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Outline for Corporate and White Collar Crime

By Bernard Perez,2014-08-11 18:58
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Outline for Corporate and White Collar Crime

    Course Outline for Corporate and White Collar Crime

    Exam: Essays. 3 hours. Floating exam. Closed-book. But in the exam packet will be a photocopy of the

    statutory supplement. Brickey will be out of town from Dec. 3-6. The last class will be cancelled. She

    won‟t be able to answer questions after the beginning of the exam period.

    I. Corporate Criminal Liability

    A. Corps have the capacity to commit criminal acts.

    1. New York Central & Hudson River RR (p.1) RR and two employees were each held liable

    for bribing sugar refiners, an anti-competitive practice in violation of the Elkins Act. RR

    held liable b/c the crime was committed for the sake of the RR‟s economic gain, the bribes

    were paid for with the RR‟s funds, and the RR benefited by gaining a temporary

    competitive edge. S. Ct. Justice Day asked rhetorically, how else are we supposed to

    correct these kinds of abuses if not through criminal sanctions? Note that there are pros &

    cons of imposing criminal liability on corps: potential to change the corp‟s culture and set

    new industry-wide standards (pros); potential unfairness to shareholders, innocent

    employees, and consumers (cons).

    2. C.R. Bard, Inc. (p.10) A corp was held liable for its violations of FDA regulations, which

    led to serious injuries and deaths. Misconduct pervasive and motivated by greed; the

    executives approved it. Ct. held that the plea agreement at issue was reasonable b/c it had

    certain features: it allowed for criminal prosecution of individual employees; it imposed

    fines; and it imposed a compliance program involving more intense FDA oversight. B. Usual way of meeting an actus reus requirement: the respondeat superior doctrine: A corp

    can be held liable under this theory if (1) a corp agent (even the most menial employee) acted

    (2) within the scope of his or her employment authority (i.e., the acts were directly related to

    the performance of the type of duties the employee had a general duty to perform, actually or

    apparently) and (3) on behalf of the corp (4) w/ the intent to benefit the corp. This is defn. of

    the federal rule, and it‟s the rule most prevalent in state courts.

    1. Beneficial Finance Co. (p.18) A group of small loan companies bribed public officials so

    that they could keep interest rates high (which benefited them). If an employee was a

    position such that he or she had enough power, duty, responsibility, and authority to act for

    and on behalf of the corp, then the employee‟s acts which were committed within that

    scope may be imputed to the corp. Title/position does not conclusively determine authority.

    2. Lessoff & Berger (p.24) A law partnership was held liable for fraud, even though only

    one of the partners was involved in the commission of the crime. “Harsh, but rational.”

    Harsh: Other partners who were clueless about the misconduct suffered. Rational: The

    other partners also stood to gain from the fraud, and they should have had incentives to do a

    better job of policing.

    3. Hilton Hotels (p.26) Corp held liable for the acts of its rogue employee, even though corp

    had explicit policy that it wouldn‟t engage in illegal boycotts and the employee

    acknowledged receiving specific instructions to the same effect. The employee just went

    off the deep end b/c of “anger and personal pique.” If a corp entrusts an employee with

    enough responsibility so that it‟s possible for the employee to get into significant trouble

    with the law while acting within the scope of his employment, then the corp should take the

    precaution of policing the employee to the extent that that risk exists. Note that mgmt‟s

    diligence is no defense: If the agent acts willfully, then we can impute the agent‟s act to the

    principal.

    C. Alternative way of meeting an actus reus requirement: proving that there was a corporate

    policy. If the misconduct was performed, authorized, ratified, adopted, or tolerated (even

    recklessly tolerated) by the corp‟s directors, officers, or other “high managerial agents” who are

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    sufficiently high in the hierarchy to warrant the assumption that their acts in some substantial sense reflect corporate policy, then the corp can be held criminally liable. This is MPC standard. Proof problems: higher-ups usually cover their tracks.

    D. Mens rea requirements: knowledge and willfulness. Two ways of proving knowledge: (1)

    one or more agents had actual knowledge; (2) collective knowledge doctrine (i.e., if one employee knows one piece of info, and another knows another piece, then the employer can be charged with the aggregate knowledge). Two ways of proving willfulness: (1) one or more agents acted willfully; (2) there was flagrant organizational indifference (serves as a proxy for proof of willfulness on the part of a single agent).

