White-Collar to Blue-Collar in One Day

Last week, the U.S. Supreme Court issued two notable decisions on the same day.

One was a civil white-collar case, the other a criminal drug-trafficking case, and in both cases, the Court reversed the lower-court ruling on appeal.

In the civil case, the Court imposed a five-year statute of limitations on SEC cases that seek to disgorge profits. That’s the same period that applies in cases to enforce a fine, penalty, or forfeiture. Although disgorgement of profits is traditionally a form of restitution that’s measured by a defendant’s wrongful gain, the Court ruled that it’s a penalty in SEC cases for a couple reasons. First, the agency uses it to deter and punish defendants as much as to compensate victims. Sometimes, the money goes to Uncle Sam, and sometimes, the only victim is the public at large. Second, the agency often disgorges more than defendants have gained, leaving them worse off than before they broke the law. That may be the point, but that makes it a penalty.

In a footnote, the Court even seemed to call into question whether courts could order disgorgement at all. That’s something they’ve been doing since the 1970s, so it’s a big deal. For more in-depth analysis of this decision, see here.

In the criminal case, the Court reined in the government’s forfeiture power. Forfeiture allows the government to seize money or property that’s derived from a crime. But the law limits this to what someone actually and personally receives or obtains. That means you can’t be responsible for amounts obtained by someone else. So the hypothetical college student who gets $500 per month to drop off a few packages isn’t on the hook for the whole multimillion-dollar drug enterprise.

Here, two brothers worked in a hardware store together. One of them owned the store, and the other was a salaried employee. The two were charged with selling large amounts of a product they knew or had reason to know was being used to make meth. In three years, the store grossed about $400,000 from selling the stuff and netted $270,000.

The government wanted the $270,000 in profits. The owner agreed to forfeit $200,000 of it when he pleaded guilty, but the employee went to trial. He was acquitted of three counts, convicted of eleven, and sentenced to sixty months in prison. Then the government went after him for the remaining $70,000.

Although the government agreed that the employee had no ownership interest in the store and didn’t personally benefit from the illicit sales, it argued that, in a conspiracy, everyone is responsible for the full proceeds of the conspiracy. And it won that argument on appeal.

But the Supreme Court rejected that and reversed.

 

Back to Basics, Again

Speaking of the U.S. Supreme Court, we shouldn’t have to rely on the country’s highest court to decide some questions correctly. But we do.

This week, the Court issued a friendly reminder about the presumption of innocence.

If you’re convicted of a crime, but your conviction is overturned on appeal, and there won’t be a retrial, the government has to return any money that you paid toward fines, fees, or restitution because you’re presumed innocent again. You’re presumed innocent until you’re proven guilty beyond a reasonable doubt in a fair trial where the verdict holds up. Until then, the government can’t make you prove your innocence to get your money back.

Here’s what happened. In two separate cases, a man and woman were convicted at trial, and they were ordered to pay fines, fees, and restitution as a result. Then both had their convictions reversed on appeal. One was retried but acquitted. The other wasn’t retried because the state dropped the case.

With the charges dismissed, the defendants asked for their money back, but they lost in the state courts because a new state law required them to sue for their money and prove their innocence by clear and convincing evidence.

But that can’t be right, and it wasn’t. Without a conviction, the state had no right to their money, and under the Due Process Clause of the U.S. Constitution, it couldn’t shift the burden of proof to them to prove their innocence.

Good for them that the court of last resort got it right.

But that court hears fewer than two percent of all potential cases each year. And it wouldn’t have heard these cases, either, if it weren’t for a pro bono clinic at the UCLA School of Law.

Take the Money and Run

Kudos to the California Court of Appeal for enforcing due process and the rule of law.

Earlier this month, the Court took another stand on the law of asset forfeiture by siding with people who had sued to get their stuff back.

In three separate cases, the Court ordered the trial court to reinstate lawsuits brought by eight people from whom local police had taken a total of three cars and $28,257 in cash.

In each case, after police seized the property, they didn’t refer the matter to the district attorney’s office like they were supposed to. No one from a prosecutor’s office reviewed the cases beforehand and signed off on them.

Instead, police just issued forfeiture notices themselves and left it to people to file a claim.

