Tag Archives: extraterritoriality

Thank You, Judge Charles Breyer, for Advancing the Cause of Prosecutorial Boundaries and Common Sense

This blog post is dedicated to all defense counsel out there who wanted to scream:  “WHY IS THIS HAPPENING?  WHY DOES THE GOVERNMENT THINK THIS CASE IS WORTH ITS (OUR) TIME AND MONEY?  WHAT PUBLIC POLICY GOAL COULD POSSIBLY BE FURTHERED BY THIS PROSECUTION?  WHY WOULD THE GOVERNMENT ALLOCATE HUNDREDS OF THOUSANDS OF DOLLARS OVER A DISPUTE OF NO CONSEQUENCE TO THIS COUNTRY?  DOES ANYONE ACTUALLY REVIEW THESE CASES AND EXERCISE DISCRETION?  WHERE IS THE ADULT SUPERVISION?”

 This blog post is also intended as reading for all Government prosecutors and enforcement lawyers, but especially those who believe prosecution/law enforcement involves finding any possible way to bring an action against someone under one of the thousands of available laws, without regard for proportionality and COMMON SENSE.  The ones who think the U.S. Treasury is their little piggy bank.

It’s an easy blog post to write.  It doesn’t require any analysis or stylistic writing.  It requires only getting the reader to read the transcript of a hearing that took place on April 17, 2015 in the case United States v. Vassiliev, No. CR 14-0341.  My thanks to Judge Charles Breyer for saying what needed to be said, and to a former colleague who sent me the transcript, knowing I would be amused and feel in some sense comforted by the fact that there are still people in the system of justice who haven’t lost their minds.  If you want to skip to the transcript right away, you will find it here: United States v. Vassiliev Hearing Transcript.  There’s a short article about the case here: No extraterritorial jurisdiction for wire fraud: a district court slams DOJ overreach.  For those who want just the highlights, I’ve chosen some choice excerpts.

District Court Judge Charles Breyer

District Court Judge Charles Breyer

Judge Breyer dismissed an indictment under 18 U.S.C. § 666 (bribery concerning programs receiving federal funds) and 18 U.S.C. § 1343 (wire fraud) that never should have been brought, and minced few words in doing so.  So, without further ado, ladies and gentleman    . . .    Judge Charles R. Breyer:

     THE COURT: So this matter is on for a motion to dismiss.  A number of grounds have been urged. And the defendants are basically charged with an honest services wire fraud and a bribery – a series of bribery charges. . . .

What I’m going to do is read the facts as I have gleaned them from the indictment and I’d like the Government to – if the Government believes that I’ve misstated it, I would like you to make note.

The International Civil Aviation Organization has been a United Nations specialized agency since 1944. . . . The time period relevant to the indictment is 2005, 2010.  And during this time, the United States made annual monetary contributions to the agencies exceeding $10,000 per year. . . .

Mr. Siciliano was an employee of this agency and was specifically assigned to work in the Machine Readable Travel Documents Program. Mr. Siciliano worked and resided in Canada, where the agency that we’ve just discussed is headquartered.  He held a Canadian passport, but is actually a Venezuelan national.

Mr. Sidorenko and Mr. Vassiliev were chairmen of a Ukrainian conglomerate of companies that manufactured and supplied security and identity products and their consortium, how they acted, was called EDAPS.

Mr. Sidorenko is a citizen of Ukraine, Switzerland and St. Kitts and Nevis. Not of the United States.  But he primarily resided in Dubai during the relevant time period.

Mr. Vassiliev also resided in Dubai, but he is a citizen of Ukraine and St. Kitts and Nevis.  He’s not an American citizen either.

And, of course, the company is not — I mean, the agency is not an American agency.

The indictment alleges . . . that Mr. Sidorenko and Vassiliev, Ukrainians, provided things of value to Mr. Siciliano in Canada in exchange for Mr. Siciliano using his position at a place in Canada to benefit an Ukrainian company, as well as these — Mr. Sidorenko and Mr. Vassiliev personally, these Ukrainians personally. . . .

