Is NSA’s Surveillance Legal? Yes or No?

By Hayes Hunt and Joshua Ruby

telephoneoperator.jpgSix months after Edward Snowden began leaking information about the National Security Agency’s secret data collection methods, two federal judges – one in Washington, D.C. and one in New York – have reached opposite conclusions about whether one NSA program unlawfully searches the phone records of millions of Americans.  The two diverging decisions in Klayman v. Obama (that the program is unlawful) and in American Civil Liberties Union v. Clapper (that the program is lawful) not only create legal uncertainty for the NSA’s controversial data collection initiatives but also show how hard it is to resolve questions of privacy and the proper scope of government surveillance in the face of new technology and new collection methods.  And the presence of these two thorough, well-reasoned, and diverging decisions makes it much more likely that the Supreme Court will ultimately resolve the NSA program’s legality.

In June, Snowden revealed, and the Guardian newspaper published, a classified order of the Foreign Intelligence Surveillance Court (FISC).  The order authorized Verizon to turn over all “telephony metadata” – information like number dialed, date, and time – for all telephone calls with at least one party in the United States for which it had records.  Although the order expired after 90 days, the Government soon admitted that the order was a small part of a much larger program, one which began in 2006 with the aim of collecting and analyzing the telephony metadata from all major wireless carriers for use in terrorism investigations.

In Klayman, several plaintiffs – including Freedom Watch founder Larry Klayman – challenged the program in federal district court in Washington.  And in ACLU v. Clapper, the ACLU, its New York affiliate, and several related organizations filed a similar suit in federal court in New York.  Both sets of plaintiffs argued that (1) the program exceeds the terms of section 215 of the USA PATRIOT Act, the statutory authority permitting the FISC to grant such orders, and (2) that the program constitutes an unconstitutional search in violation of the Fourth Amendment; the ACLU also asserted that the program violated its First Amendment rights.  Each set of plaintiffs soon moved for a preliminary injunction shutting the program down pending the outcome of the case; in ACLU v. Clapper, the Government also moved to dismiss. NSA.jpg

In both proceedings, the Government countered the plaintiffs’ constitutional arguments by relying on Smith v. Maryland, 442 U.S. 735 (1979).  In Smith, the Supreme Court held that the installation of a pen register – a device which records the date, time and number dialed of outgoing telephone calls – does not constitute a “search” governed by the Fourth Amendment.  The Court reasoned that, because telephone service providers keep similar records of the calls they handle, a caller has no reasonable expectation of privacy in the information, and the Government’s procurement of the information is not a search in the constitutional sense. 

The NSA’s program, the Government argued, was little more than a straightforward application of the Smith rule that the Fourth Amendment does not protect information like the date, time and number dialed of a telephone call.  This reasoning had frequently persuaded FISC in the years since Smith, and FISC had accordingly often ordered the production of telephony metadata to the Government. 

In Klayman, Judge Leon broke with FISC and rejected the Government’s argument.  The minimal surveillance directed at one individual in Smith, he concluded, paled in comparison to the NSA’s extensive program, dating back to 2006 and still ongoing, dedicated to collecting and analyzing telephony metadata.  But more importantly, he noted, modern society has changed radically as mobile telephones advanced technologically and went from being common to ubiquitous.  These changes mean that the NSA can harvest more metadata from each mobile telephone and that that data will reveal much more about the owner of that telephone than the simple pen register at issue in Smith.  He concluded that the plaintiffs had a reasonable expectation of privacy in the data the NSA collects and would likely prevail on their Fourth Amendment claim.

publicprivate.jpgJudge Leon acknowledged that his decision conflicts with many rulings of FISC, as well as with orders of several other federal district judges who have rejected legal challenges to the NSA program since its disclosure.  Recognizing the unsettled legal terrain, Judge Leon granted the plaintiffs’ requested preliminary injunction shutting down the NSA program but also stayed his order while the Government pursues an appeal.

In ACLU v. Clapper, Judge William H. Pauley decided the same dispute with the opposite result, that the NSA’s collection of telephony metadata survived constitutional scrutiny.  Beginning by invoking the possibility that the NSA program could have helped prevent the September 11, 2001 attacks, Judge Pauley’s opinion is a full-throated defense of the NSA’s collection methods.

On the plaintiffs Fourth Amendment claim, Judge Pauley concluded that Smith rendered the NSA program legally permissible.  He pointedly disputed the plaintiffs’ premise by concluding that the call records at issue belonged not to the plaintiffs, but to Verizon and other telecommunications service providers.  Because the telephony metadata the NSA collected belonged not to the plaintiffs but to the telecommunications providers, he reasoned, Smith, as well as numerous other cases addressing government acquisition of information voluntarily provided to the authorities or other third parties, meant that the plaintiffs had no reasonable expectation of privacy in the telephony metadata related to their telephone calls.  Accordingly, the NSA’s collection of the telephone metadata did not constitute a “search” within the meaning of the Fourth Amendment and crosses no constitutional boundaries.

Judge Pauley also expressly disagreed with Judge Leon’s reasoning that the changed character of a modern citizen’s interactions with his or her mobile telephone alters the constitutional analysis of the NSA program.  While acknowledging that mobile telephones can do more and collect vastly more data than ever before, Judge Pauley noted that the NSA program at issue here solely involves the collection of metadata related to simple, old-fashioned telephone calls.  So viewed, no novel constitutional issues arise, and the program is lawful.

The decisions create substantial legal uncertainty for the NSA program.  And although the plaintiffs in ACLU v. Clapper and the Government in Klayman will probably pursue an appeal,  the presence of these two well-reasoned cases for opposite results makes it likely that the various federal courts of appeals which will hear these and other, similar cases will also reach different results.  In that event, the Supreme Court will almost certainly have the last word on the legality of the NSA program.

