersons with U.S. ties rommaking ayments to oreign ocias to obtain or retainbusiness. Te aw has ayed a growing roe in U.S.eorts to bring transarency to deveoing nations byenaizing those who try to oen doors or business with

iicit ayments. Te aws reach is broad, touching manybusiness ractices ike ayments to ass goods through

customs or reserve recious airane cargo sace thatsome had come to see as standard rocedure in oreignmarkets. U.S. aw enorcement increasingy stresses theimortance o an ethica business cuture, and enorcesthese essons with muti-miion doar nes and jai timeor those who stray. Te events in Honduras demonstratethis eort.

Te Prize of Doing Business in Honduras

In a edera courtroom in Miami, two months rior to

Zeayas ouster, the new owners o a Forida comany,Latin Node Inc. (Latinode), stood ready to ace a judgeand answer or making corrut ayments that reached intothe highest eves o the Honduran government. A ewyears earier, Latinode had sought to oen a reationshiwith Hondute, the state-owned teehone comany inHonduras, to rovide whoesae teehone services. Desitenancia weaknesses in its bid or an access agreement,Latinode hoed that a rize it oered to a seniorHondute ocia might nonetheess make the dierence.Te rize took the orm o $300,000 assed by Latinodethrough sham consuting rms to Honduran ocias

considering the roosa.

Corruption presents a signicant

challenge to developing nations,impeding economic growth, distorting

competition, diverting important public

resources and corroding the institutions

o a civil society.


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White Collar and Corporate Investigations Newsletter

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Ater securing the dea, Latinode sought concessions romHondute. Honduran ocias said it woud be necessaryto give something to them to obtain the reerred rateand caacity sought by Latinode. Te ocias made thegiving easy, roviding their own bank account inormation,where utimatey over $1 miion was assed. Te ocias

conceaed the rate change rom the ubic, and insteadtod Latinode to infate its monthy statements o minutesurchased. Latinode aid two Hondute emoyees tomake ocia records corresond to the infated bis.Latinode even hired a ormer Hondute ocia to ead itsLatin American oerations.

Ater gaining these concessions, Latinode sod itsoerations in 2007 to eLandia Internationa Inc., aubicy traded comany. Te new owners soon discoveredthey had inherited a tremendous mess, and took imortant

stes under U.S. aw to imit the damage. Ater conductingan interna review, eLandia reorted the misconduct inHonduras to U.S. rosecutors. Tis tye o se-discosureis an imortant unction or comanies that uncovermisconduct, and rosecutors utimatey auded thesecommendabe and authentic eorts as exemarycooeration. Te discosures, however, were costy toeLandia, which ater reorted that it had overaid roughy$20 miion or Latinode, given the resuting criminaexosure and oss o business. Indeed, eLandia canceedthe Honduran contracts and aced Latinode into adormant state in order to avoid urther robems.

Prosecutors soon brought charges, aeging that Latinodehad bribed its way into the Honduras business throughayments to severa Honduran ocias, identiedby rosecutors ony by initias and their unctions inHondute. Te charges stated that Latinode aid morethan $1 miion to Ocia A, Ocia B, Ocia C, andother Honduran ocias to obtain the teehone contractand reduce the er-minute rate.

Honduras Does Not Stand Alone

Te Latinode case is not the rst corrution touchingLatin American teehone networks. In Setember2008, a edera judge in Miami sentenced a ormerAcate CI executive to 30 months o imrisonment orengaging in an eaborate bribery scheme to obtain mobieteehone contracts rom the Costa Rican state-ownedteecommunications authority. Te ocia, ChristianSasizian, romised to ay ocias u to 2 ercent othe contracts vaue. Beore being red in 2004, Sasizian

caused Acate to wire $14 miion in commissionayments to a consutant, who then transerred$2.5 miion to Costa Rican ocias.

Charges o corrution in Costa Rica debiitated the ocacivic cuture. In ate 2004, an internationa watchdog

grou ound Costa Ricans to be the second mostessimistic nation when it came to corrution. A year ater,a oca newsaer o ound 32 ercent o the ouationanned to abstain rom eections, a rate the newsaersaid demonstrated a weakening o democracy, articuarybecause o misuse o owers and the ineciency ooiticians.

Costa Rican authorities have sought to investigate theroe o oitica owers in the bribery, and the chierosecutor o Costa Rica, Francisco DaAnese, is seeking

to interrogate Sasizian. U.S. ocias denied DaAneseentry into the country on his rst visit, resuting in adiomatic rotest and caims that the United States wasintentionay acing many obstaces in the way o CostaRicas review. But a subsequent tri gave DaAnese accessto inormation, utimatey eading to charges againstormer Costa Rican President Migue Ange Rodrguezor acceting bribes in connection with the teehonecontracts. In a ate August 2009 interview, DaAnese saidthe case against ormer President Rodrguez has assed thereiminary rocess stage and has been ordered to tria bya judge.