All of those activities, everything that I have said, occurred outside the United States of America between these three defendants, who, by the way, aren’t United States citizens, who never worked in the United States and whose use of the wires did not reach or pass through the United States. . . .

Now, when last I looked, the Ukraine, what’s left of it, was not a state of the United States.

That’s correct, right?

     LEUNG: Correct, your Honor.

     THE COURT: Okay. So my first reaction in reading this indictment is that your office is to be congratulated because, apparently, you have reduced crime in the Northern District of California, and indeed in the United States of America, to such a point that you are using resources of your office to go after criminal activity that occurs in foreign countries and for that — that’s a rather interesting concept that, apparently, you thought this is a good use of assets and resources of the United States Attorney’s Office for the Northern District of California.

So it occurred to me: Is this statute or statutes, the honest services statute and the bribery statute, extraterritorial?  And, fortunately, the Supreme Court has addressed this issue.  As recently as 2010, they have said — Justice Scalia writing the opinion for a unanimous court, I might add, said that you just look at the statute.  See what Congress said.  Did Congress say it should be applied extraterritorial?  And you would concede, wouldn’t you, Mr. Leung, there is nothing in the statute that talks about extraterritorial application, is there?

     LEUNG: There is nothing in the text of 666 or 1343.  I would submit that the legislative history of 1343 suggests that it was meant to be applied extraterritorially.

     THE COURT: But you know there are those people, like judges, who look first to the statute. There is nothing in the statute. . . .  So then if there is nothing in the statute, that doesn’t preclude necessarily the application of the statute extraterritorial, but we have to see whether or not that’s consistent with the general purpose of the statute.

And it’s your view that since the Government contributes some funds to this agency, which is involved in national security — I guess we can talk about it in open court, can’t we?

     LEUNG: Yes, your Honor.

    THE COURT: Okay. I didn’t want to clear the Court because of this strong national security interests that apparently are at issue here. . . .

But because they give money to this agency which is engaged in activities, some of which may impact national and international security arrangements, that’s the nexus for the United States Government to apply the statute in an extraterritorial way, is that correct? . . .

And so it occurred to me by that logic, the United States being a very generous country, gives a lot of money to a lot of foreign countries.  They give over a billion dollars to Egypt.  They give vast sums of money to Mexico.  They give sums of money to many, many countries all over the world.

And then I wonder by their giving some money to a foreign country, does that then give them jurisdiction to apply statutes, such as the honest services statute, to individuals who are operating in that country or outside the United States? . . .

So, in other words, if I — it’s your view, your view, that the United States of America can police foreign companies in the exercise of their operation involving foreign citizens on matters unrelated to the program which the United States gave money for — that is, for the specific purpose of the program — and that they then have jurisdiction to act in that regard. . . .

So if there is ever, ever a policy interest of the United States of America in anything a foreign country — that occurs in a foreign country, the United States Attorney’s Office for the Northern District of California will vindicate the way the laws apply — the honest services law applies.  You’re going to wipe out bribery and honest services throughout the world.  I want to congratulate you for that.  And I never in my life, in 50 years of criminal practice, seen a more misguided prosecution as the one that you’ve brought.  I just don’t even get it. I don’t get it, how you can — how you can use resources of the United States Attorney’s Office to prosecute some foreign nationals involved in a foreign company, engaged in conduct which was foreign, on doing things that weren’t directly related to the contribution of the United States to that entity. . . .

    THE COURT: Did you get permission from anyone in the Department of Justice in Washington DC to bring this prosecution?

     LEUNG: It was not required. . . .

    THE COURT: And you didn’t choose fit to ask the Department of Justice whether in their smarter sentencing, smarter criminal law enforcement program this is a good use of your resources?

     LEUNG: We received office approval.  We also coordinated with the State Department, your Honor. . . .

     THE COURT: [Y]ou’re telling me this was a decision of the United States Attorney to bring this prosecution without the knowledge of the Department of Justice.