 

JoshuaRuby.jpg

Joshua N. Ruby joined Cozen O’Connor in 2013 as an associate in the firm’s Litigation Section.  Joshua practices out of the firm’s Philadelphia office. Joshua graduated from Harvard Law School, magna cum laude, and the University of Chicago with a Bachelor of Arts in history with honors, and English language and literature. Joshua completed clerkships with the Honorable Chief Judge J. Curtis Joyner, U.S. District Court, Eastern District of Pennsylvania, the Honorable Peter C. Dorsey, senior judge, U.S. District Court, District of Connecticut, and Associate Justice David A. Mills, Massachusetts Appeals Court.

About The Author
Tagged with: , , , , , ,
Posted in Prosecution & Defense

Victim of a Crime and Unclear Corporate Bylaws – Advancement of Defense Costs

By Hayes Hunt and Arthur Fritzinger

hacker.jpgIn September 2009, when the FBI had arrested Sergey Aleynikov for allegedly stealing proprietary trading codes from Goldman Sachs, the financial powerhouse probably did not expect, as a purported victim, to pay him to defend against the criminal charges. However, last month a New Jersey federal judge held that Aleynikov, a programmer at a Goldman subsidiary for less than two years, could be considered an officer by virtue of his vice president title and that the company’s bylaws required it to advance his attorney fees. The ongoing dispute over the costs of Aleynikov’s defense against federal and state charges arising from his alleged theft demonstrates the importance of careful drafting of the advancement and indemnification provisions of corporate bylaws.

The central dispute regarding Aleynikov’s entitlement to advancement was whether he was an officer under Goldman’s bylaws. The majority of his programming work involved Goldman’s “high-frequency trading,” a growing investment strategy that uses algorithms to rapidly trade securities at low profit margins. After two years at Goldman, Aleynikov accepted a position with another high-frequency trader, Teza Technologies LLC. On his last day, Aleynikov allegedly stole approximately 500,000 lines of source code from Goldman’s system. Aleynikov was convicted on federal charges in December 2010 and sentenced to 97 months in prison. However, he was released from custody when the U.S. Court of Appeals for the Second Circuit overturned his conviction in a ruling that substantially limited the application of the National Stolen Property Act and the Economic Espionage Act. Aleynikov is presently facing state criminal charges in New York for unlawful use of secret scientific material and duplication of computer-related material.

In ruling that Aleynikov was entitled to advancement of legal fees to defend the state charges against him, the district court began with the text of Goldman’s bylaws, which provided for advancement of fees to “officers” of the company. Unfortunately, the bylaws defined “officer” as “any officer”—a definition the court described as “circular and unhelpful.” The court noted that in the absence of a clear definition, provisions of a corporation’s bylaws must be interpreted against the drafting party. It further observed that the title of vice president normally is given only to officers in the corporate context, and that Goldman had advanced legal fees to certain vice presidents in the past.

corporatechart.jpgThe court also relied upon the liberal policy in favor of advancement articulated in the Delaware General Corporation Law, which many companies, including Goldman, use as a model for their advancement and indemnification provisions. Under the DGCL, a corporation may indemnify any person who is a party to litigation because he or she “is or was a director, officer, employee or agent of the corporation.” Any employee may be indemnified if he or she is “successful” in the proceeding and acted in good faith with a reasonable belief that his or her conduct was lawful. Advance payment of legal expenses, however, are available only to an “officer or director of the corporation.” As a condition of advancement, the officer or director must agree to repay the fees to the corporation if he or she is not ultimately entitled to indemnification—for example, if unsuccessful in the litigation. In light of the repayment requirement, the DGCL calls for liberal application of its advancement provision—a principle the court relied upon in finding in favor of Aleynikov.

The court’s ruling has important implications, and highlights the necessity of careful drafting of corporate bylaws. As the court noted, if clauses are ambiguous, they are likely to be interpreted against the corporation and may lead to unanticipated results. Goldman’s situation is an excellent example, as it now has been ordered to advance legal fees for the defense of a programmer charged with a crime victimizing the investment bank. Of course, if Aleynikov is ultimately convicted, it would be difficult for him to succeed with his claim for indemnification. Nonetheless, Goldman’s ability to reclaim the advancement will depend upon Aleynikov’s financial security. Indeed, the risk of defaulting on repayment of legal fees has led some corporations to require officers to meet financial standards or to post a bond in order to trigger the corporation’s advancement obligations. In Reddy v. Electronic Data Systems, No. CIV.A. 19467 (Del. Ch. Jun. 18, 2002), the court held that a corporation may condition “advancement rights on an undertaking, proof of an ability to repay, or even the posting of a secured bond.”

executives.jpgA larger issue for Goldman is the possibility that its army of vice presidents may be entitled to advancement. According to Goldman, the title “vice president” is ubiquitous in the financial industry, and is used to label employees as mid-level managers with more responsibility than entry-level associates but less than senior managers. Indeed, Goldman pointed out that there are thousands of vice presidents (as many as 37.5 percent of its nearly 35,000 employees) working at the company. Following the ruling against Goldman, it is unclear whether each of its approximately 13,000 vice presidents may now have a potential right to advancement of legal fees. Notably, Goldman’s use of the title is not unique in the financial industry, where vice presidents are common and the label is a form of recognition rather than a symbol of managerial authority. For example, Merrill Lynch was infamous in the 1990s for having six distinct levels of vice presidents, ranging from “assistant vice president” to “senior executive vice president.”

Fortunately, the right to advancement or indemnification generally does not vest until the corporation’s obligations are actually triggered, as the court held in Schoon v. Troy, 948 A.2d 1157 (Del. Ch. Mar. 28, 2008). Therefore, a corporation is free to amend its bylaws to clarify or limit the circumstances where the corporation is obligated to advance legal expenses. Although Goldman is bound by its current bylaws as it relates to Aleynikov’s claims, it is free to redraft those provisions to prevent similar claims or ambiguities in the future. The recent ruling by the New Jersey federal court should serve as a strong reminder to corporations of the importance of reviewing their bylaws, particularly as their corporate structure becomes more complex, to ensure that their advancement and indemnification provisions are clear and will not expose the corporation to unexpected or illogical obligations in the future. A company never wants to be the victim of a crime and its own bylaws’ advancement provisions.