But you can’t do that. The law specifically authorizes only a county’s district attorney or the state’s attorney general to file a forfeiture case in court or, for property worth $25,000 or less, to issue a notice of administrative forfeiture like the police did. For more background on California’s forfeiture laws, see here.

None of the people filed claims at first, but eventually, they lawyered up and sued.

They lost in the trial court after the government argued that they didn’t file administrative claims before suing in court and that they waited too long to sue when they did.

But they won on appeal. The Court ruled that the government failed to comply with the forfeiture statutes, so the forfeitures were invalid to begin with, and the state had no right to their property. The Court had made this point three years ago in a prior opinion, and apparently, it meant what it said.

New California Criminal Laws: Part Deux

To conclude our series on new criminal laws, here are two more notable ones.

You have more protection against abusive asset forfeiture. This is Senate Bill 443. It amended the Health and Safety Code to curb law enforcement’s ability to take and keep your property without convicting you of a crime. For more background see here.

Under the new law, the authorities must convict you of a crime in order to take your cash if it’s less than $40,000. The prior threshold was $25,000. As before, they also must prove up their forfeiture case against the money beyond a reasonable doubt. For cash of $40,000 or more, they still don’t need to convict you of a crime, but as before, they must prove their forfeiture case by clear and convincing evidence.

Furthermore, the authorities may no longer bypass state law by asking federal agents to adopt the forfeiture under federal law. Even in cases of a joint task force or investigation, they may not share in the proceeds of a federal forfeiture if state law would’ve required a conviction but there wasn’t one.

You’ve got a much better shot at getting a new trial based on newly-discovered evidence. This is Senate Bill 1134. It amended the Penal Code to include a new standard for writs of habeas corpus based on new evidence. Before, you would only get a new trial if your new evidence pointed “unerringly to innocence” and completely undermined the state’s case. That was a nearly impossible standard to meet.

Now, you can get a new trial if you present new evidence that’s “credible, material, presented without substantial delay, and of such decisive force and value that it would have more likely than not changed the outcome at trial.” Much better.

The New Federal Defend Trade Secrets Act

Speaking of trade secrets, there’s a new civil law on the books.

Two weeks ago, with a stroke of the President’s pen, Congress enacted a law that allows you to sue (or be sued) in federal court for the theft of trade secrets. The new law amended a criminal statute that we alluded to in last week’s post.

The amended statute defines a trade secret as any information you own that you’ve taken reasonable steps to keep secret and that derives economic value from not being known to, nor readily ascertainable by, another person who could derive value from it. The law provides federal jurisdiction for civil claims if the trade secret has sufficient nexus to interstate or foreign commerce. It doesn’t preempt any state laws.

If you’ve got a claim, you must bring it within three years of the date you discovered the theft or should’ve discovered it through reasonable diligence.

If you win, you can get injunctions to protect your trade secret as well as recover damages for your actual losses, their unjust gains, or your reasonable royalties. If you prove that the other side acted in bad faith, you can get punitive damages up to double your other damages, along with reasonable attorneys’ fees.

Plus, at the outset, not only can you sue (or be sued), you can apply for an emergency restraining order to freeze or seize property you need to preserve your trade secret, without notice to the other side.

The courts won’t just dole these orders out, though, because the law reserves them for “extraordinary circumstances.” To get one, you must clearly allege specific facts to show, among other things, that the bad guys stole your trade secret and would hide or destroy the property or evidence if they were given notice. And you have to put up security in advance to cover their damages if it turns out you were wrong or went too far.

If you do get a restraining order, the law requires that the seizure be carried out in a way that minimizes harm to any legitimate business operations. The court will schedule a hearing within seven days of the order, and there, you’ll have to prove up the underlying facts or the court will dissolve or modify its order.

If it turns out you were wrong or went too far, anyone harmed by your seizure can sue you for their damages, including lost profits, cost of materials, loss of good will, punitive damages if you acted in bad faith, and reasonable attorneys’ fees in most cases.

Finally, the law protects whistleblowers who disclose trade secrets in the course of reporting a violation of law, as well as parties to litigation who disclose trade secrets in a court filing, as long as they file it under seal and abide by any subsequent court orders.

For the full text of the statute, see here.

