Business Crimes Bulletin ® Volume 26, Number 1 - 2 • September - October 2018 Hidden ‘Time’ Bombs In White-Collar Criminal Matters

By Robert J. Anello and numerous occasions, usually in Justin Roller response to a perceived spate of a specific type of crime, or inherent Statutes of limitations establish difficulties with investigating time limits for the government certain offenses, particularly those to prosecute crimes. The clock involving overseas conduct. For usually starts ticking as soon as example, in response to the savings an offense is complete. These and loan crisis of the 1980s and statutory deadlines have been a Robert J. Anello Justin Roller a growing backlog of bank fraud cornerstone of American criminal investigations, Congress passed law since the time of the Founders. the Financial Institutions Reform, Their purpose, as the U.S. Supreme to elongate the period for the Recovery and Enforcement Act of Court has explained, is “to protect government to act in ways that 1989 (FIRREA), which extended individuals from having to defend often are not transparent to even the statute of limitations for frauds themselves against charges when experienced criminal practitioners. “affect[ing] a financial institution” the basic facts may have become A recent wire fraud prosecution to 10 years. 18 U.S.C. §3293(2). obscured by the passage of time in the U.S. District Court for the Similarly, in response to the 2008 and to minimize the danger of Northern District of California financial crisis, Congress passed official punishment because of acts is a prime example of how the the Dodd-Frank Wall Street Reform in the fardistant past.” Toussie v. government may lie in wait before and Consumer Protection Act of United States, 397 U.S. 112, 11415 launching hidden “time” bombs to 2010, which extended the statute (1970). Statutes of limitations thus lengthen the applicable limitations of limitations for certain criminal provide an important check on period. The case raises important securities fraud offenses from five prosecutorial delay and unfairness. issues regarding the government’s to six years. 18 U.S.C. §3301. Unfortunately, what was once good faith in its use of the tools Similar examples abound, perceived as a straightforward Congress has provided to extend including a six-year statute of limitation on the government’s applicable deadlines. limitations and special tolling significant enforcement powers Most federal crimes, including provisions for certain tax crimes, has become obscured by statutes traditional white-collar offenses as well as provisions permitting and court interpretations that tend like securities fraud, mail fraud, the government to suspend and wire fraud, are subject to a five- applicable statutes of limitations Robert J. Anello, a member of the Board year statute of limitations. See, 18 while it seeks to gather foreign of Editors of Business Crimes Bulletin, is U.S.C. §3282(a). But Congress has evidence or investigate frauds a partner at Morvillo Abramowitz Grand Iason & Anello P.C. Justin Roller is an extended the generally applicable committed during times of war. On associate at the firm. five-year limitations periods on occasion, the Supreme Court has LJN’s Business Crimes September - October 2018 pushed back against expanding played an increasingly important v. Jenkins, 633 F.3d 788, 799 (9th Cir. limitations periods, including in role in white collar criminal 2011). At any rate, MLAT requests criminal conspiracy cases and matters. Savvy prosecutors can (and provide the government with a in two recent enforcement cases frequently do) wait until the five- powerful tool to extend or “revive” brought by the Securities and year limitations period is nearly applicable statutes of limitations. Exchange Commission (SEC). expired to make a Section 3292 As the ongoing prosecution of Nevertheless, Congress has armed application, effectively lengthening a former FX trader in California the government with an arsenal the statute of limitations to (discussed next month in Part Two of weapons to extend limitations eight years. See, Robert Anello, of this article) makes clear, however, periods in white collar cases, Prosecutions from the Financial the issue of the government’s good which prosecutors have used in Crisis: When Is It Safe to Come out faith use of MLATs may still provide increasingly creative ways that are of the Woods?, Forbes.com (Sept. defendants a basis to challenge the often difficult for defendants to 28, 2016) (https://bit.ly/2NKShDY). tolling when prosecutors’ use of the predict. Because the government may file MLAT is merely a pretextual means MLATs: A Hidden Section 3292 requests ex parte, of lengthening their investigation Three-Year Extension putative criminal defendants often period. For Cross-Border are not aware that the limitations FIRREA Implements Financial Crimes period has been tolled and that 10-Year Statute of In 1984, Congress empowered they still are subject to prosecution Limitations for Frauds federal prosecutors to seek for conduct seemingly beyond the ‘Affecting’ Financial suspension of the applicable statute normal statute of limitations. Institutions