    1. Bank of New England (p.31) Bank held liable for violating the Currency Transaction

    Reporting Act; customer withdrew more than $10K in cash by presenting multiple checks

    simultaneously to a single bank teller. Other employees gossiped about how unusual and

    suspicious this was, and yet no one reported or even inquired whether the transactions

    should be reported. The Bank didn‟t even make any effort to report after it received a

    federal grand jury subpoena (the transactions at that point were still reportable). Ct. held

    that the Bank‟s flagrant indifference to its reporting obligations could serve as a proxy for

    willfulness.

    II. Personal Liability in an Organizational Setting

    A. Direct participants: Federal law doesn‟t recognize any distinction bet. principals and

    accessories.

    1. Wise (p.50) A corporate officer may be held personally liable if he knowingly participates

    in illegal conduct whether he authorizes, orders, or helps perpetrate the crime even if

    he‟s acting in a representative capacity. Both the corp and the officer can be prosecuted.

    We punish the corp to encourage supervision and the implementation of compliance

    programs; we punish the officer b/c that has a particularly powerful deterrent effect.

    B. Knowing participation.

    1. Brown I (p.53) Employees were held personally liable for the actions of their

    subordinates b/c they were in positions of power and authority, they knew that their

    subordinates were engaging in antitrust violations (the billboard case), and yet they did

    nothing to stop the violations. Ct. held that this passive behavior coupled with their key

    positions amounted to their knowing participation in the violations themselves.

    C. Willful participation.

    1. Brown II (p.56) Two employees of the Detroit Housing Dept. gave benefits to friends and

    cronies based on improper and impermissible conditions. Willful participation = (1)

    voluntary, intentional conduct, plus (2) a specific intent to fail to do something which the

    law requires to be done. (Note that “flagrant indifference” suffices to meet a willfulness

    requirement only in the context of corporate liability.) The first employee was a

    subordinate and wasn‟t held liable: she didn‟t understand the function of the waiting list;

    this wasn‟t a mala in se offense so that she should‟ve known she was breaking the law; and

    she didn‟t actually do the paperwork or submit it to HUD (actus reus). So neither (1) or (2)

    above were met. But her superior was held liable b/c she was in a position of power and

    authority and she issued the vouchers.

    D. Imposing liability on corporate officers via the responsible share theory: A corporate

    officer may be found to have had a responsible share in a transaction which led to a violation if (1) she was in a position of power and authority over the transaction/operation out of which the violation arose and (2) she had a legal duty to prevent or correct such violations. 1. Dotterweich (p.61) President/general manager (Dotterweich) of Buffalo Pharmacal was

    held personally liable for FDA violations for shipping adulterated and misbranded drugs in

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    interstate commerce. If someone must be responsible for the purity of the drugs and the

    accuracy of the representations, then, bet. the public (consumers) and the manufacturer and

    the shipper, the last two are in the best position to minimize the risk of harm. Dotterweich

    held responsible b/c he was the supervisor, even though he didn‟t know about or personally

    participate in the wrongdoing. Note that these violations were only misdemeanors. 2. Park (p.65) CEO of huge corp w/ multiple operations and locations (in contrast to the

    pharmaceutical corp in Dotterweich) was held personally liable for FDA violations (rodents

    in food warehouses). He had lots of notice of the problem (series of letters from the FDA);

    he delegated authority to fix the problem to subordinates whom he trusted; he thought

    everything was taken care of; and in the end he was still held liable under the responsible

    share theory. Authority can be inferred from position/title, or ostensible or effective

    authority and responsibility. Park failed to fulfill the two duties he had under the Act: a

    positive duty to seek out and remedy violations when they occur and also a duty to

    implement measures to ensure that violations won‟t occur. He knew that his system of

    delegation had broken down, so he shouldn‟t have continued to rely on it. The only

    available defense under the Act (which he didn‟t have): objective powerlessness to prevent

    the violations (e.g., sabotage under weird circumstances).

    III. Mail Fraud

    A. The mail fraud statute, 18 U.S.C. ? 1341: The gist of the offense is the use of the mails to

    further fraudulent activity. Elements: (1) D must have engaged in a scheme to defraud

    someone of a protected interest; (2) D must have had fraudulent intent; (3) the purpose of D‟s

    scheme must have been private gain; (4) the scheme must have involved the use of interstate mails/wires; and (5) the fraud or deception must have been material.

    1. Note that the fraud itself doesn‟t have to be criminal, which makes the mail fraud statute a

    useful device for prosecutors. Also: The fraud doesn‟t have to entail something that the fed.

    govt. can regulate independently, which allows the fed. govt. to expand its jurisdictional

    hook beyond the usual commerce clause limits.