     LEUNG: It was a duly authorized decision by this office to do so.

     THE COURT: My suggestion, since I’m dismissing this indictment, is that you bring an appeal, right away.  I would be very interested in what the Ninth Circuit has to say about this, whether they think that there is enough of a nexus to apply statutes, such as the bribery statute and the honest services statute, to the conduct that’s alleged in this particular case. . . .

My view is these statutes aren’t intended to apply extraterritorially to the conduct that’s alleged in this case. And just — and the very fact that you get up and say: Well, we could have prosecuted somebody in Mexico if American interests are implicated, or we can prosecute somebody in Canada — by the way, we could phone the Royal Canadian Mounted Police.  They actually have law enforcement in Canada.  If you’re so concerned about the way some Canadians are operating with a Canadian-based company in dealing with Ukrainians, you can always phone the Mounties and they will investigate it if they think it’s appropriate. . . .

There are really no limits to your argument.  There are just no limits.  I don’t understand where you really draw the line.  The United States never gives anything to anybody unless there is some interest in it. And you’re saying whenever they give something to somebody, they can prosecute them, even though everything happens in some other place. . . .

     LEUNG: . . . [T]he statutory interest recognized by the Supreme Court is that the United States has an interest to ensure that the money that it distributes pursuant to federal programs are free from corruption.

     THE COURT: That’s right.  So if you give – your argument is, you give a dollar to some foreign entity, you can then prosecute people who engage — who are involved with that foreign entity even though there are — even though they do it all abroad and do it in connection with something else.  They don’t take the dollar.  Something else.  You say: Well, we can prosecute them for honest services.  How do you actually — do you really think this is going to fly anywhere?  Anyway, I invite you, I invite you to get the judgment of the Ninth Circuit.  Obviously, I’ll be bound by it. . . .

And I’m going to write something so you have my reasons, and you take it right up to the Ninth Circuit and see what they have to say about it.  And I don’t even think you have to ask Washington, right?

     LEUNG: I think we do in this case, your Honor.

     THE COURT: Really?  I mean, you brought the indictment without asking them.  I don’t know why you can’t appeal it without asking them.  But you follow whatever procedure you think is appropriate.  And you please put in the comment that I actually think this is a serious waste of scarce resources.  If you’re not addressing crime in the Northern District of California, you’re not doing your job.  And I think this — I think this prosecution is really a — brings into serious question the manner in which decisions are made by the United States Attorney for the Northern District of California. . . .

     LEUNG: Your Honor, would you consider staying the order while we –

    THE COURT: No. . . .  Go right to the Ninth Circuit.  Get a stay, if you think that’s an appropriate use of your resources.

Straight Arrow

April 28, 2015

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U.S. v. Georgiou: 3rd Circuit Panel Decision Makes a “Mockery” of Brady Disclosures and Jencks Act Compliance

We previously discussed the Third Circuit’s flawed analysis in United States v. Georgiou of the extraterritorial application of the federal securities laws to trading activity centered abroad, based solely on the fact that some trades entered into abroad were executed with the involvement of market makers in the United States.  See Third Circuit Adopts “Craven Watchdog” Standard for Extraterriorial Reach of Securities Laws in U.S. v. Georgiou.  We now turn to a different respect in which that panel decision disappoints.  The defendant in Georgiou recently filed a petition for rehearing en banc on different grounds, focusing on the panel’s use of invalid standards in applying Brady v. Maryland, 373 U.S. 83 (1963).  The issues raised in the brief are significant.  A copy of the motion for rehearing is available here: Georgiou Petition for Rehearing En Banc.

Brady is the landmark Supreme Court decision that ended the ability of the Government to hide from defendants exculpatory evidence in its possession.  Mr. Georgiou raises serious concerns that the panel improperly limited the Brady rule, in a manner inconsistent with previous Third Circuit (and other appellate court) holdings, by allowing the Government to avoid the consequences of failing to make required Brady disclosures based on whether the defendant acted diligently to try to obtain those materials himself.  By using this standard, the panel allowed the prosecutors to get away with withholding evidence that could have strongly undercut the credibility of the Government’s key witness.  The withheld information was revealed only in sentencing proceedings for that witness after the Georgiou trial was over.

