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2012 ROUNDTABLE Series

CALIFORNIA LAWYER

EXECUTIVE SUMMARY

UR BIANNUAL ROUNDTABLE DEVOTED TO THE BIG TRENDS IN WHITE-COLLAR DEFENSE

practices had the good fortune of occurring on November 30, the same day that Judge Howard Matz issued his tentative ruling in a major Foreign Corrupt Practices Act case (U.S. v. Lindsey Manufacturing, (10-CR-1031 (C.D. Cal.)), overturning the convictions against Lindsey Man-ufacturing. The company is only the second corporation to go to trial on FCPA charges. Judge Matz issued his historic ruling on December 1. Our panelists discussed the ruling. They are Jan Handzlik of Venable, who defended Lindsey and its CEO Keith Lindsey; Robert Humphreys of Akin Gump Strauss Hauer & Feld; Martha Boersch, Attorney at Law; Pamela Johnston of Foley & Lardner; Dan O’Connor of Ropes & Gray; and Matthew J. Jacobs of Vinson & Elkins. The roundtable was moderated by California Lawyer and reported by Elena Brooks of Barkley Court Reporters.

HANDZLIK: Judge Matz has issued a tentative order dismissing the FCPA indictment against my clients, Lindsey Manufacturing and Keith Lindsey, and the former CFO Steve Lee, who is represented by Janet Levine. The basis for the ruling was a pattern of willful and repeated instances of prosecutorial misconduct.

In his tentative ruling, the judge found for us on virtually all of the issues that we raised. He actually chastised himself in a couple of places in the ruling, saying that the case moved at such a furious pace in terms of motion practice and discovery, that he lost sight of the forest for the trees. He also said that he should have sustained certain key objections rather than overruling them. The judge also mentioned the financial and emotional burden on Dr. Lindsey and Mr. Lee as well as the company. In some ways, the ruling is compara-ble to prior cases involving Senator Ted Stevens (U.S. v. Stevens, No. 08-CR-231 (D.C.C. indictment filed July 29, 2008)), W. R. Grace (U.S. v. W. R. Grace, 526 F.3rd 499 (9th Cir. 2008)(en banc)), and Gregory Reyes (U.S. v. Reyes, 577 F.3d 1069 (9th Cir. 2009). But it is unusual in its scope and breadth.

BOERSCH: What was the specific pattern of prosecutorial miscon-duct that Judge Matz found?

HANDZLIK: The judge cited eight or nine significant instances of flagrant misconduct resulting in irreversible prejudice to the defen-dants. He found that the prosecutors had inserted false information into an FBI agent’s affidavit used to obtain a search warrant for the premises of Lindsey Manufacturing. From 2008 to just before the indictment in late 2010, the same false allegation was used in several subsequent warrant affidavits by other federal agents.

In addition, the prosecutors allowed another FBI agent to testify falsely to the grand jury that indicted the Lindsey defendants. This deprived the defendants of a fair grand jury hearing. Thereafter, the prosecutors purposefully suppressed and withheld the grand jury transcript of the FBI agent’s testimony, even though its produc-tion was clearly required. To make matters worse, when compelled to produce the agent’s testimony in connection with our Miranda motion, they produced a heavily redacted version of just nine pages—just little snippets here and there—attempting to exclude her fabricated testimony. They actually didn’t produce one of the transcripts of her testimony until five weeks after the guilty verdicts.

Further grounds for Judge Matz’s ruling were based on numer-ous, highly prejudicial Brady violations (see Brady v. Maryland, 373 U.S. 83 (1963).), and the fact that the prosecutor charged Lindsey with the same illicit payment charged against another company in a Houston, Texas, indictment, as well as an improper closing argu-ment by a prosecutor who used a willful blindness argument even though the judge had explicitly ruled it was not applicable. At one point the prosecutor put his hands over his eyes to illustrate the pur-ported willful blindness of the defendants. The judge also found that the government used evidence admitted for a limited purpose in improper ways. The case was replete with instances of question-able government conduct from beginning to end, sufficient to estab-lish a pattern of flagrant misbehavior when viewed in the aggregate. We alleged about 14 instances of serious prosecutorial misconduct.