Te Hondutel Bribes ouch Zelayas Inner Circle

Whie the American aers argey overooked the Acateand Latinode cases, the Honduran ress quicky noticed.Some Honduran newsaers had been reorting onirreguarities at Hondute since 2007, ocusing rimariyon the roe o Marceo Chimirri, Hondutes managerand President Zeayas nehew. Te story took a macabreturn in February 2008, when a truck rigged with aase comartment or smugging was ound burnedunderneath a bridge in Comayagua, Honduras, with ourmen inside. One o the men is reorted to have beenroviding inormation incuding a 49-minute recordedconversation with a erson beieved to be Ocia C about eorts by Hondute ocias to extort money romhis business.

Te new aegations rom the Latinode case magniedthe interest. Secuation ran concerning the identitieso the unnamed ocias, and the ress soon identied


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candidates or each seudonym. Most sectacuar wasthe identication o Ocia B as Chimirri. Chimirrihas maintained that he did not sign contracts or owertaris or Latinode, asserting that his accusers are seeingink eehants and using who knows what kind osychotroic substances. Chimirri aso denied caims that

his ortune, incuding uxury cars, thoroughbred horsesand a mansion, had an obscure origin.

President Zeaya had denied that there was evidence o anytari reduction or o any wrongdoing in his government,but was orced to change his oinion oowing Latinodesguity ea. As auditors rom Chie came in to heunrave Hondutes nances, the new Hondute managerJorge Rosa guaranteed the investigation woud resut inthe unishment o those resonsibe. In the days beoreZeayas ouster, Rosa romised that Hondute was giving

investigators a the inormation they sought. Here,nothing wi be orgotten, Rosa said. Te investigationwi be what a Hondurans want a transarent answerand soution.

Since Zeayas remova, Honduran ocias have arrestedand detained Chimirri and others rom the Latinode aair.Honduran rosecutors continue to investigate, incudingagainst President Zeaya. More discosures surey wioow.

Te High Cost of Corruption

Did the Hondute events ead to President Zeayas ouster?Tey certainy seem to have been a contributing actor,as the Honduran ress has noted since his remova. Inany event, corrution resents a signicant chaenge todeveoing nations, imeding economic growth, distortingcometition, diverting imortant ubic resources andcorroding the institutions o a civi society. Te imact onoorer communities is articuary acute. As the WordBank recognized some years ago, corrution and oorgovernance worsen overty directy by diverting resourcesaway rom the needy and indirecty by harming thecimate or rivate investment, key to growth and overtyreduction. In short, the misuse o ower hods nationsback rom reaching their socia and economic otentia.

Enactment and enorcement o anti-corrution eortswordwide, ike the FCPA and the Organization orEconomic Co-oeration and Deveoment Convention oCombating Bribery o Foreign Pubic Ocias, not onyis romting businesses to adot measures to rotect their

Te Latinode case exemies many imortant oints orcomanies addressing issues under the Foreign CorrutPractices Act, incuding the imortance o conducting

re-acquisition due diigence o target comanies to ensurethat FCPA enorcement robems are not coming aong inthe dea and that the targets oreign business wi remainvauabe and rotabe.

In June 2007, eLandia bought Latinode or $26.8 miion.Within months, the comany reorted Latinodes FCPAvioations to the Justice Deartment, and began to reaizethat this urchase was overvaued by $20.6 miion. Whiere-acquisition due diigence wi not catch a FCPArobems, it is a necessary art o every acquisition to makesure that the buyer is getting what is exected. Te duediigence aso rotects a comany rom urchasing an asset

that wi come aong with its own FCPA investigation, asthe Justice Deartment takes the view that an acquiringcomany, bank or investor may ace iabiity or ast acts oan acquired comany that woud have vioated the FCPAhad the acquired comany been subject to the FCPA at thetime. Te best deenses against these iabiity issues is toconduct robing and eective re-acquisition FCPA duediigence, and to maintain a strong comiance rogram toavoid ongoing FCPA issues.

Quicky addressing FCPA issues when they arise is anotherimortant esson rom the Latinode case. When eLandiauncovered the misconduct ater the Latinode urchase,it immediatey began an interna review o the acts androvided timey and thorough reorts on these acts tothe rosecutors. Senior Latinode ocias resonsibe orthe robem were dismissed, and eLandia took stes tostrengthen its own FCPA comiance eorts. Tese eortsresuted in substantia benets, as rosecutors decinedto charge eLandia itse, did not require eLandia to entera deerred rosecution agreement or retain a cororatemonitor, and recommended a ne that was ess than ha o

what the minimum sentencing guideines woud ordinariyhave required.

Finay, the case demonstrates the otentia negative imactrom condoning imroer conduct in oreign markets. TeHondute bribes aciitated a cuture o secret deas andvast weath to a ew we-connected ersons. Te debris etbehind incudes contracts hidden rom ubic view, bogusaccountings o the scarce ubic resource o teehoneservice, hysica harm to an extortion victim who tried tocear the air, and ossiby even the downa o a resident.Being associated with these eements is a disaster or anyresonsibe comany seeking to engage in ethica and roerbusiness.

Latinode Lessons for

Responsible Companies


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reutations and sharehoders, but aso is reshaing theconcet o good business ractices or an ethica comany.Te Hondute case rovides a great reminder o theseimortant concets.

Author

Gregory A. Paw609.951.4145 / 215.981.4220

[email protected]

Ninth Circuit CDT Ruling Has Major Implications for Seizures of

Computer InformationReproduced with permission romWhite Collar Crime Report, Vol. 4, No. 24, Nov. 20, 2009. Copyright 2009 by Te Bureauo National Afairs, Inc. (800.372.1033) www.bna.com.