SCOTUS Stands Up for the Sixth Amendment

We’ve asked this question before. What if the government charged you with a crime, and you wanted to defend yourself but couldn’t—not because you didn’t have any money, but because the government had blocked all access to it?

Twenty-five years ago, the U.S. Supreme Court said the government can freeze your money before trial if there’s probable cause to believe the money’s traceable to the alleged crime, even if you have no other funds for legal fees.

Tough cookies if the government can drive trucks through a hole the size of probable cause. That’s your problem; the presumption of innocence be damned.

But last month, the Court was called on to decide whether the government could take the extra step of freezing assets that you need to fund a defense even if they’re not traceable to the alleged crime.

This time, the answer was no. Here’s how it went down.

The government had accused the defendant of a $45 million Medicare fraud, but when she was indicted, she had a mere $2 million to her name, which (the government agreed) included clean funds unrelated to the alleged fraud. The defendant wanted to use some of that money to pay for her defense.

Even so, the government moved for an order freezing all of it, and the court granted it. The government argued that the forfeiture statute authorized a freeze of both property traceable to the alleged crime and “property of equivalent value.” The defendant countered that, for God’s sake, she had a constitutional right to use her own money to fund a defense. The court, however, concluded that there was “no Sixth Amendment right to use untainted, substitute assets to hire counsel.”

The trial court’s order was affirmed on appeal, but the Supreme Court reversed, ruling that the government violated the defendant’s right to counsel when it restrained her legitimate, untainted assets in a way that deprived her of the ability to retain her counsel of choice.

Otherwise, the Court noted, the government could effectively prevent people from hiring private lawyers and law firms to defend them.

Then everyone would have to rely on a public-defense system that included “overworked and underpaid public defenders.”

Imagine that.

A Primer on California Asset Forfeiture

California’s asset-forfeiture laws mainly concern two things: drugs and organized crime.

It’s more complicated than that because the organized-crime statute covers a laundry list of 33 crimes (including drug trafficking), any one of which may be deemed “criminal profiteering activity” if it is committed for financial gain or advantage, and just two such incidents may qualify as a “pattern of criminal profiteering activity” that exposes you to forfeiture under the statute. See Pen. Code §§ 186.2.

But outside of organized crime, the state’s forfeiture laws are mainly about drugs, and they blend aspects of civil and criminal law. See Health & Safety Code §§ 11469-11495. Also, these drug forfeiture statutes are patterned after their federal counterparts in some ways, so California courts may regard federal cases on asset forfeiture as persuasive authority. People v. $497,590 in U.S. Currency (1997) 58 Cal. App. 4th 145, 151-52.

Here’s how it all works.

If a law-enforcement agency seizes money or other personal property worth $25,000 or less, the government can use a streamlined process called administrative (or non-judicial) forfeiture. Prosecutors must attempt to notify all potential claimants to the property either in person or by mail and by publication in a newspaper of general circulation. Any potential claimants must then file a verified claim with the court stating the nature of their interest in the property. Health & Safety Code § 11488.4(c). Generally, there is a strict deadline of 30 days within which to do that, and if no claim is filed, the government may simply declare the property forfeited and take legal ownership of it. See id. §§ 11488.4(j) & 11488.5(a)(1). If a claim is filed then prosecutors must file a formal, judicial-forfeiture petition and take the case to court. Id.

On the other hand, to win forfeiture of real property or of personal property worth more than $25,000, the government must always take the case to court, and if the forfeiture is contested, a jury trial is required unless it is waived by both sides. Id. § 11488.5(c)(2). The trial will resemble a standard civil case in most respects, including pretrial discovery, and be governed by the Code of Civil Procedure. Id. § 11488.5(e); People v. Real Property Located at 25651 Minoa Drive (1992) 2 Cal. App. 4th 787, 790-91. At least three-fourths of the jurors must agree on a verdict. See People v. Washington (1990) 220 Cal. App. 3d 912, 916-17.

The government then bears the burden of proving that the property is subject to forfeiture and that the claimant had actual knowledge of the facts that made it so. Health & Safety Code § 11488.5(d)(1)-(2). To be subject to forfeiture, property must have been either used (or intended to be used) to facilitate drug trafficking; furnished (or intended to be furnished) in exchange for drugs; or derived from proceeds traceable to an exchange for drugs. See generally id. § 11470.