JOHNSTON: In terms of the takeaways on this opinion, do you think there was a particular bad actor as Judge Matz saw it? Was there a particular prosecutor that he chose to call out, and it may not

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show up in the opinion, but it may be on the transcript?

HANDZLIK: The judge’s ruling does not use the names of the pros-ecutors, but instead specifies AUSA or DOJ attorneys, and for the most part, we chose to allege misconduct by “the government.” There were three prosecutors, two from the fraud section at main justice and one assistant U.S. attorney from Los Angeles. One of the two DOJ prosecutors came into the case a couple months after indictment. All three were part of the team from that point on and throughout the trial. It was a big case for the government as well as the defendants. We alleged that the government’s objective was to win rather than do justice, and I think the prosecutors simply lost their way.

HUMPHREYS: In a case that was so important to the DOJ and yet so replete with bad prosecutorial judgment, I can’t help but wonder: Where were the supervisors?

HANDZLIK: The systemic questions remain unanswered. The reso-lution of this matter, as well as other recent cases, raises issues about training, supervision, and oversight. Following the debacle in the

case against Senator Ted Stephens, DOJ made ethical con-duct and fair dealing by its prosecutors under Brady and other cases a top priority. It instituted enhanced training for the specific purpose of avoiding situations like this one. As a former AUSA in this district, this is a bittersweet occa-sion for me. Judge Matz correctly observed that the vast majority of federal prosecutors in this district conduct themselves ethically and honorably in the highest traditions of the DOJ. It’s very unfortunate when things like this happen.

BOERSCH: The DOJ fraud unit—and maybe this leads to the pros-ecutorial misconduct—rarely goes to trial, at least in FCPA cases. I’m not sure how much real trial experience many of those DOJ fraud section attorneys have or how experienced they are with the rules of evidence. Did you have any sense that it’s just a general inex-perience with trials on the part of the DOJ attorneys?

HANDZLIK: These were experienced prosecutors. I couldn’t tell you how many trials each has had or whether they were first chair in those trials. But they were all senior prosecutors invested with con-siderable discretion and authority in the handling of this case. How-

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MARTHA BOERSCH is a trial lawyer and for-mer federal prosecutor whose practice focuses on federal criminal defense and complex civil litigation. She has broad experience investigat-ing and litigating matters involving the Foreign Corrupt Practices Act, the False Claims Act, and RICO. Ms. Boersch represents individuals and companies in grand jury investigations, corporate internal investigations, trial, and on appeal. She has had over a dozen federal jury trials and

argued more than 20 cases before the Ninth Circuit Court of Appeals. martha@boerschlaw.com boerschlaw.com

JAN HANDZLIK is a business crime defense lawyer in Venable’s Los Angeles office. He represents companies and individuals in financial and securities fraud, antitrust, FCPA, and other white-collar criminal investigations and prosecu-tions nationwide. In addition to having tried nearly 100 jury trials to verdict, he also conducts corporate internal investigations and frequently advises public companies on governance and internal controls. As an assistant U.S. attorney,

he prosecuted federal fraud and corruption cases. jhandzlik@venable.com venable.com

MATTHEW J. JACOBS, a partner with Vinson & Elkins, has nearly 20 years of trial experience handling white-collar defense, internal investiga-tions, and complex commercial litigation. Rec-ognized as a leading white-collar specialist in Northern California, he represents corporations and individuals in criminal and internal investiga-tions. As an Assistant U.S. Attorney for the Northern District of California, he served as the

lead trial lawyer in significant prosecutions, including the Enron case, and other prosecutions involving securities fraud, health care, banking, and international money laundering. mjacobs@velaw.com velaw.com

