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Defenses To White Collar Crimes

1.     Mistake of Fact

Because the government must prove that a defendant “know[s] the facts that make his conduct illegal,” Staples, 511 U.S. at 605 (emphasis added), “[a] mistake of fact which negates the existence of the necessary criminal intent will constitute a defense.”  United States v. Goodwin, 440 F.2d 1152, 1156 (3d Cir. 1971).  A defendant may therefore demonstrate that he lacked the requisite mens rea “by showing that, under the circumstances, he reasonably believed the facts to be other than they were and that his actions would have been innocent had his belief been correct.” Id.  For instance, in United States v.International Chemical, 402 U.S. 558, 563-564 (1971) the Supreme Court noted that a person “thinking in good faith that he was shipping distilled water when in fact he was shipping some dangerous acid would not be covered.”

Other examples of mistake of fact defenses include Ahmadsupra, where a convenience store owner convicted of CWA violations after he pumped out an underground gasoline storage tank into which water had leaked, discharging gasoline into city sewer systems and nearby creeks.  The Fifth Circuit agreed that the government had to prove not only that Ahmad knew that something was discharged, but also that he knew that that something was gasoline.  Id. at 391.

In United States v. Hayes, International, Inc., 786 F.2d 1499 (11th Cir. 1986), the defendants argued that they thought that the company hired to haul waste was going to recycle the waste and not dispose of the waste.  Citing United States v. International Minerals, 402 U.S. 558 (1971), the Eleventh Circuit held that such a mistake of fact is a defense to the charges that the defendant violated § 6928(d)(1):

In this case, had the wastes been recycled, then no violation of the statute would have occurred. Accordingly, a good faith belief that the materials were being recycled is analogous to the good faith belief in International Minerals that the acid was actually water.
Id. at 1506.

In United States v. Petersen, 513 F.2d 1133 (9th Cir. 1975), the defendant was charged with embezzlement or theft of federal property in violation of 18 U.S.C. § 641, a crime requiring proof of specific intent.  Id. at 1134. The Ninth Circuit held there that Petersen was entitled to an instruction on his defense that he reasonably believed that the person from whom he bought the property was legally authorized to sell it.  Id. at 1135.

2.     Failure of Proof and Instructional Issues

Defenses are as limitless as the facts allowing for the prosecution of white collar offenses.  For example, in United States v. Newman, Nos. 13-1837-cr, 13-1917-cr (2d Cir. December 10, 2014) the Second Circuit Court of Appeals considered an insider trading case and reversed the conviction of a “tippee” because the trial court failed to require proof that the tippee knew the tipper benefited from the tip personally in a way that was “objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.”

The defense may also argue that the conduct, even if obviously wrong, did not violate the statute in question.  A good example of this is 18 USC § 1014, false statement to a bank.  According to the U.S. Supreme Court in Williams v. United States, 458 U.S. 279 (1982):

To obtain a conviction under § 1014, the Government must establish two propositions: it must demonstrate (1) that the defendant made a “false statement or report,” or “willfully overvalue[d] any land, property or security,” and (2) that he did so “for the purpose of influencing in any way the action of [a described financial institution] upon any application, advance,. . . commitment, or loan.”

Id. at 284 (emphasis added).  Despite the density of the statute, Congress enacted 1014 to criminalize false statements in loan applications.

The legislative history does not demand a broader reading of the statute. The amendments adding institutions to § 1014’s list attracted little attention in Congress and were dealt with summarily; at no point was it suggested that the statute should be applicable to anything other than representations made in connection with conventional loan or related transactions.

Id. at 288-289 (emphasis added).  The majority opinion noted that § 1014 must be subject to a “narrow interpretation.”  Id. at 290.  Thus, a defense to this statute may be that even if the defendant lied to a bank, the lie was not in connection to an “application”.

As discussed previously, the failure to instruct the jury on every essential element is reversible error.  United States v. Caldwell, 989 F.2d 1056, 1061 (9th Cir. 1993).  The Caldwell case demonstrates the complexity of white collar defense in a number of ways: the prosecutor desires convictions and plays with every available advantage, including a reduced burden of proof where available.  By submitting jury instructions to the court that reduced the mens rea necessary for conspiracy to defraud the U.S. (18 U.S.C. § 371), the prosecutor enhanced the chances of convicting Caldwell at trial.  The court adopted the instruction that omitted the requirement that the defendant acted with  “deceit, craft or trickery, or at least by means that are dishonest.”  Id. at 1058-1059.  This language was taken directly from the U.S. Supreme Court’s decision in Hammerschmidt v. United States, 265 U.S. 182 (1924).

In United States v. Mazza, the trial court gave an “interested witness” instruction, which purportedly “creates a motive to testify falsely and may sway the witness to testify in a way that advances self-interests”.  United States v. Mazza, 2014 U.S. App. LEXIS 22766 *2 (2d Cir. Dec. 4, 2014).  This instruction was clearly erroneous under a plain error standard because it undercut the presumption of innocence, which perturbed the appellate court because the instruction blatantly disregarded the holding from United States v.Brutus, 505 F.3d 80 (2d Cir. 2007).    In light of the instructional error, the Second Circuit vacated the convictions for conspiracy (18 U.S.C. § 371) and false statement (18 U.S.C. § 1001), although it affirmed the convictions for the substantive CERCLA count (42 U.S.C. § 9603(b)) and obstruction of justice (18 U.S.C. § 1519).