The government’s burden is proof beyond a reasonable doubt if the property is cash less than $40,000 or if it’s a vehicle or real estate no matter the value. Id. § 11488.4(i)(1) & (2).

Also, in such cases, the court cannot order the forfeiture unless and until someone—though not necessarily the claimant—is convicted in an underlying or related criminal case on facts that happened within five years of the seizure or notice of intent to seek forfeiture. Id. § 11488.4(i)(3). The forfeiture case must then be tried before the same judge or jury that reached the guilty verdict. Id.

If the property is cash or its equivalents worth $40,000 or more, the government’s burden is lower: proof by clear and convincing evidence, and there’s no requirement that someone be convicted of a crime. Id. § 11488.4(i)(4).

For all other personal property—including raw materials or equipment for making the drugs; containers used to store or move them (besides planes, boats, other vehicles, or real property); or the books and records of these activities—the government’s burden is lower still: proof by a preponderance of the evidence, which means the judge or jury thinks the government’s case is more likely than not. People v. Nazem (1996) 51 Cal. App. 4th 1225, 1232 n.7. The drugs themselves are contraband that may be seized and summarily forfeited without any process at all. Health & Safety Code § 11475.

So where does the money go? First it goes to pay off any bona fide, innocent purchasers or secured creditors. Then it goes to offset any costs incurred to store, repair, transport, or sell the property. Finally, the balance is distributed to state or local government as follows: nearly two-thirds of it (65%) goes to the law-enforcement agencies that participated in the seizure in proportion to their individual contributions (but with 15% of it going to fund special programs to prevent drug abuse or gang activity); another ten percent goes to the prosecuting agency that processed the forfeiture; another 24% goes to the state’s General Fund, where up to $10 million of it is supposed to be earmarked for school safety and security; and last but not least, one percent of it goes to a private nonprofit organization composed of local prosecutors who must use the funds exclusively to train law enforcement in the proper use and ethics of the asset-forfeiture laws. See generally id. § 11489.

USDOJ Ends Certain, Controversial Property Seizures. Sort of.

Last week, U.S. Attorney General Eric Holder ordered an end to a controversial, civil-asset-forfeiture practice known as federally-adopted forfeiture, or “federal adoption” for short. It’s called that because it applies to cases in which state or local agencies seize money or property under state law but then offer the property to the federal government to be forfeited under federal law because they can’t or don’t want to proceed under state law for some reason. (More on that below.) Under federal adoption, state or local agencies receive eighty percent of the value of the forfeiture back in their coffers while the federal government keeps the rest.

The Attorney General’s order now prohibits that practice for all types of property but five: firearms; explosives; ammunition; property associated with child pornography; and any other property that directly relates to public-safety concerns and whose adoption is approved by the Assistant Attorney General for the Criminal Division.

In all other cases, state and local agencies will need to pursue forfeiture of the money or property under their state’s laws.

Why might that matter? In some states, the law requires a higher standard of proof before the police can take and keep your property without even charging you with a crime (let alone convicting you of it). Some states also require the proceeds of forfeiture to go into the state’s general fund, not into the coffers of the very agency that seized it.

Why might it not matter? For starters, some states have laxer forfeiture laws than the federal government. Also, the Attorney General’s order leaves the federal program intact and available for state or local seizures that involve any hint of federal participation. That includes seizures made by state or local agencies in a joint federal-state task force, a joint federal-state investigation, an ongoing federal investigation, or even, apparently, a brand-new federal investigation if federal officials simply go to federal court and get a federal warrant to take custody of the property. So workarounds abound.

For more insights on the value and limits of the new policy, see here, here, and here. For the Justice Department’s press release, see here, and for the two-page order itself, see here.

Abuses of Asset Forfeiture Appear to Abound

In an op-ed piece from the Washington Post, two former senior Justice Department officials have called for an end to the asset-forfeiture program they helped create for the federal government.

John Yoder and Brad Cates were each, in turn, director of the Department’s Asset Forfeiture Office from 1983 to 1989.  They say federal asset forfeiture was conceived to combat drug trafficking by kingpins, but in 1986, the concept began to expand to kickstart our modern anti-money-laundering regime, and eventually, asset forfeiture came to include more than 200 crimes beyond drugs.  They now say it should be abolished, and their story has attracted widespread attention.