R. DANIEL O’CONNOR, a partner with Ropes & Gray’s Boston office, focuses on securities enforcement, internal investigations, related trial work, and compliance consulting. A former senior trial counsel at the SEC, Mr. O’Connor works with corporations and individuals involved in civil and criminal government enforcement matters and represents entities in complex com-mercial disputes. He is an expert in evaluating and establishing anticorruption programs, resolv-

ing financial reporting and disclosure matters, and fiduciary and regulatory compliance issues at investment management groups. daniel.oconnor@ropesgray.com ropesgray.com

PAMELA L. JOHNSTON chairs Foley & Lard-ner’s government enforcement, compliance, and white-collar defense practice. A former prosecu-tor in the U.S. Attorney’s Office in Los Angeles, she worked in both the criminal and civil divi-sions, twice receiving the U.S. Attorney General’s director’s award for superior performance. She earned her JD from the Boalt Hall School of Law (Order of the Coif). She is ranked in The Best Lawyers in America (2007–2012) for her work in

white-collar criminal defense. pjohnston@foley.com foley.com

ROBERT HUMPHREYS is senior counsel with Akin Gump Strauss Hauer & Feld and focuses on white-collar criminal defense. He represents both individual and corporate clients in corporate internal investigations, grand jury proceedings, trial, and appeal in a wide variety of white-collar criminal issues. He received his JD from the Georgetown University Law Center and BA from the University of Colorado, Boulder.

rhumphreys@akingump.com akingump.com

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ever, the U.S. Attorney’s Office did itself a disservice by rais-ing the guidelines for the offenses it would handle, thereby eliminating trials in less serious cases. There’s no substitute for trying cases—mail thefts, passing counterfeit money, forgery of treasury checks—to build experience and confi-

dence for more significant trials.

Lack of Trial ExperienceJACOBS: It is interesting that in recent times the government has seen a number of their highest profile cases go down the drain by virtue of prosecutorial misconduct allegations. In the antitrust area, the government has lost four or five trials in a row. Before trial, the government throws the kitchen sink at you, and many defendants, corporations, and individuals wind up tossing in the towel and pleading. The risks and penalties are high. But when the government is actually forced to go to trial, they have to go into a totally different mode and they are not necessarily as skilled at winning trials as they are at extracting pleas.

HANDZLIK: We tried to take advantage of that. Our assumption was that the prosecutors believed our clients would plead guilty or, in the case of the company, enter into some other sort of disposition. I don’t think they believed we would go to trial. And they certainly didn’t believe we’d go to trial five months after indictment. We pushed very hard. Judge Matz’s ruling cites the fast and furious pace. We felt they were not ready to try a case of this magnitude.

O’CONNOR: These issues regarding trial experience are replicated across a variety of cases. You see it in the SEC’s civil cases. The staff just had a big loss in an administrative case against former executives at State Street (In re Flannery, SEC Adm. Proc. File No. 3-14081 (Initial Decision issued Oct. 28, 2011)—where rather than bring the action in district court, they were trying for a quicker verdict without full discovery before an ALJ. The trial team did not seem well versed in presenting their case, and even in a bench trial, the trial tactics made a big difference. It was a big loss for the SEC, one of its marquee cases in the financial meltdown area, and one that the SEC felt pretty confident about given the settlement that they got against State Street. But the attorneys trying the case tried to estab-lish a motive for the alleged fraud that just wasn’t supported by the evidence and didn’t read the signals from the judge.

BOERSCH: Under the sentencing guidelines it seems like there are fewer and fewer trials. When I was starting out as an AUSA, we had maybe three or four trials a year, and then it slowly petered out. Now AUSAs in this district have maybe one trial a year. Some of that is the sentencing guidelines, but now that they are essentially advisory, I wonder if we will see more trials. Jan [Handzlik], what made your clients decide to go to trial rather than to settle? They did run a pretty serious risk of conviction.