of limitations for up to three years Most courts have held that, as Congress added another weapon while seeking to obtain business long as the government files an to the government’s deadline- records and other evidence located ex parte Section 3292 motion to extension arsenal when it passed overseas. See, 18 U.S.C. §3292. suspend a statute of limitations in a the Financial Institutions Reform, Section 3292 was a response to district court before the applicable Recovery and Enforcement Act the increasing use of offshore statute of limitations expires, the of 1989 (FIRREA). FIRREA was banks in money laundering and limitations period is tolled until the enacted in response to the savings tax evasion cases, which created foreign evidence is produced or and loan crisis of the 1980s, and delays for prosecutors seeking for a three-year period, whichever permits the Department of Justice records from other countries and comes first. See, e.g., United States (DOJ) to seek enormous civil resulted in statute-of-limitations v. Kozeny, 541 F.3d 166, 168 (2d Cir. financial penalties for violations of problems. Section 3292 allows 2008) (holding that Section 3292 several federal criminal offenses, the government to file an ex parte “require[s] the government to apply including mail and wire frauds application asking a court to toll for a suspension of the running of “affecting a federally insured the applicable statute of limitations the statute of limitations before the financial institution.” 12 U.S.C. while awaiting production of limitations period expires”). Some §1833a. Among its many reforms, evidence located overseas pursuant courts have taken a more liberal FIRREA also instituted a 10-year to a mutual legal assistance treaty approach and have concluded that statute of limitations for mail and (MLAT). the statute of limitations is tolled wire frauds that “affect” financial The Department of State has under Section 3292 from the date institutions. 18 U.S.C. §3293(2). entered into dozens of MLATs the government makes an official Congress justified this generous with countries across the globe. MLAT request to a foreign authority, doubling of the limitations period Because many of today’s business even if the suspension application by citing an “enormous backlog transactions have an international is filed after the limitations period of thousands of currently pending component, Section 3292 has has elapsed. See, e.g., United States [bank fraud] investigations and LJN’s Business Crimes September - October 2018 prosecutions and the complexity United States v. Serpico, 320 F.3d a former foreign exchange (FX) of many of the cases.” H.R. Rep. 691, 69495 (7th Cir. 2003). Several options trader at Barclays, alleging 101-54, at 472 (1989), reprinted in courts have gone a step further that Bogucki had engaged in a 1989 U.S.C.C.A.N. 65, 211. and have concluded that a financial “frontrunning” scheme to defraud FIRREA does not define the term institution may be “affected” by a one of Barclays’ institutional “affects,” and courts have taken fraud even if the institution itself clients. Shortly thereafter, in divergent approaches as to the type participated in the fraud — a so- February 2018, DOJ entered into an of effects on a financial institution called “self-affecting” theory that agreement with Barclays declining that are sufficient to trigger the prosecutors have used successfully to bring charges against the bank law’s 10-year statute of limitations. to bring charges against individual in exchange for Barclays paying The First and Fourth Circuits have employees of financial institutions. approximately $12.8 million in narrowly interpreted the term, See, e.g., United States v. Bank of restitution and disgorgement. concluding that a fraud offense N.Y. Mellon, 941 F. Supp. 2d 438, Bogucki’s alleged offense “affects” a financial institution only 46163 (S.D.N.Y. 2013). conduct took place between if the institution was “victimized Because of its breadth of September and October of 2011 by the fraud,” suffered “actual application, FIRREA has been one — more than six years before financial loss,” or was exposed of DOJ’s favored tools for extracting the government brought criminal to the “realistic prospect of loss.” colossal settlements from financial charges. Accordingly, Bogucki United States v. Agne, 214 F.3d 47, institutions for decade-old conduct moved to dismiss the indictment, 53 (1st Cir. 2000); United States v. relating to the 2008 financial crisis. arguing that his last allegedly Ubakanma, 215 F.3d 421, 426 (4th In 2017, for example, Deutsche fraudulent act took place outside of Cir. 2000). Courts adopting this Bank paid a $7.2 billion FIRREA the five-year statute of limitations. narrow approach have held that settlement for conduct that took The government, initially at least, the risk of losing a customer and place between 2006 and 2007. DOJ did not contest that the five-year potential reputational damage are has reached similar multi-billion statute of limitations for wire fraud not sufficient to trigger the 10-year dollar settlements with several applied, but instead argued that statute of limitations. Agne, 214 