    B. The wire fraud statute, 18 U.S.C. ? 1343: Analogous to the mail fraud statute; the two

    statutes are to be construed in the same way (the statutes are in pari materia).

    C. Distinction between fraud and acting under false pretenses: Someone acts under false

    pretenses when she, intending to defraud, knowingly makes a false representation of a past or a

    present fact to induce another to part with money or property. Promises and representations as to the future don‟t qualify under most false pretenses statutes. Fraud, a more fluid concept, involves an effort to gain an undue advantage or to bring about harm through some material

    misrepresentation or breach of duty. (There is no bright-line defn. of fraud depends on the

    context.)

    D. Intent to defraud, or intent to engage in a scheme to defraud. What distinguishes intent to

    defraud from incompetence/inefficiency/negligence? Lack of honesty, misrepresentation. What distinguishes intent to defraud from intent to deceive? Materiality, i.e., does it go to the heart of the bargain. (No real bright-line distinction.)

    1. Hawkey (p.126) A sheriff was held liable under mail fraud statute for self-dealing in a

    charity concert venture. D intentionally engaged in a scheme to defraud: concerts were

    designed to raise money for charitable purposes; D knowingly diverted these funds for his

    personal benefit; and D failed to inform the concert promoter, his accountant, the

    contributors, and the benefactors.

    2. Lustiger (p.131) D held liable under mail fraud statute for mailing out colorful brochures

    with literally true but misleading pictures concerning parcels of property for sale. If a

    scheme is reasonably calculated to deceive and defraud, and it involves use of the mails,

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    then it‟s fraud; the fact that there‟s no actual misrepresentation of a single existing fact

    doesn‟t matter. Also, the deception needn‟t be premised on verbalized words alone. The

    arrangement of the words or the circumstances in which they‟re used may be deceptive

    enough.

    3. Note: You just have to prove intent to engage in a scheme to defraud; you don‟t have to

    prove that the victim of the scheme was actually defrauded or suffered a loss.

    E. Materiality: Cts. have traditionally assumed that false or fraudulent representations must be material. A statement is material if: (a) a reas. person would attach importance to its existence or nonexistence in determining his choice of action in the transaction in question; or (b) the maker of the representation has reason to know that its recipient is likely to regard the matter as important in determining his choice of action, even if a reas. person would not so regard it. (Rest. 2d of Torts.)

    1. Note: Not every lie is fraudulent. Example: A salesperson telling a purchasing agent that he

    just played golf with the agent‟s boss may be lying, but that lie wouldn‟t be considered

    fraudulent. Just salesmanship.

    F. Protected interests: money, property, and the intangible right of honest services.

    1. Hawkey (p.128) The concert patrons intended that part of their payment would be a

    contribution to charity. They could‟ve expected their payment to help cover related

    business expenses, but the application of their payment to Hawkey‟s personal and wholly

    unrelated business expenses was so unusual and unprofessional as to be fraudulent. 2. George (p.135) Ds were charged w/ defrauding Zenith Radio Corp. under mail fraud

    statute. A cabinet supplier paid Zenith‟s purchasing agent (Yonan) kickbacks, through a

    third party, to ensure that Zenith would continue to purchase the suppliers cabinets. Yonan

    deprived Zenith of (1) his honest and loyal services, (2) a $300,000 discount, and (3) the

    opportunity to bargain with a fact most relevant before it. Intangible rights theory:

     are protected interests under the mail intangible rights that you‟re entitled to – (1) and (3)

    fraud statute.

    3. McNally (p.140) S. Ct. nullifies intangible rights theory, holding that the intangible right

    of the citizenry to good government is not a “property” interest within the meaning of the

    mail fraud statute. Ct. was concerned about federalism and didn‟t want to set far-reaching

    standard for good government for the states (i.e., no conflicts of interest). Money and

    property are the only protected interests.

    4. 18 U.S.C. ? 1346: After McNally, Congress restored the intangible rights theory in part.

    Now, “the intangible right of honest services” is a protected interest, in addition to money

    and property. Honest services convictions of public officials typically involve serious

    corruption, such as embezzlement of public funds, bribery, or the failure of public decision-

    makers to disclose certain conflicts of interest. To get an honest services conviction of a

    private individual, you have to establish (1) a fiduciary duty (assumed for the public

    official) and (2) that the breach foreseeably created a potential for illicit personal gain or

    economic harm to the victim. See Czubinski and deVegter.