Originally published in The Legal Intelligencer on December 4, 2013.

About The Author
Tagged with: , , , , ,
Posted in Prosecution & Defense

3rd Circuit Slams the Car Door on Warrantless GPS Tracking

By Hayes Hunt and Calli Varner

GPS1.jpgAccording to a recent decision by the Third Circuit, police are required to get a warrant prior to attaching a GPS tracker to a suspect’s vehicle.

The Third Circuit’s decision in United States v. Katzin closes the door on an issue left open by the United States Supreme Court in United States v. Jones, 132 S. Ct. 945 (2012).  Earlier this year, FTS discussed the Jones case where the Court held that GPS monitoring constitutes a search, although not one always requiring a warrant.  The Court suggested that long-term GPS monitoring requires a warrant, but that one is not necessary where monitoring takes place for one to two days. 

According to the Third Circuit, “[a]mong the issues that Jones left open, however, was whether warrantless use of GPS devices would be ‘reasonable — and thus lawful — under the Fourth Amendment [where] officers ha[ve] reasonable suspicion, and indeed probable cause’ to execute such searches.” 

Not surprisingly, lower courts read Jones as opening the door for law enforcement agencies to use technology to their advantage, without the need for a warrant.  For example, the District Court for the District of Colorado held that evidence seized from a suspect’s vehicle that was tracked through a GPS device was admissible. The Sixth Circuit upheld a conviction premised on GPS information acquired from a suspect’s cell phone. 

No4.jpgIn Katzin, the Third Circuit clarified this issue, explicitly holding that a warrant is required in order to install and use a GPS device on an automobile. 

There, law enforcement officials identified a suspect involved in a string of burglaries of Rite Aid Pharmacies in Delaware, Maryland, and New Jersey.  One morning, after consulting with the United States Attorney’s office, yet without a warrant, the officials affixed a “slap-on” GPS device on the exterior of the suspect’s van.  Several days later, the GPS showed the van parked next to a Rite Aid.  Once the van was back on the move, officers were instructed to stop the van, where they found the suspect and his two brothers as well as merchandise and equipment from the burglarized Rite Aid.  All three brothers were arrested and all three moved to suppress the evidence discovered in the van.  The Government opposed the motions arguing, inter alia, that a warrant was not required for use of the GPS device. 

The Third Circuit decided that a warrant was required.  The court determined that police cannot justify a warrantless GPS based solely on reasonable suspicion.  Similarly, the court held that the automobile exception, which permits the warrantless search of an automobile where probable cause exists, was inapplicable since that type of search was limited to a distinct moment in time.  As stated by the court: “[A]ttaching and monitoring a GPS tracker is different: It creates a continuous police presence for the purpose of discovering evidence that may come into existence and/or be placed within the vehicle at some point in the future”.

The court held, “the warrantless search in this case was not justifiable based solely on reasonable suspicion or probable cause, was thereby unreasonable, and consequently violated the Fourth Amendment.”

car.jpgWith the clear guidance of the Third Circuit, lower courts and law enforcement know that the Fourth Amendment requires a warrant for GPS tracking of one’s car.  The next time law enforcement has the time and ability to consult about the propriety of using a GPS device they now know to ask a magistrate for a search warrant.

About The Author
Tagged with: , , , , , ,
Posted in Prosecution & Defense

Bitcoin and Regulation of Digital Currency: Cash 2.0

By Hayes Hunt and Arthur Fritzinger

bitcoin3.jpgOn July 31, as an act of protest against an order to share a trial court’s award for the wrongful death of his son with others injured in the same traffic accident, an Illinois man decided to pony up the $150,000 in quarters. The 600,000 quarters were loaded into 150 bags, and an armored truck transported the four-ton payload from St. Louis to Marion, Ill. The bags were then divided equally, loaded onto two flatbed trucks and delivered to the law firms that represented the other victims in the wreck. Of course, not all cash transactions are this burdensome, but the example helps to explain why more payments are made without using bills or coins than ever before.

But even noncash payments have transaction costs, usually imposed by a bank or credit card company standing between the buyer and seller. One payment method is trying to change that by using technology to remove the intermediary—bitcoin. Bitcoins are a form of virtual currency that can be exchanged directly between computers or smartphones without the need for an intermediary. Bitcoins are still in their infancy, but courts and regulators are now beginning to understand the need to regulate the use of virtual currencies.

Today, bitcoins are used online to purchase a wide array of legitimate products and services. A criminal defense attorney in Texas has agreed to accept bitcoins as payment for his services. However, what has grabbed the attention of regulators is the popularity of bitcoins for purchasing contraband. On Silk Road, the Internet’s largest black market, bitcoins were used to purchase illegal items including guns, drugs, medical supplies and even a murder-for-hire service. Earlier this month, the government seized Silk Road’s servers, which had been used in connection with more than 1.2 million sales. It also arrested the alleged owner of Silk Road, Ross Ulbricht, and seized more than 600,000 bitcoins—more than one-twentieth of the total virtual currency’s total circulation.

The government’s seizure of Silk Road is just the latest example of the international community’s attempts to deal with the emerging virtual currency. Those efforts are recent, and there remains significant uncertainty surrounding bitcoin’s legal and regulatory status. In Germany, where bitcoin has been recognized as a “unit of account,” they can be used for tax and trading in the country. On the other hand, in Thailand, their use has been banned altogether.silkroad.jpg

In the United States, the Department of Justice has stated it believes bitcoins are legal “in and of themselves” and “have known legitimate uses.” Indeed, a federal judge recently declared bitcoins to be a “form of money” subject to regulation by the Securities and Exchange Commission, in Securities and Exchange Commission v. Shavers, Civ. No. 13-416 (E.D. Tex. Aug. 6, 2013). By allowing the SEC to proceed with its claim that the defendant was running a fraudulent bitcoin investment scheme, the court has implied that existing federal laws may be used to regulate bitcoins in certain contexts.