other financial institutions over the limitations period had been F.3d at 5253. the past five years. And in recent tolled. Unbeknownst to Bogucki, The majority interpretation white-collar criminal cases, federal the government had filed an MLAT of “affects,” however, is much prosecutors have used FIRREA’s request and had obtained an ex broader. Courts in the Second, extended statute of limitations parte order suspending the statute Seventh, Ninth, and Tenth Circuits against individual defendants. of limitations on Aug. 3, 2016 — have held that frauds “affect” United States v. just two months before the five- financial institutions where they Bogucki: The Government year limitations period was set expose such institutions to “a new Detonates Two Hidden to expire. See, In re Grand Jury or increased risk of loss,” even if ‘Time’ Bombs in Investigation, No. 16xr90698, the institutions suffer no actual or Rapid Succession ECF No. 2 (N.D. Cal. Aug. 3, net loss. United States v. Stargell, A recent decision in the criminal 2016). Apparently suspect of the 738 F.3d 1018, 1022-23 (9th Cir. wire fraud prosecution of Robert government’s motives and its actual 2013); United States v. Ghavami, Bogucki demonstrates the need for the MLAT, Judge Charles R. 2012 WL 2878126, at 6 (S.D.N.Y. government’s aggressive tandem Breyer granted Bogucki’s request July 13, 2012), aff’d sub. nom. use of MLATs and FIRREA. See, for discovery and an evidentiary United States v. Heinz, 780 F.3d United States v. Bogucki, 2018 WL hearing to assess whether the 365 (2d Cir. 2015) (per curiam); 3219460 (N.D. Cal. July 2, 2018) government’s MLAT request was United States v. Mullins, 613 F.3d (Breyer, J.). In January 2018, the actually designed to secure foreign 1273, 127879 (10th Cir. 2010); government indicted Bogucki, evidence or was merely being used LJN’s Business Crimes September - October 2018 by the prosecutors as a pretext to embraced the “self-affecting” [the bank’s] decision to enter the toll a looming deadline. theory, reasoning that Section 3293 settlement agreement”). Judge The government declined to “does not contain any limiting Breyer nevertheless rejected the provide Bogucki with discovery language suggesting that it does argument, holding that the fact regarding its MLAT request and not apply where a bank or bank that “‘many considerations … may instead stipulated that it would employee is a defendant.” Id. at 5. have caused Barclays to enter into’ no longer rely on the MLAT to toll Moreover, the court concluded that its agreement with the government the limitations period. Rather, the litigation and reputational risks does not suffice to establish as government executed a different to Barclays caused by Bogucki’s a matter of law that the alleged strategy by quickly filing aalleged fraud sufficiently “affected” conduct did not risk a loss to superseding indictment, alleging Barclays for statute-of-limitations Barclays.” 2018 WL 3219460, at 8. that Bogucki’s wire fraud scheme purposes under Section 3293. Id. Other Potential “affect[ed] a financial institution,” at 89. ‘Time’ Bombs thereby triggering FIRREA’s 10- Bogucki had argued that Barclays’ Several additional mechanisms year statute of limitations. Bogucki $12.8 million payment to secure exist through which prosecutors again moved to dismiss, arguing, DOJ’s agreement not to bring may stretch criminal statutes of among other things, that: 1) the criminal charges was insufficient limitations, sometimes indefinitely. government had waived its ability evidence of an effect on the bank Examples include: 1) criminal to rely on FIRREA’s limitations because it contained no admission conspiracy cases; 2) tax crimes; period by previously conceding of guilt by Barclays, which may and 3) wartime extensions. that the general five year statute have entered into the agreement for Conspiracy of limitations applied; and 2) no any number of reasons unrelated Although the general five-year financial institution was “affected” to Bogucki’s conduct (for example, statute of limitations applies to by his alleged fraud. to avoid collateral consequences conspiracy cases, conspiracy is by Judge Breyer rejected Bogucki’s or negative publicity). The its nature a “continuing offense.” arguments. First, the court found myriad reasons corporations This means that the conspiracy no waiver by the government, enter into guilty pleas and other continues (and the limitations period holding that it may supersede settlements of criminal charges does not begin to run) until either an indictment under the Federal have been chronicled extensively the objectives of the conspiracy Rules of Criminal Procedure at any by commentators. See, e.g., Robert are successfully accomplished time before a verdict is rendered. J. Anello & Kostya Lantsman, or the conspiracy is abandoned. Bogucki, 2018 WL 3219460, at 4 “Corporate Guilt and Individual In conspiracy prosecutions for (quoting Fed. R. Crim. P. 7(e)). Innocence in Financial Fraud,” 24 “racketeering” activity brought Second, the court adopted a broad Business Crimes Bulletin, no. 4 (Jan. under the criminal RICO statute, interpretation of Section 3293 and 2017) (http://bit.ly/2CIQPAL). And