Other nuanced instructional issues can have critical importance.  In United States v. McKye, 734 F.3d 1104 (10th Cir. 2013), the court overturned the defendant’s convictions for securities fraud (15 U.S.C. § 78j(b)) because the instructions permitted the government to convict without proving the investment notes were “securities”.   The defendant proffered an instruction requiring the jury to determine if the notes were securities, but the government argued that this was a matter of law and not a jury determination.  Id. at 1107.  McKye successfully argued on appeal that the phrase “any note” from 15 U.S.C. § 77b(a)(1) had been interpreted to mean that a note was presumed to be a security by the Supreme Court in Reves v. Ernst & Young, 494 U.S. 56, 63 (1990).  Id. at 1107-1108.  However, this presumption could be overcome if the note bore a “strong resemblance” to one of the factors identified by the Court.  Reves, 494 U.S. at 67.  As this case demonstrates, the smallest details matter in the context of jury instructions and could mean the difference between a conviction and an acquittal (or reversal on appeal).[2]

Writer Walter Pavlo stated that, “[t]he jury instructions given by a federal judge can be complicated and several pages long.  The jury pool routinely consists of blue-collar workers who have little knowledge of the inner-workings of the financial world … but they do know that the economy is bad, banks got bailed out, and few people have gone to prison for the economic collapse.”  Walter Pavlo, Can White Collar Defendants Get a Fair Trial? Forbes (Dec. 19, 2012).   The idea that juries are more inclined to convict white-collar defendants contrasts sharply with the presumption of innocence and highlights the challenge of taking white collar cases to trial.

3.     Good-Faith Reliance on Legal Advice

Good faith reliance on qualified advice is also a recognized defense in legally complicated areas, such as the tax code. Seee.g., Cheek v. United States, 498 U.S. 192 (1991); United States v. Moran, 493 F.3d 1002, 1013 (9th Cir. 2007).  The Ninth Circuit offers the following standard instruction for this issue, and explains that reliance on another’s advice is not so much a defense as a way of showing the government has not proven intent:

One element that the government must prove beyond a reasonable doubt is that the defendant had the unlawful intent to [specify applicable unlawful act].  Evidence that the defendant in good faith followed the advice of counsel would be inconsistent with such an unlawful intent. Unlawful intent has not been proved if the defendant, before acting, made full disclosure of all material facts to an attorney, received the attorney’s advice as to the specific course of conduct that was followed, and reasonably relied on that advice in good faith. 9th Cir. Model Crim. Jury Inst. No. 5.9 (2010).

In SEC v. Tourre, 1:10-CV-03229-KBF (S.D. NY June 18, 2013), the district court ruled that the civil defendant was precluded from introducing evidence that an attorney was present for the transactions in question because to do so would “back door” this type of evidence when the defendant conceded he could not meet the requirements for a reliance on the advice of counsel defense.  See Dkt. 345 at 23-29.  The Second Circuit listed the following factors necessary to raise an advice of counsel defense: (1) complete disclosure to counsel, (2) having sought advice for the specific conduct, (3) having received advice that conduct was legal, and (4) having relied on that advice.  Markowski v. SEC, 34 F.3d 99, 104-105 (2d Cir. 1994).

In a related scenario, charges against attorneys providing legal advice to corporations provide an entirely different set of challenges in white collar defense.   In a case against an attorney for GlaxoSmithKline, the government obtained records otherwise shielded by attorney-client privilege by invoking the Crime Fraud Exception in response to the Food and Drug Administration’s very broad request for information.  United States v. Lauren Stevens, RWT-10-694 (D. Ct. MD May 10, 2011) (Rule 29 transcript).[3]  The Crime Fraud Exception was developed to overcome privilege claims when the attorney’s client was already engaged in a fraudulent scheme when legal advice was sought to further the scheme and the privileged materials bear a close relationship to the scheme.  Id.  In ruling in favor of the Rule 29 motion, the trial judge found that the attorney had not been engaged to perpetrate a crime; rather, GSK hired the attorney to assist in responding to the FDA’s inquiries.   Moreover, the judge cited the Safe Harbor Provision, which was “designed specifically to protect an attorney who is acting in accordance with the obligation that every lawyer has to zealously represent his or her client and place their position in the most favorable possible light.”  Id. at 6.

1.     Insufficient Evidence of Associations

In the context of white collar cases, the variety of relationships and associations will often play a significant role in defending the case.  This is particularly true in the corporate context because of compartmentalization and specialization of the workforce.  Naturally, corporate officers are presumed to possess greater knowledge of a company’s activities than the average employee.

For example, in United States v. Ashfield, 735 F.2d 101 (3d Cir. 1984), the trial court granted a post-trial motion for acquittal for one of the two defendants in a tax evasion trial notwithstanding the jury’s guilty verdicts.  Id. at 104.  The acquitted defendant argued that the government could not prove “willfulness” because he was not responsible for the company’s accounting practices and was unaware of the errors in accounting.  Id.  The appellate court reinstated the conviction against this defendant because his “participation in a tax evasion scheme goes well beyond a mere professional association with Storm,” including borrowing corporate funds to pay personal expenses but only made one loan repayment, using corporate funds to repay the debts, and the fact that he was a 50% shareholder and vice president who attended the financial meetings with accountants.  Id. at 108.

© 2014 Knut S. Johnson & Emerson Wheat.  May not be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the publisher, except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law.

[1] The National Association of Criminal Defense Lawyers, Inc. (“NACDL”) provides a variety of useful resources on its White Collar Crime Policy Department website.  See https://www.nacdl.org/whitecollar (last visited Dec. 22, 2014).

[2] Susan E. Brune and Laurie Edelstein, Jury Instructions: Key Topics in Federal White Collar Cases, The Champion, at 26 (Sept./ Oct. 2012) (suggesting that pattern jury instructions may not reflect recent decisional law and developments, which supports the defense filing individually-tailored proposed jury instructions).

[3]Link available at: https://lawprofessors.typepad.com/files/110510stevens.pdf (last visited Dec. 26, 2014).

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