HANDZLIK: They had this quaint notion that they were not guilty. It may be a relic of the past, but they thought it would be a good idea

to have a jury decide their fate. That really is the answer to your ques-tion. There was no factual basis for pleas of guilty. But, of course, we did get a plea offer. We didn’t think the offer had a basis in reality. We believed the offer was much worse than what we would have gotten following a trial. So, coupled with the weak evidence of guilty knowl-edge and corrupt intent, the decision to go to trial was not difficult.

HUMPHREYS: Do you think the low number of trials figures into some of these issues? If you’re a young prosecutor who handles just one trial a year, you don’t want to lose it. That can create a tempta-tion to cut corners.

HANDZLIK: The vast majority of prosecutors, young and old, con-duct themselves with integrity. Lack of experience does not lead young prosecutors to behave improperly, but a lack of trial experi-ence certainly ratchets-up the pressure, especially if a lot of time and resources have been invested in one high-profile case. It can lead to very harsh plea offers up front, followed by more reasonable offers, if the case is actually going to trial. You have to try cases in order to try other cases, and to do a good job in big cases.

JOHNSTON: I’ve handled some high-profile cases, and there’s brighter light on them than the average case. If the prosecutor abides by the rules, the spirit of an even playing field and, in fact, plays fair, then there’s no problem. But if the prosecutor takes advantage of the structure of the criminal discovery rules and holds back informa-tion from the defense, or loses sight that justice should be the DOJ’s singular goal, then when the scrutiny of a high-profile case comes, mistakes, aggressive positions, and oversights will see the light of day.

I hate to see these prosecutorial misconduct decisions because they mean something has gone terribly wrong, an individual pros-ecutor’s career is seriously damaged, and the defendant has received unfair treatment by his or her government. But frankly, district courts need to dig down when substantial problems are showing up in a case and make the hard calls. I give a lot of credit to Judge Matz for taking the time and effort to step back and see the whole pic-ture. In the last couple of years the DOJ has realized this is a terrible trend, and California is at the forefront of it. Certainly makes one wonder whether the Office of Professional Responsibility’s efforts to police the prosecutors is broken.

HANDZLIK: We all know matters like this are usually resolved out-side the light of day. If the defense comes across really serious mis-conduct, something that undermines the government’s case and will be embarrassing, it gets resolved quietly. In most cases, no dismissal motion has to be filed. It never reaches a public stage, much less a dismissal ruling. Judge Matz showed a great deal of courage, at the same time expressing his regret at having to do this.

O’CONNOR: A lot of the activities in Lindsey relate to the grand jury phase—the false statement in affidavits—that’s very different than the issues that can arise from lack of trial experience. As you reel off these problems, each one seems worse than the last, and much more problematic than someone who’s worried about winning at trial, and

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not used to going to trial.

JOHNSTON: Is something happening so that fewer cases are going to trial? In the last couple months a series of federal fraud trials in Cali-fornia have ended in acquittals. When the next client comes in the door and you have to advise them, not only do you account for sen-tencing and the normal factual and legal issues present in most cases, but you also have to adjust for the fact that the government is going to trial and losing. The government’s conviction rate is nowhere near the 90 to 95 percent that used to exist for tried cases, which makes it even harder to advise a client what to do.

BOERSCH: The stakes for the defendants are so huge that there’s a tendency to take whatever you can get and get out. If more clients and defense lawyers had the nerve to go to trial, DOJ would not have a 98 percent conviction rate. That statistic is based largely on the number of pleas, actual trials are not anywhere near 98 percent. But it’s very hard to advise a client to take that risk. When your client is convicted, it’s a very bad feeling.