In United States v. Comprehensive Drug Testing(CD) andtwo comanion cases, the Ninth Circuit Court o Aeasen bancissued a ar-reaching decision about court-orderedsearches and seizures o comuters and eectronicaystored inormation (ESI) that may be reviewed by theU.S. Sureme Court. Te CDTcase, which arose out oa edera investigation into steroid use by roessionabaseba ayers, is a must-read or those aected by court-ordered searches or ESI.

Te Ninth Circuit, in an eort to strike a roerbaance between the governments egitimate interest inaw enorcement and the eoes right to rivacy androerty, estabished a ve-art rotoco or searches

and seizures o comuters and ESI ursuant to warrantsthat authorize over-seizure and subsequent o-sitesegregation o data or which there is robabe cause. Mostimortanty, edera judges in the Ninth Circuit issuingsearch warrants must now insist the government waivereiance uon the ain view doctrine in digita evidencecases.

In addition, the government must oow strict ruesregarding segregation and redaction o ESI, discosingthe risk o destruction o ESI, imiting its search rotocoto uncover ony inormation or which it has robabecause, and destroying or returning non-resonsive ESI. Asdiscussed by the dissenting oinions, these requirementsarguaby reresent a dearture rom recedent.

Facts of the Case

At issue in CDTwas the governments eort to obtain itsdesired inormation in any way ossibe, using mutiesuboenas and two search warrants rom three dierentdistricts. CD was a comany that administered a steroid

It seems likely that we will see more

case law developments as the courts tryto balance privacy interests and the

application o the plain view doctrine

to ESI searches and seizures.

testing rogram or the Major League Baseba PayersAssociation. Ater earning that ten ayers tested ositive

or steroid use, the government obtained a grand jurysuboena in the Northern District o Caiornia or adrug testing records and secimens rom CD. CD andthe ayers moved to quash the suboena.

Desite CDs assurances that it woud reserve a dataunti the motion to quash was decided, the governmentresonded to the motion to quash by seeking a searchwarrant in the Centra District o Caiornia or recordso the ten ayers identied by the government as havingtested ositive or steroid use. In its aication or thewarrant, the government made a generic argument or

over-seizure, describing the ease with which eectronicinormation can be hidden and the dicuty in roeryexamining and segregating eectronic inormation at thesite o the search. Te government did not discose CDsromise to maintain the data requested by the NorthernDistrict suboena. Te Centra District Court issuedthe warrant and authorized over-seizure, but rovidedsaeguards requiring indeendent review and segregation onon-resonsive data.


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In addition to the Caiornia roceedings, the governmentobtained a search warrant in the District o Nevada or thetested secimens and additiona inormation regarding thesteroid tests. Te government then issued new suboenasin the Northern District o Caiornia or the sameinormation it had obtained in Nevada.

CD and the ayers ed a motion under Fed. R. Crim.P. 41(g) or return o the roerty seized in the CentraDistrict o Caiornia. In executing the warrant, thegovernment seized and reviewed the drug testing recordso hundreds o ayers and a great many other eoe.Te District Court granted the Rue 41(g) motion, ndingthat, desite the warrants authorization o over-seizure,the government aied to comy with the conditions othe warrant designed to segregate inormation as to whichthe government had robabe cause rom that which was

swet u ony because the government didnt have thetime or aciities to segregate it at the time and ace othe seizure. Te court concuded that the governmentsactions disayed a caous disregard or the rights o thirdarties, viz., those ayers as to whom the government didnot aready have robabe cause and who coud suer direersona and roessiona consequences rom a discosure.

Additiona motions were brought in Nevada with the sameresut, with the excetion o materias seized reating to theten identied baayers. In Nevada, the court ordered thata traces rom the imroer seizures in the governments

ossession be destroyed. Te suboenas rom the NorthernDistrict o Caiornia aso were quashed. In short, thedistrict courts rebued government arguments that theyhad comied with the court-ordered search rotocos, andthat their seizures regarding a the baseba ayers wereauthorized under the ain view doctrine, or that they wereotherwise aowed to retain evidence rom the searches.

Ninth Circuits En BancRuling

In CDT, the Ninth Circuit uhed a three district courtorders. At the outset, the Circuit Court ound that thegovernments caims o error were essentiay recuded dueto an untimey aea, but, to avoid any quibbe aboutthe roer scoe o recusion, substantivey reviewed thedistrict court orders anyway.

In addressing the governments ain view argument, theNinth Circuit ound that the urose o the ESI over-seizure search rotocos was to maintain the rivacy omaterias that are interminged with seizabe materias andto avoid turning a imited search or articuar inormation

Attorney Spotlight: Jeremy D. Frey

Jeremy D. Freyis a artner inthe Commercia Litigation and

White Coar and CororateInvestigations Practice Grous oPeer Hamiton LLP, residentin the Phiadehia and Princetonoces. Mr. Frey concentrateson cororate investigations,white coar crimina deense and

comex civi itigation.