It remains unclear how the government will be able to shape its rules to address the unique characteristics and challenges presented by virtual currencies like bitcoin. In August, U.S. Sens. Tom Carper, D-Del., and Tom Coburn, R-Okla., sent letters to several executive agencies asking what policies and regulations could be used for overseeing bitcoins and similar “virtual currencies.” The letters reflect that the investigation is in its beginning stages, and identify a pressing need to “understand and provide a sensible regulatory framework” for regulation of this new market.

In New York, home of the world’s largest financial markets, the Department of Financial Services has also started to investigate the need for regulation of virtual currencies like bitcoin. In August, the department sent notices to certain stakeholders, including investors and venture capital firms, identifying a need to put “in place appropriate regulatory safeguards for virtual currencies” in order to “build greater confidence among consumers” and to “root out illegal activity.”

Imposing rules on an international digital currency that has no central governing authority presents significant challenges. The use of virtual currencies is difficult to track. Most transactions are made anonymously over the Internet. Moreover, the international nature of virtual currencies raises concerns about divergent regulations among nations. These concerns bitcoin.jpgare particularly pressing because the difficulty of identifying where Internet transactions involving virtual currencies “take place” could readily lead to jurisdictional disputes.

In addition to regulatory and legal issues, bitcoin faces fundamental commercial problems. It is exceptionally volatile. Since the beginning of 2013, the price of a bitcoin has ranged from $13 to $266. Further, it has no intrinsic value, as it consists of nothing more than digital information. Its value is dependent on what someone else will pay for it. Compounding these problems is the fact that there are relatively few bitcoins. There are presently a little more than 11 million bitcoins in circulation, and that number is set to top out at 21 million around 2040.

Bitcoin is not the first attempt to leverage technology to limit transaction costs. Several retailers, like Starbucks and Dunkin’ Donuts, have developed smartphone apps that customers can use to pay for merchandise. By preloading money onto the app in a single transaction, rather than processing each purchase separately, stores pay less in credit card fees. LevelUp, which is particularly popular in Philadelphia, allows customers to pay directly from their smartphones, charging their credit cards periodically rather than after each transaction. Square, which allows small businesses to accept credit card payments using a smartphone, takes advantage of its position as a handler of a high volume of transactions to negotiate lower credit card fees. Last week, Square released Square Cash, which allows people to send cash directly to other users with their smartphone free of charge.

Bitcoin distinguishes itself by trying to eliminate the middle man altogether. Bitcoins are a separate currency entirely; digital cash stored in an encrypted file on the user’s computer orbitcoins1.jpg smartphone, and capable of being sent directly from the buyer to the seller. As with actual cash, transactions can be anonymous, and the seller knows immediately that he or she has been paid. There are no intermediaries, fees or concerns about the payment being fraudulent. However, the price of declaring itself independent from any existing currency or banking system has been the introduction of significant uncertainty and instability.

Despite these significant legal and commercial challenges, bitcoin might well be a glimpse into the future of electronic payment methods. An electronic form of cash, exchangeable directly between the customer and business and free of transaction fees, could provide the ease of electronic payments without the transaction fees. When that happens, the wallet may be next on the list of items replaced by today’s smartphones. As is often the case, our legal and regulatory systems will have to adapt themselves to address the unique challenges presented by the public’s widespread use of a new technology.

 Oiginally published in The Legal Intelligencer on October 23, 2013.

130911Arthur_Fritzinger019.jpgArthur P. Fritzinger practices in the commercial litigation group at the firm in Philadelphia. He graduated from Temple University’s Beasley School of Law and clerked for U.S. District Judge Mitchell S. Goldberg of the Eastern District of Pennsylvania and U.S. Magistrate Judge David R. Strawbridge.

   

About The Author
Tagged with: , , , , , , , , ,
Posted in Prosecution & Defense

Is a Plaintiff’s Motive to File a Lawsuit Discoverable? Standard & Poor’s and the DOJ

By Hayes Hunt and Michael Zabel

UncleSam.jpgEvery day, countless civil lawsuits are filed in this country. Every day, countless plaintiffs seek relief from our nation’s court systems, whether it be to recover for economic losses, to prevent future illegal conduct or to challenge a law or regulation. For a lawsuit to continue past the preliminary stages, each plaintiff must allege some degree of facts and a cognizable legal theory that entitle that plaintiff to relief. In turn, each defendant has an opportunity to dispute the plaintiff’s factual and legal allegations and thereby contest the validity of the action. All of this is quite elementary to even the greenest of lawyers.

But now imagine a case where the plaintiff has an ulterior motive for filing his or her complaint: revenge for something else that transpired between the parties (this should require no great leap of the imagination). Can that ulterior motive be legally relevant to the action? And what happens when the defendant raises the issue?

Headlines in a high-profile case have recently raised these exact questions. In response to the civil suit filed against it by the federal government, financial services company Standard & Poor’s has claimed, in effect, that Uncle Sam is picking on it. According to S&P, the U.S. Department of Justice’s lawsuit against the nation’s largest credit rating firm was brought in retaliation for S&P downgrading the United States’ credit rating in 2011. S&P is now asking for discovery related to the government’s reasons for bringing the lawsuit against S&P and not its competitors.