As the brief in support of the Georgiou petition describes, the approach adopted by the Third Circuit panel allowed a blatant evasion of the obligations imposed on the Government to disclose exculpatory evidence in its possession.  The degree of diligence used by the defense to obtain that same information simply should not be relevant.  To be blunt, it is not too great a burden to demand that Government lawyers satisfy their duties to make required disclosures without permitting them to insulate their failures from consequences by making an issue of defense diligence.  Whether defense counsel is diligent or not, Government lawyers need to recognize their duties and perform them, period.  Anything less undermines the criminal justice process.

Unfortunately, there is a near-constant need to have the courts assure that prosecutors meet their obligations.  Prosecutors seem addicted to trying to win cases through sharp practices rather than a thorough presentation of the facts to the judge or jury.  It never ceases to amaze me that prosecutors consistently try to minimize the effect of Brady by avoiding the disclosure of potential exculpatory material in their possession.  An attempt to deprive the defendant of information that might be useful at trial reflects a prosecutor’s willful effort to prevent a fair and just trial.  It should not be tolerated by the senior lawyers that manage prosecution teams, and it should not be tolerated by the courts.  Indeed, a knowing avoidance of Brady obligations should expose prosecutors to court and bar sanctions, and in some instances be prosecuted as an obstruction of justice.  Prosecutors routinely take the narrowest view possible of Brady obligations, but why they do so is a mystery to me.  What do they think they are achieving by depriving the defendant of potentially relevant evidence?  Do they really think that their views that a defendant is guilty as charged are so reliable that the jury should not be permitted to consider all of the evidence?  The job of a prosecutor is not to engineer a conviction, but to try to assure that a fair adjudication occurs.  Instead of allowing prosecutors to play games to avoid Brady obligations, U.S. Attorneys should demand that their assistants err on the side of producing potentially exculpatory evidence.

Since that did not occur here, it was up to the courts to elevate justice above the prosecutors’ hubris, or their single-minded desire for a notch in the belt.  Alas, that did not occur.  Instead of casting a jaundiced eye on the prosecution’s questionable disclosure decisions, the Third Circuit panel bent over backwards to justify or exonerate those decisions.  It should have held the prosecutors’ feet to the fire, because adhering to principles that foster a fair and just adjudication is far, far more important than the result in a particular case.  The Third Circuit panel abdicated its role to hold overly-zealous prosecutors in check.

The petition points out another serious error by the Third Circuit panel.  The Government never produced to the defense notes of witness interviews by Government officials of the prosecution’s key witness.  Any such materials known to the prosecutors should have been produced under Brady if aspects of the interviews were exculpatory, and under the Jencks Act because they reflect previous statements of one of the Government’s witnesses.  The panel ruled that even though the SEC was in possession of notes of these interviews, they were not required to be produced by DOJ prosecutors because they were in the possession of the SEC, not the DOJ.  As a result, in the court’s view, these materials “were not within the possession of the prosecutorial arm of the government” and therefore prosecutors were absolved of the duty to produce them, even if they knew they existed and could easily have obtained them.  That is a truly absurd position which has been soundly repudiated by other courts.  Those courts rightfully recognize that accepting this fiction would make a “mockery” of the Brady and Jencks Act disclosure requirements. See, e.g., United States v. Gupta, 848 F. Supp. 2d 491, 493-95 (S.D.N.Y. 2012).

In this case, as in most criminal cases involving allegations of key securities violations, the DOJ worked hand-in-hand with the SEC, often jointly participating in interviews.  To permit avoidance of disclosures by the DOJ based on which government employee took or retained those notes — whether they were SEC officials, FBI agents, U.S. mail inspectors, or some other agency employee — is a gross elevation of form over substance.  All of the law enforcement agencies in these cases cooperate and work together, and all of them should be required to treat these notes as jointly-held materials.  To rule otherwise does, indeed, make a mockery of justice.