for example, the government may held that Bogucki’s alleged fraud Bogucki’s argument had gained sweep in a significant amount of “affected” his employer, Barclays, traction with at least one court. See, criminal conduct that occurred well which is a “financial institution” United States v. Rubin/Chambers, outside of the limitations period as for purposes of FIRREA. The court Dunhill Ins. Servs., 831 F. Supp. 2d long as a single act of racketeering canvassed several other federal 779, 784 (S.D.N.Y. 2011) (holding occurred within the limitations statutory schemes and reasoned that a bank’s settlement agreement period. See, G. Robert Blakey, that, when Congress has sought to was “not direct evidence of an ‘[e] “TimeBars: RICO — Criminal and impose a higher standard, it has ffect [on] a financial institution’ Civil — Federal and State,” 88 Notre used terms such as “substantially because … in the absence of Dame L. Rev. 1581, 164350 (2013). affects,” which Section 3293 does an admission of guilt, there are Moreover, a conspiracy conviction not do. Id. at 8. The court also many possible explanations for may be obtained where the overall LJN’s Business Crimes September - October 2018 conspiracy continues into the store owner, holding that the is outside the United States for limitations period, even if all of the government’s charges with respect any reason, including vacations. In conspiracy’s predicate acts took to the pre-2003 conspiracy were United States v. Levine, for example, place outside of the limitations thus barred by the five-year statute the government indicted a tax period. See, United States v. of limitations. Id. at 1177. attorney for tax evasion 16 days Pizzonia, 577 F.3d 455, 467 (2d Cir. Tax Crimes after the six-year limitations period 2009). A special six-year statute of had expired. 249 F. Supp. 3d 732, Courts have imposed important limitations applies to all of the 738 (S.D.N.Y. 2017). The attorney boundaries on the extension of most commonly charged tax moved to dismiss the charge as limitations periods in conspiracy crimes, including tax evasion, filing time-barred, but the court denied cases, which may benefit white- false returns, failure to pay taxes, the motion because the government collar defendants depending on the and even conspiracy to evade asserted that it would prove at trial circumstances of their particular taxes (the usual five-year statute that the attorney was out of the case. For example, the Supreme of limitations for conspiracy cases country “for at least three weeks” Court has consistently held that gives way to the six-year deadline during the limitations period. acts of concealment by themselves for tax crimes). 26 U.S.C. §6531. Id. The court noted that, under do not, in and of themselves, The limitations period typically Section 6531, the limitations period enlarge the limitations period in begins to run on the date of the is tolled “even if the defendant is the way that substantive acts in last fraudulent or evasive act, but outside of the country for business support of a conspiracy do. See, for those individuals who file their or pleasure trips.” Id. Grunewald v. United States, 353 tax returns before the statutory Moreover, the six-year criminal U.S. 391, 39899 (1957). Courts also April 15th deadline, the tax code limitations period may be tolled have restricted liability on statute- deems the returns as filed on April in situations where the Internal of-limitations grounds in “multiple 15th. See, 26 U.S.C. §6513(a) (“[P] Revenue Service (IRS) serves a conspiracy” scenarios. In United ayment of any portion of the tax summons for documents and/ States v. Wilbur, for instance, made before the last day prescribed or testimony regarding a putative the government brought money for the payment of the tax shall defendant on a third party. See, 26 laundering and conspiracy charges be considered made on such last U.S.C. §7609. For example, if the IRS against a store owner relating to day.”). The Supreme Court has serves a summons on a taxpayer’s sales of untaxed cigarettes. 674 held that the “net effect of [Section bank seeking the taxpayer’s F.3d 1160 (9th Cir. 2012). The 6513(a)’s] language is to prolong banking records, the IRS must give government filed its indictment in the limitations period when, and notice to the taxpayer. Id. §7609(a). 2009, charging a single conspiracy only when, a return is filed or tax If the taxpayer then intervenes and encompassing sales between 1999 paid in advance of the statutory brings a proceeding to quash the and 2007. The store owner argued deadline.” United States v. Habig, summons, the limitations period is that, between 2003 and 2005, 390 U.S. 222, 225 (1968). suspended during the period that his sales of untaxed cigarettes The six-year limitations period the proceeding, and any appeals were made lawful by a contract for tax crimes is tolled during the with respect to the enforcement between the state of Washington time that a defendant is a fugitive of the summons, are pending. Id. and the Swinomish Tribe, and or is located “outside the United §7609(e)(1). Similarly, if the third therefore there was a “gap in the States.” 