The stories of abuses are not uncommon.  Just this week, the Des Moines Register covered the travails of two professional poker players who have sued for damages after they allege state troopers unlawfully seized $100,000 from them and then tried to compel them to capitulate by getting them charged with drug crimes.

When the two men were stopped in Iowa, they were driving from a World Series of Poker tournament in Illinois, and their rented car had Nevada plates.  They were supposedly stopped for passing another car without signaling, but dash-camera video from the patrol car clearly shows otherwise, and one of the officers may have fudged other facts at his deposition.  After hiring an attorney, the two were able to recover $90,000, but they had to spend $30,000 on legal fees to do it, and by then, one of them had suffered a stroke after their homes in California were raided for marijuana.  Why?  It seems California authorities received a “tip” from Iowa police after they found a tiny amount of pot inside a marijuana grinder during the traffic stop.  Those California searches led to felony drug-possession charges for the men, even though both had medical marijuana cards.  All charges in both states have since been dropped.

Their story has received some national attention as well.

When Money-Laundering Laws Become “Smurfin’ Ridiculous”

While we’re on the subject of money laundering, let’s talk about “smurfing.”

That’s slang for the term “structuring,” which refers to the purposeful act of breaking up larger financial transactions into smaller amounts in order to avoid federal reporting requirements. For example, the Bank Secrecy Act requires banks to report any deposits, withdrawals, or transfers of more than $10,000. So, if you’re a discreet drug dealer who wants to deposit $100,000 in your bank account, you might decide to break up that deposit into $9,999 increments so that your bank doesn’t go notifying the federal government. If you did, you might think you’re being clever, but you’re probably not, because you’d be guilty of a felony punishable by fines and up to five years in prison. (Not to mention, the government would likely catch wind of it anyway because your deposits would probably cause the bank to generate a suspicious activity report.) If you did it while violating another federal law or as part of a pattern of illegal activity involving more than $100,000 in a 12-month period, your maximum sentence would rise to ten years.

So why can federal structuring laws be smurfin’ ridiculous? Because it’s not illegal to deposit $9,500 (or even $9,999) in your bank account for cryin’ out loud. It’s only illegal to do it because you don’t want your bank to report the deposit to the government. But even then, it doesn’t matter if you didn’t know that doing so was a crime, or if you weren’t trying to cover up any criminal activity, or if you’d earned all the money legitimately, or if you reported every penny of it at tax time. You’d still be guilty. And it gets worse, because if the government suspects you of structuring, it can apply the civil-forfeiture laws to seize all your money or other assets, even if it never charges you with the crime. See 31 U.S.C. § 5317(c)(2).

For examples of government overreach that ruined or nearly ruined people’s lives, consider these two.

In one case, a Russian immigrant was trying to buy a house, but two weeks before closing, she learned that her bank in Russia wouldn’t wire the purchase money because of a mix-up over her married and maiden names. Scrambling, she spent the next two weeks withdrawing her maximum daily limit from every ATM in town and depositing it in her domestic bank account. She was charged with structuring, convicted of a felony, and ordered to sell her home and surrender the proceeds to the government. She finally got the conviction reversed on appeal but only because prosecutors had converted her trial into a general referendum on her character by asking her a bunch of unfair, unrelated questions on cross-examination. I’m sure she thought it was all worth it in the end.

In the second case, a father and daughter were running a small but successful grocery store in suburban Michigan. Their insurance only covered losses up to $10,000, so they would make frequent deposits below that threshold. Sure enough, they were investigated, and the government went after them, seizing all the money in their bank account and commencing forfeiture proceedings to keep it. The government finally backed off, but only after a public-interest law firm roused up publicity about the case.

The takeaway? If you’re a gas station, convenience store, used-car dealership, or another business that typically handles a lot of cash, take care. Here’s what one lawyer had to say about it:

“The emphasis is on basically seizing money, whether it is legally or illegally earned. It can lead to financial ruin for business owners, and there’s a potential for abuse here by the government, where they use it basically as a means of seizing money, and I think we’ve seen that happen.”

Cash, it turns out, is not always king.

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