    5. Carpenter (p.147) WSJ columnist gave confidential business info belonging to the WSJ

    to Wall Street traders prepublication who used the info to out-trade the WSJ‟s readership. S.

    Ct. held that Ds deprived WSJ of its exclusive right to decide how to use the information in

    the “Heard” column before disclosing it to the public, and that this was a protected property

    interest. The info was generated in the course of the columnist‟s employment for the WSJ.

    Impact: harm to WSJ‟s reputation and effect on readers who used info in the column to

    make investment decisions.

    6. Cleveland (p.151) S. Ct. held that unissued video-poker machine licenses in the hands of

    a govt. regulator do not constitute “property” within the meaning of the mail fraud statute.

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    Ds, licensees, had misrepresented themselves on their license applications. Such licenses

    are “purely regulatory.The govt.‟s interest doesn‟t involve any capital investment,

    entrepreneurship, risk of harm to its reputation, etc. in contrast to a business‟s interest in a

    license, or other property. Also, Ct. refused to expand federal criminal jurisdiction so

    sweepingly in the absence of a clear statement by Congress.

    7. Czubinski (p.160) An IRS employee who exceeded his authority and conducted

    unauthorized searches in taxpayer info database was not held liable for wire fraud b/c no

    proof that he intended to deprive the IRS of its property, or the IRS and the public of their

    intangible right to his honest services. This was mere browsing. There was no evidence that

    he intended to further use the info for any private purposes, besides his one comment at the

    cocktail party he didn‟t create dossiers, print stuff out, solicit bribes from the taxpayers he

    looked up, share info about the taxpayers with others, etc. Regarding the honest services

    charge, he didn‟t derive any tangible benefit, and he didn‟t seriously breach any fiduciary

    duty.

    8. deVegter (p.169) Two employees of investment banks deprived Fulton County of honest

    commercial services by providing corrupted financial advice regarding underwriting

    proposals, causing potential economic harm to the County. They both had fiduciary

    relationships w/ the County b/c the County relinquished de facto control of the underwriter

    selection decision to one of them, and the other was vested w/ a position of dominance,

    authority, trust, and de facto control in recommending an underwriter.

    G. The use of the mails. The mailing just has to be incident to an essential part of the scheme. 1. Schmuck (p.175) Schmuck was convicted of mail fraud for selling used-cars with rolled-

    back odometers to dealers, who in turn resold them to retail purchasers. The dealers mailed

    title-registration applications to the state, and the state mailed them back to the customers.

    S. Ct. held that the mailing of the applications was part of the execution of the fraudulent

    scheme b/c D intended the retail purchasers to bear the ultimate loss (as opposed to the

    dealers) and b/c this was an ongoing scheme involving 150 cars over a period of years. 2. Maze (p.178) D who stole and used roommate‟s credit card was not held liable under mail

    fraud statute. The invoices that the stores and motels mailed to the bank that issued the

    credit card were not part of the execution of D‟s scheme b/c D‟s scheme in no way

    depended on the mailings; they merely determined which of D‟s victims would ultimately

    bear the loss.

    3. Parr (p.178, n33) Must show that the mailing would not have occurred but for the

    fraudulent scheme.

    4. Carpenter (p.147) The delivery of the newspapers to the customers was part of the

    execution of the fraudulent scheme b/c the trades wouldn‟t have been profitable if the

    “Heard” column didn‟t affect the mkts. Note that the mailings themselves were entirely

    innocent nothing in the column was falsified or manipulated.

    5. Sampson (p.181) Ds were convicted of mail fraud for making representations about

    business services they would supply, collecting advance fees from customers, mailing

    “lulling letters” to the customers, and then making no effort to perform the services. The

    assurances in the letters were part of the scheme b/c they lulled the victims into a sense of

    complacency that allowed the Ds to obtain money from other victims.

    H. Proof of use of the mails/wires: OK to use circumstantial evidence. Not a major issue. Note

    that each separate use (mailing, phone call, etc.) in furtherance of the scheme constitutes a separate offense.

    I. Mail and wire fraud affecting a financial institution. If the fraud affects a financial

    institution, the person gets fined a maximum of $1mm and/or imprisoned a maximum of 30 years higher than the ordinary fine/5-year maximum.