26 U.S.C. §6531; see also, party challenges the summons conspiracy” that essentially created 18 U.S.C. §3290. Section 6531’s and the summons dispute is not two conspiracies — one between “outside the United States” tolling resolved within six months, the 1999 and 2003, the other between provision applies to exclude from limitations period is suspended 2005 and 2007. Id. at 1176. The the limitations period any time starting from six months after Ninth Circuit agreed with the period during which a defendant service of the summons until the LJN’s Business Crimes September - October 2018 dispute is finally resolved. Id. the Supreme Court narrowed the in disgorgement — $29.9 million §7609(e)(2). The statute makes WSLA’s applicability, holding that of which resulted from violations clear, however, that these tolling the statute “must be construed to outside the five-year limitations provisions apply only when the refer only to crimes” and not to civil period. Id. at 1641. The SEC argued IRS summons is issued to a third claims. See, Kellogg Brown & Root that disgorgement is not a “penalty,” party; no tolling applies when the Servs., Inc. v. U.S. ex rel. Carter, and thus the five-year statute of challenged summons is served 135 S. Ct. 1970, 1978 (2015). limitations in Section 2462 should on the putative defendant. See, Reason for Optimism: not apply to SEC disgorgement id. §7609(c)(2)(A) (“This section Gabelli and Kokesh claims. The Court unanimously shall not apply to any summons Although establishing a statute of rejected this argument, holding served on the person with respect limitations defense is rare, defense that the five-year limitations period to whose liability the summons is counsel should not be left with applies to SEC disgorgement and issued ….”). the impression that statutes of drastically reducing the amount of War-Time Extensions limitations are toothless in white- disgorgement Kokesh was required The government has used the collar matters. To the contrary, in to pay. The Court reasoned that Wartime Suspension of Limitations recent cases, the U.S. Supreme Court SEC disgorgement “bears all the Act (WLSA) to toll limitations has strictly interpreted the five-year hallmarks of a penalty: It is imposed periods in fraud cases. Congress statute of limitations applicable to as a consequence of violating a passed the first version of the civil penalty enforcement cases public law and it is intended to deter, WSLA after the end of World War brought by the SEC. See, 28 U.S.C. not to compensate.” Id. at 1644. I in order to address concerns §2462. Conclusion about war-related frauds against In Gabelli v. SEC, 568 U.S. 442, The government has a potpourri the United States. The statute 44950 (2013), for example, the of methods by which it may extend indefinitely tolls the limitations Court rejected the SEC’s argument limitations periods for various period for “any offense involving that the five-year clock for seeking white-collar offenses. Accordingly, fraud or attempted fraud against civil monetary penalties begins to defense counsel must be alert to the United States” during times of tick when the agency discovers an and advise their clients regarding war. 18 U.S.C. §3287. It has most alleged fraud, rather than when the maneuvers prosecutors may frequently (but not always) been the fraud actually occurs. The use in order to parry statute-of- applied in criminal fraud cases that Court explained that it has never limitations defenses. Anticipating have a nexus to the armed forces. extended this so-called “discovery when a hidden “time” bomb may See, e.g., United States v. Meléndez- rule” to government enforcement explode is not always possible, but González, 892 F.3d 9 (1st Cir. 2018) actions for “good reasons” — clients will be better served if they (U.S. Army National Guard officers namely, that government agencies are made aware that they abound. engaged in fraudulent scheme (unlike private citizens) are tasked to obtain recruitment bonuses). with rooting out and charging In 2012, prosecutors successfully alleged frauds, and therefore do invoked the WLSA to extend the not need the protections afforded statute of limitations in a civil by the discovery rule. Id. at 45051. —❖— mortgage fraud lawsuit having no The Supreme Court similarly connection to the armed forces; restricted the duration of the SEC’s Wells Fargo ultimately settled enforcement power in Kokesh v. Reprinted with permission from the September and October the case for $1.2 billion. See, SEC, 1237 S. Ct. 1635 (2017). In that 2018 editions of the Law Journal Newsletters, con- solidating the following articles respectively: “Hidden ‘Time’ United States v. Wells Fargo Bank, case, the SEC obtained a judgment Bombs In White-Collar Criminal Matters”, and “Stretching the Limitations Period In White-Collar Criminal Matters”. © 2018 N.A., 972 F. Supp. 2d 593, 60914 against Charles Kokesh for securities ALM Media Properties, LLC. All rights reserved. Further dupli- cation without permission is prohibited. For information, contact (S.D.N.Y. 2013). In 2015, however, fraud and sought $34.9 million 877.257.3382 or [email protected]. # 081-09-18-01