Mr. Georgiou faces an uphill battle in his effort to win reconsideration of the decision or en banc review, or, failing so, in getting a grant of certiorari from the Supreme Court.  But if the panel decision stands as written, it represents an embarrassment to criminal justice, regardless of whether Mr. Georgiou is guilty of the crimes charged.

Straight Arrow

February 11, 2015

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Third Circuit Adopts “Craven Watchdog” Standard for Extraterriorial Reach of Securities Laws in U.S. v. Georgiou

In United States v. Georgiou, No. 10-4774 (Jan. 20, 2015), the Third Circuit recently applied the Supreme Court’s extraterritoriality ruling in Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), to a criminal securities fraud conviction.  Georgiou was convicted of securities fraud, wire fraud, and conspiracy for a stock manipulation scheme orchestrated outside of the United States. The court affirmed the conviction, finding that even though the securities trading did not occur on a U.S. securities exchange, it was actionable under the U.S. securities laws because an aspect of the securities transactions was completed within the United States.  A copy of the opinion can be found here: US v Georgiou.

The case involved an alleged classic manipulative scheme to buy thinly-traded stocks, inflate their prices with matched trades, wash sales, and the like, and dump the stocks at the artificially high prices.  Georgiou used brokerage accounts in Canada, the Bahamas, and Turks and Caicos for the manipulative trading.  The stocks were traded over-the-counter on the OTC Bulletin Board (“OTCBB”) or the Pink OTC Markets (“Pink Sheets”).

In Morrison, the Supreme Court limited the application of section 10(b) to the use of “manipulative or deceptive device[s]” in securities transactions involving either (i) “the purchase or sale of a security listed on an American stock exchange,” or (ii) “the purchase or sale of any other security in the United States.”  Morrison , 561 U.S. at 273.  The Third Circuit sought to apply that standard to the Georgiou trades.

The court first considered whether securities listed on the OTCBB and the Pink Sheets are “listed on an American stock exchange.”  It noted that the SEC identifies 18 nationally registered securities exchanges, but does not include the OTCBB and the Pink Sheets.  It also noted that both the OTCBB and the Pink Sheets are self-described as trading mechanisms for securities not listed on any exchange.  Finally, it noted that the securities statutes themselves distinguish between “securities exchanges” and “over-the-counter markets.”  For those reasons, it found the transactions here were not the purchase or sale of a security on “an American stock exchange,” and therefore were not subject to U.S. securities laws on that basis. See slip op. at 13-15.

The analysis then moved to the second Morrison prong: whether these transactions were the purchase or sale of securities “in the United States.”  The court took note of the fact that Morrision involved a so-called “foreign-cubed” transaction – foreign plaintiffs suing a foreign issuer based on securities transactions in foreign countries.  In contrast, the securities in the Georgiou case were those of U.S. issuers, and the transactions involved the participation of “market makers” operating in the United States.

Morrison instructed that transactions are “domestic transactions” based not on “the place where the deception originated,” but the place where the purchases and sales occurred.  Morrison, 561 U.S. at 266-67.  It is the “location of the transaction” that determines the applicability of the U.S. securities laws.  See id. at 268.  The Georgiou court noted that the 2d, 9th, and 11th Circuits had previously found that a “domestic transaction” was one (i) where the parties became obligated to proceed in the U.S., or (ii) where the actual transfer of title occurred in the U.S.  Georgiou, slip op. at 16-17 (referring to Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60, 69 (2d Cir. 2012); Quail Cruise Ship Mgmt Ltd. v. Agencia de Viagens, 645 F.3d 1307, 1310-11(11th Cir. 2011); SEC v. Levine, 462 Fed. App’x717, 719 (9th Cir. 2011)).  The court then “agreed” that “commitment” is “a simple and direct way of designating the point at which . . . the parties obligated themselves to perform . . . even if the formal performance of their agreement is to be after a lapse of time.”  Slip op. at 17 (quoting Absolute Activist, 677 F.3d at 68).  Accordingly, “the point of irrevocable liability” can be used to determine where a securities purchase or sale occurred; “territoriality under Morrison turns on ‘where, physically, the purchaser or seller committed him or herself’ to pay for or deliver a security.”  Slip op. at 17 (citations omitted).