The DOJ has denied allegations of retaliation ever since it first filed suit in the U.S. District CourtS&P.jpg for the Central District of California in February. The government’s complaint alleges that between 2004 and 2007, S&P misled investors by issuing a series of fraudulent credit ratings for collateralized debt obligations and other residential mortgage-backed securities. At the time the suit was filed, Attorney General Eric Holder said there was “no connection” between the lawsuit and S&P’s 2011 downgrade of the United States’ credit rating. Some, however, observed that the other major ratings companies, Moody’s and Fitch, which did not downgrade the government’s credit rating, were also heavily involved in rating mortgage-based securities but were not sued by the federal government. 

With its belief that the United States was acting with a retaliatory purpose, S&P arguably had several legal options to choose from. Rule 11 of the Federal Rules of Civil Procedure prohibits an attorney from filing a pleading “for any improper purpose, such as to harass.” The federal rules apply with equal force to the United States when it is party to a civil suit, so, hypothetically, S&P could have filed a motion for sanctions under Rule 11, alleging that the United States was seeking to harass and punish S&P for its 2011 downgrade.

S&P did not pursue Rule 11 sanctions, and it appears wise not to have done so. Why? Because federal courts across the country have held that a plaintiff’s subjective intent in bringing a lawsuit is irrelevant to a Rule 11 motion if the complaint itself is nonfrivolous — i.e., when the claims are warranted by existing law and have evidentiary support. In other words, generally speaking, as long as you have a valid legal reason for a lawsuit, your ulterior motives do not matter. Indeed, for most civil cases, the “nonfrivolous purpose” principle marks the end of the court’s inquiry into a plaintiff’s reason for filing a suit.

#11.jpgAs the U.S. Court of Appeals for the Second Circuit has observed in Sussman v. Bank of Israel, 56 F.3d 450, 459 (2d Cir. 1995), citing the Ninth Circuit’s ruling in Townsend v. Holman Consulting, 929 F.2d 1358 (1990), there is good reason for that limited inquiry: “The complaint is, of course, the document which embodies the plaintiff’s cause of action and it is the vehicle through which he enforces his substantive legal rights. Enforcement of those rights benefits not only individual plaintiffs but may benefit the public, since the bringing of meritorious lawsuits by private individuals is one way that public policies are advanced. It would be counterproductive to use Rule 11 to penalize the assertion of nonfrivolous substantive claims, even when the motives for asserting those claims are not entirely pure.” Thus, in the S&P case, when U.S. District Judge David Carter of the Central District of California held in July that the United States had sufficiently pleaded its causes of action against S&P, that ruling effectively eliminated S&P’s grounds for a Rule 11 motion.

Instead of Rule 11, S&P chose to raise the issue of retaliation as an affirmative defense to the government’s claims. Ordinarily, such a defense would be relevant to little more than the determination of the plaintiff’s credibility. S&P’s defense, however, alleges more than just an ulterior motive — it alleges a violation of the company’s First Amendment rights. In its answer to the complaint, S&P claims that the United States is suing the company “in retaliation for [S&P’s] exercise of their free speech rights with respect to the creditworthiness of the United States.” As an S&P lawyer has explained it, the argument goes that the ratings issued by S&P and other companies are opinions and thus protected speech.

Much like a plaintiff asserting a cause of action for First Amendment retaliation, in order to prevail on its affirmative defense, S&P will need to establish that its speech was indeed constitutionally protected, and that S&P’s downgrade was a substantial or motivating factor in the United States’ decision to sue the company. If the retaliation defense is allowed to proceed, then S&P will be entitled to conduct discovery on the government’s reasons for commencing its suit against the company. Discovery on such an issue has the potential to become a massive effort on both sides. For that reason alone, expect the government to vigorously challenge S&P’s First Amendment defense at every opportunity.TimeToFight.jpg

Many expect that the First Amendment defense will be a tough legal row to hoe for S&P. In lawsuits brought by private plaintiffs against rating companies, several courts have already rejected the notion that financial ratings are subject to First Amendment protection. Other critics of S&P’s defense have noted that the First Amendment does not protect fraud, which is what the federal government has alleged against S&P (specifically, that the company issued ratings it knew to be wrong).

Regardless of its ultimate disposition, the issues raised in the S&P case so far highlight some interesting questions regarding a plaintiff’s decision to bring a lawsuit — especially when the plaintiff is the federal government. The general rule that emerges from our courts is that the plaintiff, whether public or private, does not need pure motives or the noblest of intentions. He or she just needs one good reason.

Originally published in The Legal Intelligencer on September 25, 2013

About The Author
Tagged with: , , , , , ,
Posted in Litigation

The Government Gets Cell Phone Location Data Without A Search Warrant

By Hayes Hunt and Jeffrey Monhait

cellphone.jpgAccording to the Fifth Circuit, the government does not need a warrant to access cellular providers’ records of caller location data.  In re: Application of the United States of America for Historical Cell Site Data, No. 11-20884 (5th Cir. July 30, 2013).

The Stored Communications Act (“SCA”), 18 U.S.C. §§ 2701-2712, allows the government to access cell provider records upon a showing of “specific and articulable facts showing that there are reasonable grounds to believe that the contents of a wire or electronic communication, or the records or other information sought, are relevant and material to an ongoing criminal investigation.”  Id. at § 2703(d).  The Court rejected a per se constitutional challenge to this provision, finding that callers did not have a reasonable expectation of privacy to location data that callers voluntarily conveyed to effect a business transaction. 

The Court analyzed the location data under “business transactions” precedent, rather than “tracking devices” precedent:

The cell service provider collects and stores historical cell site data for its own business purposes, perhaps to monitor or optimize service on its network or to accurately bill its customers for the segments of its network that they use . . . . The Government has neither required nor persuaded providers to keep historical cell site records.  In the case of such historical cell site information, the Government merely comes in after the fact and asks a provider to turn over records the provider has already created.

Id. at 18 (internal quotations omitted).  The caller conveys his location information to the provider so that the provider can connect the call and complete its part of the business transaction.  Id.  The contents of the call are neither conveyed to the provider nor disclosed to the government, and the call recipient does not receive the caller’s location information.  Id. at 18-19. 