Mr. Frey ocuses his ractice on internainvestigations or ubic and rivatey hed businesses,SEC investigations and enorcement roceedings,cororate comiance, ubic authorities, edera taxmatters, rea estate and commercia itigation, cassaction cases, qui tam roceedings, atent and heathcare itigation, environmenta comiance matters,whiste-bower emoyment cases, First Amendmentitigation, oreiture roceedings and extensivereresentations o businesses and individuas inedera and state crimina investigations and cases.

Beore joining the rm, Mr. Frey was the AssistantU.S. Attorney-in-Charge o the U.S. Attorneys Oce

in Camden, New Jersey. In more than 15 years as arosecutor, Mr. Frey tried dozens o major cases andsuervised hundreds o others.

Mr. Frey has taught at Rutgers University Schoo oLaw and has resented continuing ega educationcourses on crimina ractice, edera sentencingguideines, heath care raud, the attorney-cientriviege, insider trading, e-discovery and broker-deaer registration. He sits on the Advisory Board oBNAs White Collar Crime Report.

Mr. Frey received a B.A. degree rom Oberin Coegein 1976 and is a member o Phi Beta Kaa. Hereceived his J.D. rom New York University Schoo oLaw in 1979, where he was an editor o theAnnualSurvey of American Law. Mr. Frey is a member o thePennsyvania and New Jersey bars.


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into a genera search ... Te Ninth Circuit did not quibbewith the governments assertion that ESI can be easiyhidden and dicut to recover, but it did dismiss the ideathat ermitting over-seizure to address the concerns meantthat a ESI woud a under the ain view doctrine:I the government cant be sure whether data may be

conceaed, comressed, erased or booby-traed withoutcareuy examining the contents o every e and we haveno cavi with this genera roosition then everythingthe government chooses to seize wi, under this theory,automaticay come into ain view. Since the governmentagents utimatey decide how much to actuay take, thiswi create a oweru incentive or them to seize morerather than ess ... Such an aroach woud encouragethe government to take everything back to the ab, have agood ook around, and see what [it] might stumbe uon.

o revent the government rom converting every court-ordered search or ESI authorizing over-seizure intoa genera warrant, the Ninth Circuit announced thatthe government shoud, in uture warrant aications,orswear reiance on the ain view doctrine ... that woudaow it to retain data to which it has gained access onybecause it was required to segregate seizabe rom non-seizabe data. Te court added that i the government didnot wish to rovide such a waiver, an indeendent thirdarty must do the segregation under the suervision o thecourt, or the warrant request shoud be denied.

Te Ninth Circuit aso gave additiona directions aboutcourt-ordered searches o comuters and ESI. As an initiamatter, the government, when seeking a warrant, mustdiscose the actua degree o risk o conceament anddestruction o evidence as oosed to a generic recitationo the dicuties that might be osed by ESI coection.Te government must aso discose any romise o thearty ossessing the data to reserve it. Such edges odata retention are obviousy highy reevant in determiningwhether a warrant is needed at a and, i so, what its scoeshoud be. Once the government has obtained a warrant,it must ensure that (a) segregation o seizabe materiasmust be done by a screen team or third arty, (b) the ESIsearches by the government are designed to uncover onyinormation or which it has robabe cause (which is theony ESI that may be rovided to the case agent), and (c)non-resonsive data is either destroyed (i the data is iegato ossess) or returned.

Searatey, the court uhed a broad reading o Rue 41(g)authorizing a court in aroriate circumstances to requirethe government to destroy a inormation in its ossession

seized under a warrant not executed in accordance with itsrestrictions.

Analysis of the Ruling

Te Ninth Circuits udated measures in CDThe

romote Fourth Amendment rotections againstunreasonabe searches and seizures in the context ocomuter and ESI over-seizures. Authorized over-seizuresand subsequent o-site searching o the data by awenorcement are oten necessary as a ractica matter.Without other constraints, however, the ain viewdoctrine aied in ESI over-seizure cases can encourageunjustied intrusions by aw enorcement into rotectedrivacy in the absence o robabe cause.

Te comaints o the dissenters in CDTare not easy

to dismiss. Tey argued, among other things, that themajority oinion dearted rom recedent by rovidingheightened Fourth Amendment rotection to ESI.Moreover, they argued that the majoritys exansive ruingwas unnecessary, and the case shoud have been decidedmore narrowy based on the governments non-comiancewith the warrant restrictions or inaicabiity o the ainview excetion.

Nevertheess, there is heightened risk o unjustiedinvasion o rivacy interests with ESI. Te voume oinormation that can be stored eectronicay on a singe

disk, comuter, or server makes ESI dierent thanaer documents. As this case demonstrates, giving thegovernment unettered access to massive quantities oinormation when it has reason to search or and seize onya sma ortion erodes the Fourth Amendments robabecause requirement. Whie requiring the government towaive reiance on the ain view doctrine in authorizedover-seizure cases is one remedy, the Ninth Circuitscategorica rue may swee too broady i it denies thegovernment evidence otherwise roery discovered underthe ain view doctrine during the course o an authorizedsearch. Tough the governments unsavory conduct inCDTjustied suression under the circumstances o thatcase, the majority oinion may not ersuade other ederacourts outside the Ninth Circuit to adot its categoricarotoco to allwarrants that ermit over-seizure o ESI.