O’CONNOR: It’s an easier decision for an individual than for a com-pany, especially a public or regulated company where the mere exis-tence of the unsettled allegations in an indictment or a complaint can disrupt business. I find that prosecutors are aggressive in asking for items in a settlement that they would never get from a judge in court. With many companies the government overreaches, misap-plies facts, and does not give credit to evidentiary issues associated with actually producing their case.

While going to trial and winning is fantastic news for your client, you now have to deal with the Google effect. Type in your client’s name and the first thing that comes up isn’t that they were acquit-ted, but that they were charged. You have to weigh that against the vindication that comes from the lengthy, arduous, expensive process of winning.

Need for OversightJACOBS: It lets the government off the hook too easily to attri-bute these failures entirely to lack of trial experience. We’ve all seen outright misconduct or questionable judgment that starts from the beginning of the case, including grand jury leaks—which in the Broadcom matter ultimately led to the dismissal of the case—through the discovery process, plea negotiation process, and trial. (See (U.S. v. Ruehle, No. 08-CR-0139 (C.D.Cal. order issued Dec. 15, 2009).)

I am involved in a forfeiture matter (U.S. v. Liquidators of Euro-pean Federal Credit Bank, 630 F.3d 1139 (9th Cir. 2011)) in which the Ninth Circuit found that the government was collaterally estopped from making an argument because they previously made a completely different argument to the same court of appeals in an earlier proceeding. As a result, the court ordered the government to return to us all seized monies. And in a related case, the Ninth Cir-cuit ordered the government to pay our fees (U.S. v. $1,379,879.09, No. 08-16935, 374 Fed. Appx. 709, 2010 WL 1041465 (9th Cir.

2010)). We got all of our money returned. The issues we are talking about have become endemic

throughout the prosecutorial process. Supervision is where the responsibility lies, separate and apart from a prosecu-tor who might have limited experience. These issues can be dictated by the tone at the top. You need a U.S. attorney in each district, and senior managers who run the fraud sections and anti-trust division field offices to teach their more junior lawyers what is important. The ultimate goal for the government should not be just winning the case, but it should be bringing about a just result. That all too frequently gets lost.

HUMPHREYS: The issue is really one of scrutiny, and a trial is an excellent way to scrutinize the government’s case. You hope that supervisors would be able to prevent what happened in the Lindsey case, but sometimes only a trial will bring the situation to light.

HANDZLIK: One specification of misconduct in our case was that DOJ alleged that our company was responsible for a particular bribe payment at the same time it had charged another company with the exact same bribe in a case in Texas (U.S. v. O’Shea, No. 09-CR-629 (S.D. Tex.) indictment still pending; trial now set for January 2012). When we filed our motion, the government’s response was, “You’re not entitled to know anything about that, because it’s covered by grand jury secrecy.” And the judge said, “What?”

HUMPHREYS: It’s almost frightening that they’re so tone deaf. There was a case not long ago in which a state prosecutor took inconsistent positions in two murder cases about which defendant delivered the killing blows. The California Supreme Court did not take kindly to that (In re Sakarias, 35 Cal.4th 140 (2005)). That was a pretty well-reported decision. To see it happening again, particularly on a case like this that was going to get a lot of scrutiny, is extraordinary.

HANDZLIK: The Lindsey prosecutors sought to introduce as evi-dence at trial a bribe allegation actually charged in Houston. Although we had requested them, we were never given the underly-ing documents or grand jury testimony from Houston. The judge essentially said, “How can you do that?” There was no adequate answer.

BOERSCH: The sorts of sentencing decisions, and the offers that they’re making in plea agreements, are just out of whack with the real strength of their case if they’re ever pushed to trial. Dan [O’Connor] mentioned how difficult it is for companies in that situation to take the risk of going to trial. What ought to be re-examined in the U.S. is the whole principal of corporate criminal liability, and whether it makes sense to be prosecuting companies for wrongdoing the way the government is nowadays. It creates a pattern of prosecutorial dealings based on their confidence that they’re never going to trial because the risk to the company is so huge. They get in the habit of conducting their business that way.