From the caller’s perspective, the Court found that: (1) users necessarily understand that map2.jpglocation data must be conveyed to providers, and thus that providers record that data, and (2) the use of phones is entirely voluntary.  Id. at 21.  “New technology may provide increased convenience or security at the expense of privacy, and many people may find the tradeoff worthwhile.”  Id. at 23 (quoting United States v. Jones, 132 S. Ct. 945, 962 (2012) (Alito, J., concurring).  The Court concluded that the legislature is best positioned to strike a balance between privacy and safety, and that in this case, Congress did so in enacting the SCA.  Id. at 23.

As we continue to learn more and more about broad and sweeping Governmental investigations using massive data from cell phones, the Courts suggest using legislative and voter change, not legal precedent. 

About The Author
Tagged with: , , , , , ,
Posted in Prosecution & Defense

Corporations in the Role of Criminal Defendant

By Hayes Hunt and Michael Zabel

skyline.jpgChances are, when you hear or read about a defendant entering a plea in a criminal case, you picture a guy in an orange jumpsuit, someone who ultimately is most likely led away in handcuffs after the plea is entered. But what happens when the criminal defendant isn’t a person but a corporation? How exactly does a corporation plead guilty — or not guilty, for that matter?

To state the obvious, it is far less common for a corporation to be subject to criminal penalties than it is for a natural person. Most corporate criminal prosecutions occur in the federal courts (in contrast, the vast majority of individual criminal cases are handled in the state systems), and even there, corporate criminal defendants are scarce. According to the U.S. Sentencing Commission, there were 84,360 federal criminal cases in which an offender received a sentence in the fiscal year 2012, and of those cases, only 187 involved a corporation or other “organizational” offender. In other words, less than 0.25 percent of all federal convictions last year involved corporate defendants.

Recent news, however, demonstrates that corporate criminal charges, when they are actually filed, can make for some big headlines. For example, on July 25, the U.S. Department of Justice announced that Halliburton had agreed to plead guilty to destruction of evidence related to the 2010 Gulf of Mexico oil spill. On the very same day, in another well-publicized case, Peter Nussbaum, general counsel for SAC Capital Advisors, entered a not guilty plea on behalf of the company in the U.S. District Court for the Southern District of New York.

We hope that in your capacity as general counsel, you will never be faced with the same situation as the Halliburton and SAC Capital legal departments recently were (undoubtedly, you hope so, too). But should the threat of a potential indictment ever cast its shadow on your walls, here are a few things that you should know:DeptJustice.jpg

Just as with civil liability, a corporation’s criminal liability must be established through the acts or omissions of its agent or agents. Generally speaking, the government must prove two things to establish corporate liability: (1) that the corporate agent’s acts were within the scope of his or her duties, and (2) that the acts were intended, at least in part, to benefit the corporation. In its Principles of Federal Prosecution of Business Organizations, the DOJ explains it may be appropriate to charge a corporation for even minor offenses when the conduct was undertaken by a large number of employees or was condoned by the upper management. In contrast, when a corporation has a strict compliance program, it may not be appropriate to charge the corporation for the isolated act of a rogue employee. The single biggest factor in the decision to charge, the DOJ said, is “the role and conduct of management. … Management is responsible for a corporate culture in which criminal conduct is either discouraged or tacitly encouraged.”

Even after an information or indictment is filed, corporate criminal charges can sometimes be resolved without a plea agreement or trial. In particular with large companies, the DOJ has increasingly used deferred prosecution agreements (DPAs) to enforce criminal law. A DPA is effectively a criminal settlement agreement under which the corporate defendant admits some level of wrongdoing and agrees to pay fines and restitution, or develop compliance programs, or commit to specific reforms, in exchange for which the government agrees not to prosecute the corporation. One recent and somewhat notorious DPA involved HSBC, the British banking organization. Under the terms of that DPA, which was approved by a federal judge just last month, HSBC agreed to pay $1.9 billion and institute certain reforms. If HSBC complies with the DPA, the government will dismiss the criminal charges against the company in five years.

If a plea does become necessary for the corporate defendant, certain steps must be taken. First, a corporate plea may only be made by an agent duly authorized to do so. A court will require sufficient evidence that the proper authorization has been given to the proper person. One such way to establish this is a certificate from the relevant secretary of state identifying the clerk of the corporation and a certificate from that clerk identifying the stockholders and/or directors of the corporation and the relevant votes taken. As another example, in its 2012 plea agreement with the federal government, GlaxoSmithKline produced a certified copy of a board resolution authorizing the company’s guilty plea.

Additionally, if the corporation is to plead not guilty, the corporate defendant will also need to establish that the plea is free and voluntary. Thus, just as with natural people, it is essential that the governing body of a corporate defendant consult with its legal counsel and be fully apprised of the nature of the charges and their consequences.

pawn.jpgUnlike with a natural person, however, the plea process for a corporate defendant may be done entirely through its legal counsel, so long as he or she has the proper authority. Rule 43(b)(1) of the Federal Rules of Criminal Procedure explains a corporate defendant need not be present at a plea so long as it is represented by counsel who is present. GSK entered its guilty plea through its counsel. A year later, SAC Capital entered its not guilty plea through its attorneys. The benefits to this approach are clear: It is likely to ensure a smooth and well-informed plea process.

Of course, the best way for general counsel to avoid a colloquy before a federal judge or DPA negotiations with the DOJ is to encourage your client to practice firm managerial oversight over its business. In that sense, federal prosecutors share the same philosophy as the Roman philosopher Seneca, who wrote that the man who does not forbid the crime when he is able to commands it. 

 Originally published in The Legal Intelligencer on August 28, 2013.