Even so, CDTreresents an imortant deveomentin rotecting rivacy interests by acknowedging theheightened risks o unjustied rivacy invasion associatedwith seizures o ESI. Long-estabished rues aying toseizure o aer documents and other tangibes may not


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be sucient to address this risk. Tough CDTsaroachto ain view waiver may be too categorica, it seems ikeythat we wi see more case aw deveoments as the courtstry to baance rivacy interests and the aication o theain view doctrine to ESI searches and seizures.

For those courts that wi be arsing CDT, theNinth Circuit et unsetted whether its rotoco isconstitutionay basedincuding most criticaythe requirement o ain view waiver where there areauthorized over-seizures o ESI. Dissenters in CDTcaimedthat the rotoco was dicta and not art o the en bancNinth Circuits hoding. In any event, it seems ikey thatthe rotoco wi be interreted as an exercise o the courtssuervisory ower, but sti as binding recedent on theower edera courts in the Ninth Circuit. For cases inedera courts outside the Ninth Circuit, CDTbrings new

sizze to Fourth Amendment suression caims in ESIover-seizure cases. CDTis not binding on edera courtsoutside the Ninth Circuit, or on any state courts.

Because CDTarguaby gives heightened FourthAmendment rotection to comuters and ESI, whierestricting the venerabe ain view doctrine in new ways,the Ninth Circuits ruing is a candidate or U.S. SuremeCourt review i the government decides to aea. o theextent that the government interrets CDTsain-viewwaiver requirement as constitutionay based, an aea tothe Sureme Court seems more ikey, notwithstanding

that the governments distasteu conduct eading uto CDTmight otherwise diminish the governmentsincination to seek review.

Te question o whether the government wi aea nowhas to await a new deveoment. Eary in November, theNinth Circuit entered an order asking the arties or brieson whether the case shoud be reheard by the u NinthCircuit, which has an authorized comement o 28 activeCircuit judges.

In the meantime, ersons aggrieved by seizures ocomuters and ESI based on search warrants, and criminadeendants seeking to suress incriminatory evidenceresuting rom such warrants, shoud careuy reviewCDTor its aication to their circumstances.

Authors:

Jeremy D. Frey215.981.4445 / 609.452.0808

[email protected]

News and Noteworthy

Frank C. Razzano is schedued to moderatea ane on honest services raud at the ABA

Crimina Justice Sections 24th Annua NationaInstitute on White Coar Crime in Miami,Forida in February 2010.Frank C. Razzano and Kristen Jones ubished,Te Sureme Court Deves Into UncertaintiesSurrounding the Honest-Services Fraud Statutein the October 23 issue o the BNAs White CollarCrime Report. Jeremy D. Freyand Ivan B. Knauer soke onBroker Deaer Registration and Commerciaransactions at a recent CLE rogram hed in

Peers Phiadehia oce.Michael A. Schwartz andJeremy D. Freyarticiated in a roundtabe discussion titedHedge Funds: What Is Haening Now at arecent rogram hed in Peers New York oce.Michael A. Schwartz recenty soke at thePhiadehia Law Deartment and PhiadehiaDistrict Attorneys Oce annua meetings onHonest Services Fraud and Ethics/CamaignFinance Reorm. Mr. Schwartz aso is teachinga cass, Corrution Law and Poicy, at emeUniversitys Beasey Schoo o Law during Sring

2010.Jeremy D. Frey contributed to Unsworn WitnessConcerns Justied Disquaiying Accuseds Long-ime Counse, in the November 6 issue o theBNAs White Collar Crime Report. Mr. Frey asocontributed to the artice Attorneys, AcademicsSort Trough Landmark Case on ComuterSearches, which was ubished in the Setember16 issue o BNAs Electronic Commerce and LawReport.Tomas M. Gallagher recenty soke at theIndiana University Schoo o Law AnnuaContinuing Lega Education Program CororateIntegrity: Meeting Chaenges and Doing theRight Ting. Te toic o Mr. Gaaghers seechwas Living With a CIA: Day One and Beyond.

Sara B. Richman215.981.4658

[email protected]


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Federal Honest Services Fraud Law at the Crossroads

Since Section 1346s honesty

requirement ails to provide anydened standards o conduct that

citizens are required to meet,

the statute should be declared

unconstitutionally vague and sent back

to Congress.

On December 8, 2009, the U.S. Sureme Court wi hearora argument in Black v. United Statesand Weyhrauchv. United States, which romise to be among the most

signicant white coar crime cases o the decade. In thesecases, the Court is exected to decide whether the ederahonest services raud (HSF) statute (18 U.S.C. Section1346) is constitutiona and, i so, what imiting rinciesay.

Earier this year in Business Law Today, we argued thatthe HSF aw was so vague that it invites chaenge onconstitutiona grounds. Razzano and Jones, Prosecutiono Private Cororate Conduct: Te UncertaintiesSurrounding Honest Services Fraud, 18 Business Law

TodayNo. 3, .37 (January/February 2009). Shortythereater, Justice Scaia in a dissent rom the denia ocertiorariin Sorich v. United States, 129 S. Ct. 1308, 1309(2009), took a simiar view in commenting on the HSFstatutes remarkaby broad reading. More recenty, weargued in BNAs White Collar Crime Report(Te SuremeCourt Deves into Uncertainties Surrounding the Honest-Services Fraud Statute, Razzano and Jones, 10-22-09) thatdue to the uncertainties surrounding the HSF statute, theSureme Court shoud decare it unconstitutiona. Withthe ucoming ora arguments in Blackand Weyhrauch, weexect to gain additiona insight into the Courts thinking

on whether the HSF statute oends constitutiona duerocess, or whether the Court wi choose to ashion somekind o imiting rincie to cabin its reach.