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    1. Bouyea (p.184) D was convicted of bank fraud and wire fraud for causing a subsidiary of

    a bank to lend him money on the basis of forged and falsified documents. The subsidiary

    wasn‟t a financial institution, but the bank was. Ct. looked at the relationship bet. the bank

    and the subsidiary and held that the bank was affected b/c the bank had to loan the $150K

    to the subsidiary so that the subsidiary, in turn, could make the loan to D.

    J. The bank fraud statute (a statute prohibiting a specific fraud), 18 U.S.C. ? 1344:

    1. Doke (p.187) Doke and his atty were held liable for bank fraud b/c Doke‟s atty secured a

    loan for Doke and failed to disclose Doke‟s involvement to the bank. The Ds caused the

    bank to violate civil banking regulations, which was enough to constitute fraud; the bank

    was entitled to make its decision regarding the loan with all material facts on the table. This

    case could have been brought under either subset of the bank fraud statute.

    K. The computer fraud statute (a statute prohibiting a specific fraud), 18 U.S.C. ? 1030:

    1. Note: A protected computer is one that is used by the U.S. govt. or a financial institution, or

    one that is used in interstate or foreign commerce or communication.

    2. Middleton (p.192) A disgruntled ex-employee who sabotaged his former employer‟s

    computer system was held liable for computer fraud under ? 1030(a)(5)(A). The statute

    covers damage to “one or more individuals,” which includes corporations. In the

    calculation of damages, it‟s OK to consider what measures were reasonably necessary to

    restore and resecure the data, program, system, or info that was damaged. Can look at direct

    expenditures (e.g., new software) as well as the value of the time of the employees who had

    to work on fixing the damage.

    3. Czubinski (p.200) D was not held liable for computer fraud under ? 1030(a)(4) b/c the

    prosecution couldn‟t prove that he intended to defraud or that he obtained something of

    value when he performed unauthorized searches in the IRS database. Note that the “unless”

    clause in ? 1030(a)(4) is meant to distinguish computer fraud from computer trespass.

    L. Double jeopardy issue? Cts. use the Blockburger test to determine whether two charges are the

    same. Two charges are not the same if each offense requires proof of an element that the other does not. While mail fraud, wire fraud, and bank fraud each involve a scheme to defraud, mail fraud involves use of interstate mails, wire fraud involves use of interstate wires, and bank fraud must be against a financial institution. So, no double-jeopardy issue w/ charging under these three statutes.

    IV. Securities Fraud

    A. SA of 1933 and SEA of 1934: Both contain a general criminal penalty provision that (1)

    elevates what would otherwise be a civil regulatory violation to a felony, provided that the violation is willful, and (2) defines and penalizes the independent crime of willfully making false and misleading statements in a registration statement or other document.

    B. Knowing and willful participation in fraud. A knowledge/willfulness requirement can be met

    by (1) actual knowledge of impropriety and failure to do something about it, or (2) partial knowledge and conscious avoidance (willful blindness) of duty to investigate. 1. Weiner (p.204) Independent public accountants were held liable for securities fraud for

    falsifying financial information re: their client corp over several years, presumably in order

    to present the desired image of a healthy, growing corp. Ct. found that the sheer magnitude

    of the adjustments the corp had to make, plus the length of time over which the three Ds

    were involved w/ the corp as auditors, plus the fact that they didn‟t follow basic standards

    for auditing, could only mean that (a) the Ds were totally inept, or (b) they were aware to

    some extent of the false inflation of the corp.‟s accounts. Even if they didn‟t initially know,

    their consistent failure to apply GAAS and GAAP after they knew some kind of a major

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    fraud was afoot provided a basis from which the jury could infer their knowing and willful

    participation in the fraud. Similar to the Enron and WorldCom cases.

    2. Bilzerian (p.213) D was held liable for securities fraud for engaging in fraudulent

    transactions in the common stock of four companies. He filed a motion in limine seeking a

    ruling permitting him to testify regarding his state of mind, his belief in the lawfulness of

    his conduct, while prohibiting the prosecution from following-up w/ questions about his

    communications w/ his atty. Ct. held that the atty-client privilege is waived when a D

    asserts a claim that in fairness requires examination of protected communications (here, the

    basis of D‟s understanding that his actions were legal). Note: D still could have raised his

    good-faith defense through his lawyer‟s closing argument.

