A Tale of Two Memos for White-Collar Cases and Whistleblowers

In the past month, the U.S. Justice Department has released two memoranda that will affect civil enforcement generally and the False Claims Act specifically.

The first memo confirms that DOJ will more actively dismiss the whistleblower cases it turns down rather than let them run their course. The memo follows a surprise announcement in October that we covered here. It’s an internal memo, but it’s already been published in the legal press. Here’s a summary.

Under the False Claims Act, the government may move to dismiss a case over a whistleblower’s dissent as long as it gives notice of the motion and there’s a hearing on it.

In exercising this power, the memo calls on civil prosecutors to consider these factors:

  1. Whether the case clearly lacks merit at the outset or after investigation.
  2. Whether it piggybacks off an existing government investigation but adds nothing to it.
  3. Whether it interferes with the government’s policies and programs in that sector or industry.
  4. Whether it interferes with the government’s goals for litigation brought on its behalf.
  5. Whether it poses a risk to national security from disclosure of classified information.
  6. Whether it will cost the government more in time, labor, dollars, or lost opportunities than it will return on the investment.

Three more points. First, these factors are not mutually exclusive, so more than one may apply at a time. Second, they’re not exhaustive, so the government can move to dismiss for other reasons, too. Third, it ain’t all or nothing, so the government can move to dismiss some claims or defendants but not others.

The second memo says something more profound for enforcement generally. Effective January 25, civil prosecutors may no longer treat an agency’s “guidance” as a set of binding rules whose violation means a violation of law. That’s because an agency’s guidance can’t create binding rules beyond what exists by statute or regulation. For one thing, it doesn’t go through the same process as formal regulations do, where an agency will give notice of a proposed rule to stakeholders and afford them a chance to comment. (Which makes for better rules). Sometimes, it doesn’t even emanate from the agency but a contractor. Because guidance doesn’t have the force of law, the fact that a person or business didn’t comply with it doesn’t prove or even presume that they violated the law.

The memo defines such guidance as “any agency statement of general applicability and future effect, whether styled as ‘guidance’ or otherwise, that is designed to advise parties outside of the federal Executive Branch about legal rights and obligations.” The memo expressly applies, for example, when the government enforces the False Claims Act by alleging that someone falsely certified their compliance with statutes or regulations.

Happy 2018, California

Let’s celebrate because the new year marks the dawn of the state’s licensing program for commercial, recreational cannabis. It follows the voters’ approval of Proposition 64, the Adult Use of Marijuana Act, which we wrote about last year.

But hold your horses, too, because it’s just the beginning. Earlier this month, the state launched its online application system, and two weeks ago, it issued its first batch of temporary licenses to retailers, distributors, microbusinesses, and testing laboratories. These licenses go effective January 1 and allow previously accredited businesses to do business while they complete the application process.

So far, only a few cities and counties are ready to go on January 1. Others, like Los Angeles, have been getting ready and will start taking applications within days or weeks. Some have opted out entirely. And most haven’t decided one way or another.

It’s a work in progress, then, and the best advice for now is to cover your backside. Run your business by the book, and invest in high-quality legal research, analysis, and representation. Invest in compliance, in other words, because it’s the only sustainable way in the end.

In the meantime, seven more states are poised to join the growing majority that has chosen to legalize, regulate, and tax medical or recreational pot.

So it may just be the beginning, but the new year looks bright.

SEC Chair Offers Advice on Bitcoin and Its Ilk

This week, the chair of the U.S. Securities and Exchange Commission weighed in on crypto-currencies as well as ICOs or initial coin offerings. With the price of bitcoin nearing $20,000, it probably comes at the right time. You may have been wondering yourself: What are the rules for this stuff? Are they being followed? And what are the risks in these markets?

Here is a summary of his advice for both Main Street and Wall Street.

For Main Street

These are the folks at home who may be tempted to jump on the bandwagon.

  1. Understand that, for now, it’s the Wild West out there. The SEC hasn’t approved any crypto-currency-related funds or products for listing and trading, and no one has registered an ICO with the Commission. Don’t let anyone today tell you otherwise.
  2. Do your homework. If you choose to invest in these things, ask plenty of questions and demand clear answers. The Chair’s statement includes a list of sample questions to consider. Be especially careful if a pitch sounds too good to be true or you’re pressured to act quickly.
  3. Understand that these markets cross borders, so your money may travel overseas even without your knowledge. Once there, you may not ever be able to get it back.

For Wall Street

These are market professionals like brokers, dealers, lawyers, advisers, accountants, and exchanges.

  1. Although ICOs can be effective ways to raise money, you have to follow the securities laws if it constitutes an offering of securities. So ask yourself: Is this offering a security? Is it an investment contract? Is it, in other words, an investment of money in a pooled venture that expects to derive profit from the efforts of others? If you’re not clear on this then you need a lawyer because the Commission will look past the form of a transaction to its substance. So just calling it a currency doesn’t settle the question. We blogged recently about this fact-intensive inquiry here.
  2. If you handle transactions in crypto-currency, you should treat them as if cash were being handed from one party to the other. You should know your customer and mind anti-money-laundering laws whenever you allow payments in crypto-currencies, allow their purchase on margin, or otherwise use them to facilitate securities transactions.

The CURES For What Ails You

Speaking of prescription drugs, almost every state now has a prescription-drug monitoring program (or PDMP). The goal is to curb prescription-drug abuse by discouraging pill-pushing and doctor-shopping. So whether you’re a patient or provider, you should pay attention because law enforcement and licensing boards are watching.