Background

Te edera mai raud statute, which became aw oowingthe Civi War, currenty rovides whoever, having devisedor intending to devise, any scheme or artice to deraud,or or obtaining money or roerty by means o ase orrauduent retense, reresentations or romises sha

be ned, imrisoned not more than 20 years, or both.Te statute aied to dene what a scheme or artice toderaud is. Over the course o the next hundred years,courts came to dene the terms as a ase reresentationsast, resent, or uture. Te tyica jury charge tod jurorsthat it encomassed any conduct which ais to matchthe refection o mora urightness, undamenta honesty,air ay and right deaing in the genera and business ieo members o the community. As one court noted, thisamorhous denition constitutes nothing more than a

sixth-grade civics esson. But by the 1970s, courts androsecutors began to use this amorhous denition toincude schemes to derive others o the intangibe righto a deendants honest services. Tis intangibe right ohonest services was aied in two distinct areas ubic-and rivate-sector cases. In ubic-sector cases, the theoryo raud rests on the rincie that ubic ocias andubic emoyees owe duties o honest services to theubic. Private sector HSF cases rest on the theory thatrivate ersons, when acting in various caacities, aso oweothers, such as their emoyers, duties o honest services.

In the ubic HSF arena, unti the 1950s the ederagovernment ayed itte roe in oicing corrution amongstate and oca ocias. Tere was a edera bribery statute,which was one o the rst bis enacted by Congress in1789, 18 U.S.C. Section 201. It aies, however, ony toedera ocias, not to state or oca ocias. Tere wasno edera aw aimed at state or oca corrution. By the1960s, rosecutors began bringing cases under the ederarave Act, 18 U.S.C. Section 1957 (outawing interstatetransortation o money in aid o bribery and the extortion

statute) and the Hobbs Act, 18 U.S.C. Section 1951(outawing ayments under coor o ocia right) to attackstate and oca oitica corrution.

In the 1970s, however, rosecutors began to emoy theedera mai and wire raud statutes on the theory thatwhen a state or oca ubic ocia takes a bribe, theocia derives the ubic o its right to the ociashonest services. Since mai and wire raud are redicatecrimes under the edera racketeering statute (RICO, 18


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U.S.C. Section 1961 et seq.), rosecutors aso startedbringing charges under the new edera RICO statute.Te rosecution o Maryand Gov. Marvin Mandecatauted honest services raud and RICO to the oreronto the edera governments eort to ght state and ocacorrution. At the same time, rosecutors aso began

charging rivate HSF cases as we on the theory that,or exame, emoyees who took bribes derived theiremoyers o honest services.

In 1987, the Sureme Court struck down the honestservices raud theory inMcNally v. United States, hodingthat the mai raud statute rotects roerty rights, not anintangibe right to honest services. In the wake oMcNally,Congress assed 18 U.S.C. Section 1346, which deneda scheme or artice to deraud as incuding a scheme orartice to deraud another o the intangibe right o honest

services. Tere is virtuay no egisative history o Section1346. When Section 1346 was assed, the term intangiberight o honest services had no common aw meaning; itwas not dened in Blacks Law Dictionary, and there wereony a handu o edera circuit courts that had addressedcases invoving honest services raud beore the theory wasdisavowed by the Sureme Court in McNally.

In the years oowing Congress enactment o Section1346, the courts began a strugge to dene what theintangibe right to honest services means, without thebenet o any deveoed jurisrudence. As a resut, edera

courts throughout the country came u with varyingand, at times, conficting imiting rincies. Whie athe circuits coud agree that Section 1346 shoud notbe interreted to transorm every breach o a workacerue or ethics vioation into a edera crime, the courtscoud not agree on what imiting rincie woud aowthem to achieve an aroriate resut consistent with theconstraints o ederaism. Among the issues courts havewrested with are whether an HSF vioation aso requiresvioation o a state crimina aw, a state civi statute, orwhether breach o a state or edera common aw dutywi suce. In cases o omissions to act, such as aiuresto discose conficts o interest, the issues have becomeeven more obscure. In the ast ve years, with ederarosecutors aggressivey ursuing their view o ubiccorrution, the varying ormuations in the courts o whatconduct can constitute an HSF crime has roduced anationa sectace.

Supreme Court to Review HSF Statute

Te Sureme Courts certiorarigrants in Weyhrauch andBlack, as we as more recenty in the rivate HSF case oSkilling v. United States, bring the romise that some orderwi be imosed. Weyhrauch, a ubic HSF case, invoved

an Aaska state egisator whose ubic osition was aart-time job. Weyhrauch sought a job with an oi edservices comany ater he determined he woud not run orre-eection. As it turned out, egisation was ending beorethe Aaska egisature that woud benet the comanythat was Weyhrauchs otentia emoyer. Weyhrauch wasindicted and convicted by a jury or aiing to discose theconfict o interest created by his voting on the egisation.Te rosecution conceded on aea that Weyhrauchvioated no state statute requiring discosure o the conficto interest. Nevertheess, the Ninth Circuit uhed

Weyhrauchs conviction, and ound that Weyhrauchsconduct in not discosing the confict vioated ederacommon-aw. In his etition or certioraribeore theSureme Court, Weyhrauch argues, among other things,that there is no edera crimina common aw, and thatdecaring it in his case vioates due rocess. Weyhrauch asoargues that Section 1346 must be interreted in accordancewith the rue o enity, which requires that any ambiguitybe resoved in his avor.