    C. The SEA’s “no knowledge proviso, 15 U.S.C. ? 78ff(a): “No person shall be subject to

    imprisonment under this section for the violation of any rule or regulation if he proves that he had no knowledge of such rule or regulation.” This may protect ostensibly innocent corporate

    officers from going to jail for violating some obscure rule or unpublicized administrative action, but it doesn‟t insulate them completely from criminal liability for the violation (i.e., they might still have to pay a fine). Harder to assert this after the Administrative Procedure Act. 1. Lilley (p.219) Ds pled guilty to buying and selling shares for the purpose of creating the

    appearance of trading activity in a stock, violations of SEC Rule 10b-5. When they pled

    guilty, they essentially admitted that they knew generally that their conduct was

    manipulative and that securities fraud was illegal. It didn‟t matter that they didn‟t know

    specifically that they met the Rule 10b-5 standard. Knowledge that securities fraud is

    illegal was enough.

    D. Insider trading: SEA ? 10b and Rule 10b-5. SEA ? 10b prohibits use of a manipulative or

    deceptive device in connection with the purchase or sale of securities in violation of SEC rules and regulations. Rule 10b-5, which was promulgated by the SEC pursuant to this provision, proscribes in turn the following manipulative and deceptive devices: (1) to employ a device, scheme, or artifice to defraud; (2) to make any untrue statement of a material fact or omit any such fact necessary to make a statement not misleading; or (3) to engage in a transaction, practice, or course of business that would operate as a fraud or deceit. Insider trading is prosecuted under Rule 10b-5 on the theory that it constitutes a scheme to defraud. 1. Rule: If material misrepresentation, then automatic 10(b)/10b-5 criminal liability. If

    material omission, then have to show that D had a duty to disclose by arguing classical

    theory (Cady, Roberts duty), constructive insider theory (footnote 14 in Dirks)

    misappropriation theory, or tipper-tippee theory.

    2. In re Cady, Roberts & Co. (p.228) [Classical theory] SEC decided that a corporate insider

    must abstain from trading in the shares of his corp unless he has first disclosed all material

    inside information known to him. His duty to the other shareholders of the corp with whom

    he transacts arises from (1) the existence of a relationship affording access to inside info

    intended to be available only for a corporate purpose, and (2) the unfairness of allowing a

    corporate insider to take advantage of that info by trading without disclosure. The theory

    applies to permanent insiders (corporate officers, directors, executives those who have

    permanent responsibilities at the corp) and to temporary fiduciaries (lawyers, accountants,

    consultants, takeover specialists, investment bankers, etc. see footnote 14 in Dirks).

    3. Chiarella (p.226) [Classical theory] An employee of a financial printer prepared

    documents announcing corporate takeover bids and made strategic trades based on the info

    he saw prepublication. The names of the corps were blacked out, but he was able to deduce

    their identities from other info. S. Ct. did not hold him liable for insider trading b/c he

    didn‟t have a relationship of trust and confidence with the shareholders of the corporation

    (the target company) in which he traded stock. The trades were impersonal mkt.

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    transactions; there was no duty to reveal material facts. (Note: Chiarella today could have been prosecuted under the misappropriation theory. He owed a duty to his employer, which in turn owed a duty to the acquiring company.)

    4. O’Hagan (p.233) [Misappropriation theory] Lawyer who worked for firm that

    represented client corp re: a potential tender offer made trades on the basis of the confidential tender offer plans. He was held liable for mail fraud, securities fraud, and insider trading, even though he did no work for that client and the firm ceased to represent the client a month before the client announced its tender offer for another company‟s stock.

    The misappropriation theory: D committed fraud “in connection with” a securities

    transaction, and thereby violated ? 10b and Rule 10b-5, when he misappropriated confidential info for securities trading purposes, in breach of a duty owed to the source of the info, his employer. The fraud was consummated when, without disclosure to his firm, he used the info to trade. (Note: Why wasn‟t this classical insider trading? Because D‟s

    duty was to the client corp and its shareholders, not to the shareholders of the target company.)

    5. Dirks (p.239) [Tipper-tippee] D, an officer of a broker-dealer firm who specialized in providing investment analysis of insurance company securities to institutional investors, received info from a former officer of Equity Funding re: fraudulent corporate practices. The former officer asked D to investigate the fraud and disclose it. D did investigate, and some employees corroborated the charges. D passed on the info to a WSJ reporter and to his clients, some of whom sold their Equity Funding holdings. S. Ct. held that he was not

    liable for securities fraud on the theory that the former officer didn‟t breach his Cady,

    Roberts duty to shareholders in disclosing the info to D. The tippers were motivated by a desire to expose the fraud, not personal gain. A tippee is only liable if (1) the tipper is, i.e., if the tipper has breached a duty, and (2) the tippee knows that the tipper passed the info on to him improperly.

