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.

 

If Prison Walls Could Talk

Here’s an interesting story about a just-released report on prison reform, with a kick: it’s written by the prisoners.

The authors are five inmates, all first-time offenders, who have spent a combined 95 years in the Texas prison system.

They write from their own experiences and those of others, but many of their observations apply across the country. They write about food, medicine, discipline, parole, programming, solitary confinement, and other things. And they write well.

Here are six examples to give you a flavor. Even if we don’t adopt every suggestion, doesn’t it make sense to listen?

The intake process. It ought to help steer people toward reform and rehabilitation, but it doesn’t. Instead, it degrades them and strips them of their dignity. Sometimes, new arrivals are greeted with words like, “Welcome to hell,” and then treated accordingly. Staff may yell obscenities in their ear throughout the process, among other things. This routine demands submission but discourages rehabilitation. It isn’t necessary and doesn’t comport with the state’s mission statement.

The commissary. Stock it appropriately to reduce the black market for goods that inmates otherwise steal from the kitchen or laundry at taxpayers’ expense. Stock it with healthier foods, including fruits and vegetables, and inmates will eat them. Don’t worry about their making wine out of the fruit because they’re making the wine, anyway. “[They] make wine without fruit by using fruit juice, mint sticks, raisins stolen from the kitchen, and other black-market items procured in prison. Trying to eliminate the exceptional activities of a few by prohibiting healthy items for all serves no purpose. The wine is still being made!”

Computers and technology. Expand inmates’ access to it. You can monitor and regulate their use, but keeping them from it only impedes their successful reentry into society. “When an inmate is released, they should be familiar with the technology they are expected to interact with on a daily basis.”

Visitation. Expand visiting hours and improve the experience. Don’t make it more difficult or unpleasant for people. Nurture the bonds that inmates have with their loved ones. Don’t fleece them with surcharges on phone calls and emails.

Differences among staff. Bad officers create hostile work environments for other officers and foster bad behavior among the inmates. Good officers try to treat inmates with respect and make the prison safer for staff and inmates alike. They view inmates as people who are worthy of respect and who will one day rejoin society.

Reward good behavior. Don’t just punish bad behavior. “Giving inmates the ability to set themselves apart … would give an inmate a reason to care about his future; it would give him hope that his future can be different; and giving inmates hope about a better future will change the culture of the prison system.”

 

Double, Triple Whammies and Rewards

Speaking of the False Claims Act, get ready to buckle up.

Starting Monday, an interim final rule by the U.S. Justice Department will nearly double the statute’s civil monetary penalties for each false claim. The minimum penalty will go from $5,500 to $10,781, and the maximum penalty will go from $11,000 to $21,563.

For defendants, this means you’re looking at a minimum fine of $10,781 for every allegedly false claim. Multiply that by hundreds or thousands of bills that the government may deem suspect, and you quickly run up some big numbers.

Already, the FCA’s penalties have implicated the Eighth Amendment’s ban on excessive fines in cases where they’ve far surpassed the government’s actual losses. In many of those cases, the Justice Department has avoided the constitutional question by forgoing or reducing the penalties it sought under the statute.

Now throw these new penalties in with the specter of treble damages, which means the government can recover three times its actual losses in addition to the penalties, and you’ve got double and triple whammies for government contractors—with corresponding rewards for the whistleblowers who sue them.

The new rule was required by the Bipartisan Budget Act of 2015, which directed all federal agencies to update their civil monetary penalties every year to account for inflation. For the False Claims Act, this first update catches up on inflation since 1986, which was the last time the Justice Department raised the penalties in such cases. Actually, that’s not true; the last time was 1999, but the new rule disregarded that because the Bipartisan Budget Act had repealed the underlying legislation.

The DOJ’s new penalties apply in both its civil and criminal division and across constituent agencies like the Drug Enforcement Administration (DEA), the Federal Bureau of Investigation (FBI), and the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF).

The rule may also budge many states to conform their own penalties to federal law. That’s because the federal government lets states keep ten percent more than their pro-rata share of a Medicaid-fraud recovery when they bring a case under state law. To be eligible, however, a state’s civil penalties must meet or exceed the federal ones.

The new rule is effective August 1, and it will apply to all cases that allege false claims after November 2, 2015, which is when the Bipartisan Budget Act became law. Although the Justice Department is soliciting public comment through August 29, the rule is already final and will go effective next week.

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