Blackis a rivate-sector case. In Black, senior executives oHoinger Internationa received $5.5 miion in exchange

or a non-comete agreement. Neither the comanys AuditCommittee nor its board was inormed o or aroved thetransaction as required by the confict issue the transactionraised. Te deendants argued that the ayment was reaya management ee, but was characterized as a non-cometeagreement in order to address issues under Canadiantax aws. Te Seventh Circuit ound that Back owed aduciary duty o oyaty and candor to Hoinger, and thathe and others misused their ositions or ersona gain inconnection with the transaction. As a resut, Hoinger wasderived o its right to their honest services. Te questionresented in the etition or certiorariin Blackis whetherHSF requires economic or other roerty harm to a rivatearty to whom the duty o honest services was owed. TeSeventh Circuit requires ony a breach o duciary duty orersona gain at the exense o the arty to whom the dutyis owed and not oreseeabe harm.


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Like Black, Skillingaso is a rivate HSF case, athoughcertiorariin Skillingwas granted ater Black. Skiing is theormer Enron CEO. His certiorarietition argues thatrivate gain is required to sustain an HSF conviction,and that without such a requirement, the statute isunconstitutionay vague. Just as in Weyhrauch and Black,

the undamenta question resented to the Court inSkillingis whether to ashion a imiting rincie as tothe reach o Section 1346 or whether that is a egisativeunction.

In our view, it is the roe o Congress, not the SuremeCourt, to estabish such imiting rincies. Since Section1346s honesty requirement ais to rovide any denedstandards o conduct that citizens are required to meet, thestatute shoud be decared unconstitutionay vague andsent back to Congress. On December 8, 2009 at the ora

arguments in Blackand Weyhrauch beore the SuremeCourt, we exect to get the rst indications o whether theSureme Court agrees.

Authors:

Frank C. Razzano202.220.1286

[email protected]

Kristin Hynd Jones215.981.4897

[email protected]

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First Circuits Textron Ruling

Raises New Concerns about

Vitality of Work-Product

Doctrine

In August 2009, the First Circuit en bancrued on theaicabiity o the work-roduct doctrine to shied taxaccrua work aers rom an IRS summons. United Statesv. Textron, Inc., 577 F.3d 21 (1st Cir. 2009). In a decisionwidey criticized in the accounting industry and by otherssuch as the Association o Cororate Counse o America(ACCA), the court hed that work-roduct rotection

did not ay. In the context o interna cororateinvestigations, Textron raises new concerns about discoveryby government authorities o counses assessments oiabiities that might arise rom ossibe misconductdiscovered by businesses in the course o oerations.

Background

In 2001, extron articiated in nine sae-in, ease-out(SILO) transactions, which the IRS considers to be abusiveisted transactions. extrons in-house tax attorneysanayzed the comanys tax ositions, and its in-houseaudit ersonne, in consutation with counse, rearedtax accrua work aers. Te work aers incuded asreadsheet isting the issues, ercentage estimates o thehazards o itigation, and estabished a tax reserve. extrondiscosed the tax accrua work aers to its externaauditors, Ernst & Young (E&Y), with the understandingthat they were condentia. It did not aow E&Y to retaincoies.

Te IRS commenced an audit o extron and becameaware o the SILO transactions. Under IRS oicy, the

Service (1) seeks tax accrua work aers secicayreated to a taxayers articiation in a isted transactioni the taxayer engaged in a singe isted transaction androery discosed its articiation; and (2) seeks a taxaccrua work aers i the taxayer engaged in mutieisted transactions or in a singe isted transaction that wasnot roery discosed. Because extron engaged in nineSILOs, the IRS issued summonses or a o extrons taxaccrua work aers or 2001. extron decined to roduce


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them, caiming work-roduct rotection, and the IRSmoved to enorce the summons.

Te district court ound or extron, agreeing with thedeense that the discosure was not a waiver o the work-roduct doctrine as dened by Fed. R. Civ. Pro. 26(b)

(3). According to the district court, ony discosuresinconsistent with the adversary system are deemed waiverso the work-roduct rotection. yicay, this meansdiscosure to an adversary, which E&Y was not. Ayingthe First Circuits because o itigation test, the owercourt concuded the tax accrua work aers quaiedor the doctrines rotection because o the rosect oitigation, even i the documents aso had a dua businessurose.Maine v. United States Dept of the Interior, 298F.3d 60, 68 (1st Cir. 2002).