    6. Chestman (p.245) [tipper-tippee] The stockbroker (Chestman) of a couple (Susan and Keith Loeb) that was related to the founder of a publicly-traded supermarket chain (Waldbaum) made trades for his own account and for his clients‟ discretionary accounts on the basis of info he received improperly. The info related to the pending sale of Waldbaum to A&P. The stockbroker was not held liable for insider trading. Because Keith owed

    neither his wife nor the Waldbaum family a fiduciary duty or its functional equivalent, he didn‟t defraud them by disclosing news of the pending tender offer to his stockbroker.

    Absent a predicate act of fraud by Keith, the alleged misappropriator, the stockbroker couldn‟t be derivatively liable as Keith‟s tippee.”

    7. Rule 10b5-2 (p.253) Addresses the question, considered in Chestman, of when non-

    business relationships may give rise to a duty of trust and confidence for purposes of the misappropriation theory of insider trading. Section (b)(3) stands Chestman on its head we

    now start with a rebuttable presumption that there is a relationship of trust and confidence whenever someone receives material, non-public info from a spouse, mother, etc. Section (b)(1) agree to maintain info in confidence; (b)(2) pattern and practice.

    8. Teicher (p.254) Teicher and Frankel, two players in a five-person group in which

    confidential business info was shared, were held liable for securities fraud, conspiracy, and mail fraud. Ds argued that the prosecution should have had to prove a causal relationship bet. the misappropriated material non-public info and their trading, i.e., that they traded “on

    the basis of” that info. The ct. rejected this argument, holding that the standard is “knowing possession.” “It strains reason to argue that an arbitrageur, who traded while possessing info he knew to be fraudulently obtained, knew to be material, knew to be non-public and

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    who didn‟t act in good faith in so doing – did not also trade on the basis of that info. [O]n

    the facts of this case, no reas. jury could have made such a distinction.”

    9. Rule 10b5-1 (p.259) Address the question of when a person in possession of material

    nonpublic information trades “on the basis of” the information. Definition in (b) codifies

    Teicher rule of “knowing possession. But the affirmative defenses in (c) accommodate

    some of the concerns of the Teicher defendants.

    E. New securities fraud statute from Sarbanes-Oxley, 18 U.S.C. ? 1348: Modeled after the

    mail fraud statute; cts. are likely to draw on mail fraud statute case law. Different from SEC Rule 10b-5: “in connection with any security” covers a lot more than “in connection with the purchase or sale of a security.” Unclear when prosecutors would use ? 1348 and when they‟d use Rule 10b-5 perhaps prosecutorial guidelines will be developed.

    V. False Statements

    A. False statements generally, 18 U.S.C. ? 1001: Whoever (1) knowingly and willfully (2)

    makes false or fraudulent statements (3) that are material (4) in any matter within the jurisdiction of a federal department or agency, except in judicial proceedings, is guilty of violating the statute.

    1. United States v. Rodgers (p.292) D was held liable under ? 1001 for making false reports

    to the FBI and to the Secret Service in order to locate his wife. In light of the statute‟s

    original policy of curtailing the flow of false info to the agencies, which interferes w/ their

    administrative and regulatory functions, the ct. read the term “jurisdiction” more broadly

    than did the lower ct., finding that “the phrase „within the jurisdiction‟ merely differentiates

    the official, authorized functions of an agency or department from matters peripheral to the

    business of that body.” The statute applies only to those who lie “knowingly and willfully”

    to the govt., so it shouldn‟t deter citizens who in good faith want to report suspected crimes.

    2. United States v. Wright (p.296) D was held liable under ? 1001 for filing falsified reports

    with the County Health Dept. regarding the water treatment plant where he worked. He

    argued that there was no direct relationship bet. the reports he submitted and a function of

    the EPA b/c the EPA had surrendered primary authority for enforcement of Safe Drinking

    Water Act standards to Oklahoma and b/c he filed the report w/ the state, not the EPA. The

    ct. rejected his argument, reasoning that (1) a grant of primary authority is not a grant of

    exclusive authority, (2) the EPA is involved in assuring state compliance w/ nat‟l water

    standards, and (3) the EPA‟s funding of Oklahoma‟s public water program is conditioned,

    in part, on the results of its annual evaluations of that program (which are based in small

    part on water analysis data). All that matters is whether the EPA has the authority to review

    the reports to enforce the Safe Drinking Water Act not whether the EPA actually

    exercises that authority.