In California, for example, the program is called CURES: the Controlled Substance Utilization Review and Evaluation System. By law, pharmacies must report to CURES every prescription for a Schedule II, III, or IV drug within seven days of dispensing it. And pretty soon, under a law passed last year, doctors will be required to check CURES before prescribing such drugs to a patient for the first time and every four months after that during treatment.

Last week, the California Supreme Court ruled that the California Medical Board could freely access CURES at any time. It didn’t need to get a warrant or show good cause beforehand. The doctor who was being investigated argued that this violated the privacy of his patients. But the Court held that, on balance, the Board’s access was justified by the need to protect the public from drug abuse and protect patients from impaired or negligent doctors.

Even if your state’s law is different, remember that federal law remains supreme. Last month, a federal court decided a case in which the Drug Enforcement Administration (DEA) subpoenaed data from Oregon’s PDMP. Unlike California’s program, Oregon required all agencies—even federal ones—to get a court order before it would respond to a subpoena. It sued to compel the DEA to comply with its law, but it lost. Federal law authorizes the DEA to issue subpoenas on its own, so Oregon couldn’t force it to follow state law.

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.

Can They Search My Phone at the Border?

Suppose you go to visit your aunt in Italy, and you take your phone and tablet with you.

When you come back through customs, can they just search your devices willy nilly?

Probably. Here’s a good overview of your rights at the border, along with some practical considerations. It’s worth reading ahead of time because the government is stepping up its enforcement at points of entry, and there have been some heavy-handed run-ins lately between agents and travelers, including U.S. citizens.

The general rule is that customs and border agents may conduct routine, reasonable searches of you and your belongings, including your electronic devices, for any reason or no reason at all. They don’t need a warrant, and they don’t need any basis to believe they’ll find evidence of a crime. It’s known as the Fourth Amendment’s border-search exception.

But how far can they go?

Can they conduct full, forensic searches or force you to give up your passwords?

According to this 2009 policy memo, the answer is yes. It says agents can seize your device, copy its contents, and search them. To do so, they can hold a device for up to five days with a supervisor’s approval. For longer periods, they must get further approval at higher levels. Ordinarily, they must conduct the search in the presence of a supervisor, too, but if that’s not feasible, they must inform a supervisor about their search as soon as possible. If they find probable cause to believe your phone contains evidence of a crime, you may not get it back for a while, if at all. If they don’t, you should get your phone back eventually, and they’re supposed to destroy any copied information.

The law is evolving, however, to require at least a reasonable suspicion for a full forensic search. That’s already the case in the federal circuit that covers California and eight other states, and the law should continue to trend in that direction. What is a reasonable suspicion? It’s a particularized and objective basis for suspecting someone of a crime.

Still, reasonable suspicion is not a tough legal standard to meet.

Plus, agents can always just ask you to unlock your phone or give up your passwords, and if you refuse, they have plenty of ways to coerce you. They can take your phone; detain you, too; search your bags more thoroughly; deny you entry if you’re visiting; or scrutinize your green-card status. Most folks just want to be on their way.

So happy trails, traveler. Leave the phone, perhaps, but take the cannoli.

New California Criminal Laws: Do-Over

Speaking of new laws, last year we wrote about Senate Bill 227, which changed the Penal Code so that grand juries could no longer criminally indict or investigate a police officer’s deadly use of force. The stated rationale behind the law was that grand juries undermined the public’s trust in such cases because they lacked transparency and accountability. For more on grand-jury secrecy and the overall process, see here.

Well, never mind that new law because the California Court of Appeal just threw it out.

The Court held that the Legislature could not, by statute, restrict the power of grand juries to indict or investigate criminal cases because that power flowed from the state’s Constitution.

“The Legislature is not powerless to remedy the problem it has identified. It may submit a constitutional amendment to the electorate to remove the grand jury’s power to indict in cases involving a peace officer’s use of lethal force. It could also take the less cumbersome route of simply reforming the procedural rules of secrecy in such cases, which are not themselves constitutionally derived or necessary to the grand jury’s functioning….”

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 Lowdown on California’s Proposition 57

Last week it was Proposition 64; this week, it’s Prop 57.

Voters approved it by a wide margin, but what does it do?

Two things for now.

First, it amended the California Constitution to ensure parole eligibility for people who have been convicted of a nonviolent felony, once they have served the full term for their primary offense. In layman’s terms, that means that you’re eligible for parole once you’ve served the meat and potatoes of your sentence, even if you were sentenced to additional, consecutive time on lesser counts or for sentencing enhancements. But this just means you’re eligible; it doesn’t mean you get released. It just means you’ve got a shot at parole, and something to work toward. No one is automatically released, and no one is entitled to parole.

Second, Prop 57 mandates that a judge must always decide whether a minor age 14 or older should be prosecuted and sentenced in adult court. (Kids 13 and younger don’t go to adult court.) Before, you automatically went to adult court, even at 14, if you were charged with murder or an aggravated sex crime. Or the prosecutor could file your case directly in adult court if you were 16 or 17 and charged with a serious or violent felony or you were 14 or 15 and charged with an especially serious or violent felony. In all cases, the prosecutor could request the juvenile court to transfer your case to adult court, even for a misdemeanor.

Under Prop 57, there’s no direct filing of juvenile cases in adult court, and prosecutors have less discretion to request their transfer. For ages 14 or 15, they may request a transfer only if the kid is charged with a serious or violent felony. For ages 16 or 17, it can be any felony but not a misdemeanor.

Some things haven’t changed, like the criteria for deciding whether a minor’s case should be transferred to adult court. These include the following:

  • the nature and seriousness of the charges
  • the degree of criminal sophistication he displayed, given his age, maturity, intelligence, environment, and upbringing
  • his prior history of delinquency, if any
  • whether he can be rehabilitated by the time he comes of age or close to it

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