On aea to the First Circuit, the IRS argued that theresence o a business or reguatory urose deeated work-roduct rotection. Te IRS caimed that the tax accruawork aers were not reared because o itigation sincethey were created to evauate uncertain tax ositions ornancia accounting uroses. Te First Circuit initiayrejected this IRS argument and armed the district courtshoding that documents coud be rotected even thoughthere was a dua urose. Ater a, as the ane noted, theywoud not have been reared or nancia accountinguroses i there had been no rosect o itigation withthe IRS. Tis decision was vacated, however, and the case

was heard en bancby the First Circuit.

En BancRuling in extron

In its en bancoinion, the First Circuit vacated the anesruing. Te First Circuit hed that the work aers were notrotected ursuant to the work-roduct doctrine under theFirst Circuits estabished because o itigation test. Tecourt rejected the argument that roviding the IRS withthe comanys evauation o its ega osition was unair,observing that that tax coection is not a game and thatunder-reorting o cororate taxes is ikey endemic. Tecourt utimatey ound the work-roduct doctrine is aimedat rotecting work done or itigation, not in rearingnancia statements. Since extrons work aers were tosuort nancia ings and gain auditor arova, the IRShad rightu access.

For the dissent, the majoritys decision was out o ste withboth circuit recedent and the ain anguage Rue 26. Seee.g., United States v. Adlman, 134 F.3d 1194, 1198-99 (2d

Cir. 1998) (hoding that a memorandum discussing variousega issues reating to taxation and redicting the outcomeo ossibe itigation reared in connection with the saeo a subsidiary coud quaiy as work roduct). Chiding

the majority or avoritism toward the IRS, the dissentcomained that the scoe o the work-roduct doctrineshoud not deend on what arty is asserting it. Perhasmost imortanty, however, the dissent noted that underthe majoritys rue one arty in a itigation wi be abe todiscover an oosing artys anaysis o the business riskso the instant itigation, incuding the amount o moneyset aside in a itigation reserve und, created in accordancewith simiar requirements as extrons tax reserve und.

Analysis

In Textron, the First Circuit aied its because oitigation test narrowy in dening the reach o work-roduct rotection under Rue 26 in connection withaudit work aers. Textron oows the Fith Circuitssimiar ruing many years ago in United States v. El PasoCo., 682 F.2d 530, 542 (5th Cir. 1982), cert. denied, 466U.S. 944 (1984) (nding tax accrua work aers are onyrotected by the work-roduct doctrine i the documentsare rimariy motivated to assist in uture itigation).Ater Textron, there is arguaby itte dierence otherthan nomencature between the First Circuits because

o itigation test and the Fith Circuits od rimaryurose standard.

Te Textronen bancruing shoud be careuy consideredby counse when consuting with auditors regardingossibe oss contingencies. Work aers refectingstatements o counse and the resuting estabishment o asecic reserve in connection with a ossibe secic caimmay not be rotected under the work-roduct doctrineand may constitute highy damaging admissions o a

Te court rejected the argument that

providing the IRS with the companys

evaluation o its legal position was

unair, observing that that tax

collection is not a game and that under-reporting o corporate taxes is likely

endemic.


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Tomas M. Gaagher is the chair o Peers White Coar and Cororate Investigations Practice Grou.For more inormation on Peer Hamiton or our White Coar and Cororate Investigations ractice,

contact Mr. Gaagher at [email protected] or 215.981.4068.

Te materia in this ubication was created as o the date set orth above and is based on aws, court decisions,administrative ruings and congressiona materias that existed at that time, and shoud not be construed as egaadvice or ega oinions on secic acts. Te inormation in this ubication is not intended to create, and the

transmission and receit o it does not constitute, a awyer-cient reationshi.Pease send address corrections to [email protected].

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arty oonent under F.R.E. 801 admissibe in court. Terobems with aowing adversaries to discover such mattersin connection with itigation and to admit resutingevidence at tria are so obvious as to need no eaboration.It seems hard to argue with ACCAs osition that Textronais to recognize that greater rotection, not ess, is needed

to suort candid attorney-cient communications and tocabin discovery by adversaries o attorney work-roduct.

o the extent that Textron refects the First Circuitsview that work-roduct is entited to ess rotectionwhen aw enorcement interests are engaged, Textron isa articuary ominous decision or awyers, accountantsand their cients in deending reguatory roceedings andcrimina cases. Counse conducting interna cororateinvestigations o ossibe misconduct are urged to reviewand consider Textron, as we as the Financia Accounting

Services Boards roosed changes to Financia AccountingStandards Statement 5 reating to nancia statementreorting o oss contingencies, beore consutingcomanys management and the comanys audit ersonneregarding the resuts o their inquiries.

With any uck, neither Textronsreasoning nor resut wibe adoted in other circuits. In the absence o any reie

rom Textron, the best aroach or aected arties is to bemindu o the record they may have to resent in suorto uture caims o work-roduct rotection. Accordingy,both in-house and outside counse invoved in internainvestigations, as we as those invoved in consideringossibe oss contingencies, shoud take measures to

document and suort that their work was done inanticiation o itigation under Rue 26.

Jonathan Marks,* CPA, CFE, CFFCrowe Horwath LLP, New York City

[email protected]

John Michael B. Myers215.981.4823

[email protected]

Jeremy D. Frey215.981.4445 / 609.452.0808

[email protected]

* Jonathan Marks is a artner with Crowe Horwath LLP inthe New York oce. He is not admitted to ractice aw.

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