About The Author
Tagged with: , , , ,
Posted in Prosecution & Defense

Extradition Fundamentals

By Hayes Hunt and Jeffrey Monhait

batman.jpgEdward Snowden’s detention in the Moscow airport transit zone, and the U.S. government’s efforts to extradite him, may seem confined to that case’s politically charged circumstances. But what if Snowden were merely a malingering corporate employee? Imagine if he had absconded with company secrets (such as the Coca-Cola recipe), or embezzled company funds, and was hiding out halfway across the world. Under what circumstances, if any, could he be forcibly returned to the United States to answer for his actions? Fans of the 2008 film The Dark Knight will recall the “extradition” of the accountant Lau from Hong Kong. Batman flew to China, grabbed Lau from the skyscraper penthouse and reverse-parachuted into an airplane to return to Gotham City. The financial costs, technology and political consequences involved in such an undertaking relegate that manner of extradition to the creative minds in Hollywood.

As we know, extradition is the U.S. government’s domain. The United States has extradition treaties with many countries under which these individuals may be returned for trial. What this means for companies is that the onus is on them to convince the government to invest in bringing back fugitive corporate employees. Counsel should quickly and diligently investigate the offense at issue, and then gather, package and present to the government information sufficient to: (1) satisfy the requirements of the applicable extradition treaty, and (2) convince the government that the benefits of extraditing the fugitive outweigh the costs, both financial and political, of securing extradition.

Extradition Treaties

Extradition treaties are the primary vehicle for the U.S. government to secure the extradition of fugitives. Under such a treaty, the United States and the other participating country agree to return individuals charged with felony crimes to the requesting nation. The alleged crime generally must be an offense under the laws of both countries, as these treaties typically exclude actions that only one of the countries prohibits.

For example, the extradition treaty between the United States and Hong Kong commits the parties to return individuals charged with crimes punishable in both countries by imprisonment for a period of at least one year, as per an agreement signed December 20, 1996. Such provisions, also known as “dual criminality” terms, mean that individuals will not be surrendered for acts not considered illegal in the surrendering country, as in Shapiro v. Ferrandina, 478 F.2d 894, 907-08 (2d Cir. 1973). 

Formal Requests for Extraditionparachute.jpg

Extradition “involves four basic steps,” according to the U.S. Attorneys Criminal Resource Manual 602. First, prosecutors contact the Office of International Affairs to request extradition and discuss whether extradition will be possible. The OIA’s role is to advise prosecutors on extradition.

Second, the OIA makes a “determination of extraditability” based on a number of factors, including the individual’s location, citizenship and offense charged. “Location” concerns the existence of a valid treaty between the United States and the fugitive’s location. The fugitive’s citizenship is important because many countries will not extradite one of their own. The OIA examines the feasibility of trial, including whether there is sufficient evidence available to sustain a verdict. It is basically a determination of whether the case justifies the costs of extradition (both preparing the necessary documentation and expending the political capital necessary to secure compliance with the applicable treaty).

Third, the OIA decides whether to ask for a provisional arrest of the individual. Such arrests are often necessary because of the time it takes to prepare the formal submission for extradition. The applicable extradition treaty should include details for requesting a provisional arrest and the time period following arrest in which a formal request for extradition must be made.

Fourth, there must be a submission of documents supporting the formal request for extradition. The Department of State transmits this submission to the foreign government via “diplomatic channels.” Individual treaties may vary slightly but tend to require similar documents. These include an “affidavit from the prosecutor explaining the facts of the case,” copies of the statutes allegedly violated and the applicable statute of limitations for each offense, and any formal documentation of the charges against the individual, such as arrest warrants or indictments.

Once the foreign government receives the formal request, it makes two determinations: (1) whether the paperwork supports the extradition request, and (2) whether to comply with the extradition treaty. The fugitive may present evidence against extradition to the nation harboring him, and the procedural delays involved in such challenges often extend the time period necessary to complete the extradition process.

Companies Conducting their Own Investigations

Although the government controls the use of extradition, companies can and should reduce the unitednations.jpggovernment’s burden in assessing a case. As discussed above, the costs of investigating and preparing a case for extradition are often prohibitive, and that is before accounting for the political capital necessary to secure compliance with an extradition treaty.

Companies should conduct their own investigations, quickly and thoroughly. They should preserve, gather and package the information related to the offense, and then present those findings to prosecutors to persuade them that the case is worth pursuing. Developed evidence is far more compelling than mere allegations. Companies may not have a personal Batman-type figure to forcibly return the individual, but counsel can reduce the government’s workload and thus improve the cost/benefit analysis in a given case. If the government does not have to invest substantial resources in preparing the extradition submission, that could make the case more appealing for extradition.

Lastly, companies should conduct these investigations because it is good business. Even in cases where extradition fails, companies that investigate and pursue such cases send a strong message of deterrence to potential future bad actors. Companies must protect their proprietary interests because, in most instances, no one is going to do it for them.

Originally published in The Legal Intelligencer on July 24, 2013

About The Author
Tagged with: , , ,
Posted in Prosecution & Defense

Law of Airport Transit Zones – The Legal Fiction of Ed Snowden’s Status in Russia

By Hayes Hunt and Jeffrey Monhait

St Basils.jpgThe fugitive NSA leaker Edward Snowden’s widely publicized detention in the transit zone of Moscow’s Sheremetyevo International Airport may well bring to mind Tom Hanks’ 2004 film The Terminal, about a man who finds himself trapped at New York’s John F. Kennedy Airport after his passport is rendered invalid by the start of a revolution in Krakozhia, his fictionalized home country.  What are these airport transit zones, and, more importantly, are they legally important to us?