This is all largely consistent with previous decisions.  But here the Third Circuit took a detour. The court found the involvement of U.S.-based market makers in “facilitating” at least some of the otherwise foreign transactions made them “domestic transactions” under Morrison: “Here, at least one of the fraudulent transactions in each of the Target Stocks was bought and sold through U.S.-based market makers. . . .    [A]ll of the manipulative trades were ‘facilitate[d]’ by U.S.-based market makers, i.e., an American market maker bought the stock from the seller and sold it to the buyer. . . .  Therefore, some of the relevant transactions required the involvement of a purchaser or seller working with a market maker and committing to a transaction in the United States, incurring irrevocable liability in the United States, or passing title in the United States.”  Id. at 18.  The court concluded: “We now hold that irrevocable liability establishes the location of a securities transaction. Here, the evidence is sufficient to demonstrate that Georgiou engaged in ‘domestic transactions’ under the second prong of Morrison, i.e., transactions involving ‘the purchase or sale of any [] security in the United States.’  See Morrison, 561 U.S. at 273.  Thus, the District Court’s application of Section 10(b) to Georgiou’s transactions was proper.” Slip op. at 19.

The rationale adopted by the court is, at best, designed to satisfy Morrison’s letter rather than its spirit.  Although the opinion is somewhat opaque, it seems apparent that the court concluded that the mere involvement of a U.S. person as a market intermediary in a transaction that in all other respects was between foreign persons is sufficient to make the transaction one properly governed by the U.S. securities laws.  But to allow the apparently unknown involvement of U.S. market makers “as intermediaries for foreign entities” to serve as the basis for subjecting a transaction to U.S. law seems to violate both the language and spirit of the Morrison opinion.  It totally ignores the point made by the Morrison Court that the standard for applicability of U.S. law to a transaction could not be whether some aspect of the transaction touched upon the United States: “For it is a rare case of prohibited extraterritorial application that lacks all contact with the territory of the United States. But the presumption against extraterritorial application would be a craven watchdog indeed if it retreated to its kennel whenever some domestic activity is involved in the case.”  Morrison, 561 U.S. at 266.

The Morrison Court noted that the subject “purchase-and-sale transactions are the objects of the statute’s solicitude.” Id. at 267.  It did not look to see if the interstices of those transactions involved some other agreement (i.e., between the seller’s foreign broker and a U.S. market maker) that occurred in the United States, because any such “facilitating” transaction was not “the object of the statute’s solicitude.”  Instead, “it is parties or prospective parties” to the purported unlawful transaction that “the statute seeks to ‘protec [t].’”  Id.  In the Georgiou case, the U.S. market maker is not one of those parties.

If the acknowledged test for the locus of a transaction is, as the Third Circuit says, where the parties “irrevocably” “obligated” themselves to the transaction, then, by all appearances, in this case that was outside of the United States, where the buyer and seller made their purchase and sale commitments.  It is not faithful to Morrison to rule that because the market mechanism by which those commitments were implemented included a transaction by other unaffiliated persons within the U.S., the transaction at issue morphed into a “domestic transaction.”  In a globalized electronic marketplace, almost any securities transaction that parties commit to on foreign soil can involve an “intermediary” in the United States that “facilitates” its completion.  To allow that to trigger the extraterritorial reach of the U.S. securities lawyers would, in fact, make “the presumption against extraterritorial application . . . a craven watchdog . . . retreated to its kennel.” Morrison, 561 U.S. at 266.

Straight Arrow

January 23, 2015

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