    3. Steiner Plastics (p.299) The D corp produced plexiglass cockpit canopies for Grumman

    Aircraft, which was producing jet planes for the Navy. It engaged in a fraudulent scheme in

    which it switched inspection approval stamps so that defective canopies would pass

    inspection. The ct. found that the scheme was designed to deceive both Grumman and the

    Navy, and therefore was “within the jurisdiction” of the Navy. Also, the ct. found that it

    didn‟t matter whether or not the canopies in question were actually defective b/c such

    evidence wouldn‟t have negated the false statements in the inspection approval stamps,

    which deprived the Navy of the right to make the approval decisions on its own.

    B. Material false statements: A statement is material if it relates to the function of an agency if

    it has the “capacity or natural tendency” to influence the course of an agency project or investigation, whether or not it‟s likely to influence. Not a stringent standard. (The higher

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materiality standard in the securities fraud context reasonably would influence an investor‟s

    decision is the exception rather than the rule.)

    1. LeMaster (p.303) FBI was investigating allegations that certain legislators were illegally

    receiving money in exchange for favorable votes on pending horseracing legislation. Ct.

    held that D‟s lies in an interview were material to the FBI‟s investigation, even though the

    FBI knew beforehand that D had accepted money, b/c FBI needed to make sure there

    wasn‟t an innocent explanation for D‟s having accepted the money (improbable but

    possible).

    2. Shah (p.307) D certified in a govt. contract, “I will not disclose price info before the

    contract award,” after he had invited a competitor to share bids with him. Ct. held that a

    promise may amount to a “false, fictitious, or fraudulent” statement, within the meaning of

    ? 1001, if it‟s made without any present intention of performance and under circumstances

    s.t. it plainly, even if implicitly, represents the present existence of an intent to perform. It‟s

    not that he broke a promise; it‟s that he made a promise while not intending to keep it.

    What about insincere predictions? Not unlike false promises. Have to determine whether

    the prediction is material, whether it induced the other party to enter into the contract.

    C. Exculpatory no’s. No such thing.

    1. Brogan (p.313) S. Ct. held that there is no exception to liability under ? 1001 for a false

    statement that consists of the mere denial of wrongdoing, the so-called “exculpatory no.”

    Ginsburg wrote a concurring opinion warning of “the extraordinary authority Congress,

    perhaps unwittingly, has conferred on prosecutors to manufacture crimes.”

    D. Culpable mental state w.r.t. jurisdictional facts: None required. But cts. have founds that ?

    1001 isn‟t a trap for the innocent b/c there‟s still a knowingly-and-willfully requirement w.r.t

    the false statement or fraud. If the amt. of the fraud is truly minor, try to argue that the govt. should exercise prosecutorial discretion.

    1. Yermian (p.320) D had already lied on his employment application, and he didn‟t want to

    get caught, so he lied again in connection with a security questionnaire. Charged under ?

    1001, he claimed that, although he knew that he lied, he didn‟t realize that he was lying to

    the Dept. of Defense. He requested a jury instruction requiring govt. to prove that he had

    actual knowledge that his statements were made in a matter within the jurisdiction of a

    federal agency. S. Ct. held that ? 1001 doesn‟t require actual knowledge of jurisdiction but

    declined to specify whether some lesser mental state was required.

    2. Example: Suppose D lied on an employment application, and, years later and without D‟s

    knowledge, D‟s employer used the false info from the application in a contract proposal

    submitted to the govt. Section 1001 violation? Have to argue that at the time D filled out

    his employment application, what he lied about was not within the authority of any federal

    agency to act upon in its official capacity.

    3. Green (p.324) D falsified safety test report for a nuclear power plant; the safety tests were

    required by the Nuclear Regulatory Commission. Ct. held that no mental state (actual or

    constructive knowledge) is required w.r.t. federal involvement in order to establish a

    violation of ? 1001.

    E. Double jeopardy: The Double Jeopardy Clause prohibits prosecution for the same offense following conviction, prosecution for the same offense following acquittal, and imposition of multiple punishments for the same offense. Under the Blockburger test, two offenses are not the

    same if each explicitly requires proof of an element that the other does not. 1. Ramos (p.327) D was convicted for giving a false name, place, and date of birth and

    using false papers in applying for a passport in violation of ? 1001, and for making a false

    statement with the intent to secure a passport in violation of 18 U.S.C. ? 1542. Ct. held that,

    under the Blockburger test, the Double Jeopardy Clause wasn‟t violated. Section 1001

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