As explained in a recent Slate article, transit zones first appeared as a means to resolve an administrative hassle.  Before transit zones were created, a traveler needed a “transit visa” to pass through a country, even if only for a connecting flight, and even if the traveler never left the airport.  Obtaining and processing these visas was a nuisance.  To solve this problem, countries created transit zones—a space where national tax laws did not apply and, as a result, flyers can buy Rolexes and rum at the duty-free shops. 

flags.jpgThe reach of these zones quickly expanded.  International laws, as well as the laws in many countries, protect refugees against deportation to countries that would persecute the refugees.  In response, some countries have tried to claim that a refugee who enters only a transit zone has not actually entered the country, and thus has not earned the protections of immigration laws.  These zones are not necessarily limited to airports.  In Paris, for example, the transit zone covers places that are miles from the airport, including a hospital and a court.  Detainees transferred between these locations are deemed to be travelling within “floating transit zones.”

As a practical matter, Russia is using its transit zone as a convenient excuse to detain Snowden.  Russia simultaneously claims that it does not have jurisdiction over Snowden because he has not “entered” the country, but will not allow Snowden to leave because he lacks the necessary documentation. 

airportexit.jpgHowever, to maintain this position, Russia has had to ignore its own regulation.  Russia’s embassy website states that travelers who stay more than 24 hours in Russia must obtain a transit visa.  Thus, according to Max Fisher and The Washington Post, Russia must issue Snowden a travel visa or permit him to remain illegally. 

Russia claims it has no jurisdiction over Snowden, but Russian officials are detaining him and refusing to let him leave.  At the end of the day, transit zones are legal fictions that countries use to serve whatever end they wish to pursue.

About The Author
Tagged with: , , ,
Posted in Prosecution & Defense

Blogger Beware – Lawyer Blogs: Free Speech and Advertising

By Hayes Hunt and Brian Kint

blog.jpgLawyers and law firms are increasingly using blogs, also referred to as “blawgs” along with social media sites such as Facebook and Twitter, to build their visibility and brand.  While blogs do not have the traditional look and feel of attorney advertising, they certainly have at least some measure of commercial purpose.  After all, it is unlikely that law firms would expend resources on this new form of communication if they did not at least hope to receive some return on their investment.  Yet, blogs may not fit neatly inside regulations on attorney advertising that were written with more traditional media formats in mind.  A recent Virginia Supreme Court case helped shed some light on when and how state bar organizations can regulate the content of attorney blogs.  The case is available at Hunter v. Virginia State Bar, No. 121472, 2013 WL 749494 (Va. Feb. 28, 2013).

Attorney Horace Hunter of the law firm Hunter & Lipton maintained a non-interactive blog titled “This Week in Richmond Criminal Defense,” on which he posted discussions of numerous legal issues.  The overwhelming majority of his posts, however, were narratives about cases in which Hunter had received favorable results for his clients.  Neither the blog home page nor any individual post contained a disclaimer stating that case results depend on a variety of factors unique to each case, as required in attorney advertising by Virginia State Bar Rule of Professional Conduct 7.2.

The Virginia State Bar launched an investigation into Hunter’s blog.  Ultimately, the VSB determined that, among other things, Hunter’s blog was legal advertising because it advertised cumulative case results.  The VSB further determined that the legal advertising on the blog was inherently misleading due to its lack of disclaimers, in violation of Rules 7.1 and 7.2. 

freespeech.jpgThe case eventually made its way to the Virginia Supreme Court.  First, the Court determined that Hunter’s blog was commercial speech, specifically attorney advertising.  The Court noted that the blog was linked to the law firm’s website and had the same style and look as the firm’s website.  It also noted that Hunter specifically mentioned his lawyering experience and skills in nearly all of the posts and that the blog did not allow readers to post commentary and engage in discussions.  The Court acknowledged that some of the posts contained political commentary, but stated that this limited content did no more to “transform Hunter’s otherwise self-promotional blog posts into political speech than opening a presentation with a prayer or a Pledge of Allegiance would convert them into religious or political speech.”

Next, the Court had to determine whether the speech fell within the scope of the First Amendment.  Commercial speech falls within the scope of the First Amendment if it concerns lawful activity and is not misleading.  There was no contention that Hunter’s posts concerned illegal activity, and the Court concluded that the posts were not inherently misleading.  Therefore, it held that the blog fell within the protections of the First Amendment.

Still, the state can regulate protected commercial speech if it has a substantial interest in doing so, the regulation directly advances that interest, and the regulation is not more extensive than necessary to serve that interest.  Here, the Court determined that the state had “a substantial government interest in protecting the public from an attorney’s self-promoting representations that could lead the public to mistakenly believe that they are guaranteed to obtain the same positive results if they were to hire Hunter.”  It then ruled that permitting a blog to discuss cumulative case results but requiring a disclaimer stating that no results are guaranteed directly advanced that interest and is no more restrictive than necessary.  The Court then remanded the case for the imposition of a disclaimer that complied with the Rules of Professional Conduct.

advertising.jpgIn making its decision, the Court emphasized that simply because a speech is an advertisement, references a specific product, or is economically motivated does not necessarily mean that it is commercial speech.  However, the combination of all of those factors is strong evidence that the speech is commercial.  The Court appeared to suggest that blogs that predominately contain posts on general legal topics and allow for discussion and commentary would properly be characterized as non-commercial speech even if they derivatively bring attention to a law firm or a particular attorney’s legal practice.  This may be true even if the blog is linked from a law firm’s website.  In any event, attorneys who blog should be cognizant of the line between general commentary and self-promotion.  Once a blog crosses that line, it becomes attorney advertising and is subject to regulation by the state.

 

Originally published in The Legal Intelligencer on June 27, 2013.

About The Author
Tagged with: , , , , , , ,
Posted in Ethics & Professional Conduct
About the Editor
Hayes Hunt concentrates his practice in the representation of individuals, corporations and executives in a wide variety of federal and state criminal law and regulatory enforcement matters as well as complex civil litigation. Hayes is a partner in the firm's Commercial Litigation Department as well as its Criminal Defense and Governmental Investigations Group.
Subscribe for Updates

fromthesidebar

Cozen O’Connor Blogs