How much does the notion of corporate criminal liability and the efforts of the government to prosecute companies for what

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ultimately are the acts of individuals really makes sense? In other countries there is no such thing as corporate criminal liability, only individuals can be criminally prosecuted.

HANDZLIK: We have to recognize that the FCPA among other offenses are huge moneymakers for the federal government. Ever since DOJ revised its prosecution policies to make large finan-cial penalties one of the objectives of federal criminal prosecutions, prosecutors have been incentivized to get big monetary settlements in addition to criminal convictions. In some cases, the government threatens a potentially destructive criminal prosecution, perhaps against a publicly traded company. Using that leverage, it subse-quently agrees to resolve things on financial terms with no prosecu-tion. This makes objective sense, especially to the company whose existence may hang in the balance. But it has led to a distortion of the criminal process in some situations.

Level the Playing FieldJOHNSTON: What can be done to put incentives into the system to prevent these kinds of problems? Leveling the playing field in two ways: First, fixing criminal discovery so that the defense gets witness statements and everything else in the case early on, and, sec-ond, changing the risk-reward balance for the government. When the defense wins a case, the client often asks, “How do I get back my reputation and the money spent on the defense of the case? Can we sue the government?”

We need reform around the Hyde Amendment (18 U.S.C. § 3006A), which permits a prevailing defendant a reasonable attor-neys fee and other litigation expenses but only when the court finds that the position of the United States was vexatious, frivolous, or in bad faith. If you lowered that standard and forced prosecutors to include this analysis in the process of deciding whether to bring a case to trial, you might have a different analysis. When the prosecu-tion goes to trial, they never think about a Hyde Amendment judg-ment. That’s because the judges don’t order it, and the standard is so difficult to meet. Some of that money collected from defendants for FCPA violations could be used to protect defendants from over-zealous prosecutors.

BOERSCH: That’s a really good point. I don’t know of a single case in which there’s been a Hyde Amendment claim granted to some-body. The Hyde Amendment was enacted in 1998. If the govern-ment, like in a civil case, had to consider that at the end of the trial it may have to pay attorneys fees, that would really change the incen-tives, and maybe how it conducts its business.

JACOBS: Individual prosecutors are generally oblivious to the costs that they are incurring, either for the government or on the individu-als they’re investigating. I had a case where the investigation went on for five years, with various iterations of being told that my client would not or would be prosecuted before the case was finally closed. The cost to the client in terms of relationships, and an inability to serve as an officer of a company that was going to go public, resulted

in my client moving to three different firms during that period. Then at the end of the day, the government just closes up and says, “Oh well. Never mind.”

O’CONNOR: It’s the same for companies. When you talk to prosecu-tors about how they should view the case, and remedies, there’s no credit given for the fact that over three years an otherwise legitimate, prosperous business, which employed people who aren’t thought to have been involved in wrongdoing, has been brought to an end. I’m not sure making it easier to hold the prosecutors on the hook for these bad charging decisions is going to make much difference.

HUMPHREYS: One unfortunate dynamic that we see all the time is when a case starts, the government won’t talk to you. They often spend years spinning their wheels, only to find out that the case is not as good as they thought. But now they have spent years on it, and they’ll be darned if they’re going to just decline it. So they try to coerce settlements, even where the evidence is weak. A lot of these cases could be better handled if there was actual communication.

HANDZLIK: It’s always seemed peculiar to me that some prosecutors won’t meet and talk about a case. They might learn something from the defense, there might be an exchange of ideas, and it might lead to a resolution. On the other hand, it might lead them to conclude that the case isn’t as great as they thought it was. This gets back to a lack of experience as well as a lack of confidence in the case, but also a “them-and-us,” “we’re on the right side and you’re on the wrong side” mentality. It makes no sense. It could bring people together and lead to quicker resolutions and smarter, more effective investigations and prosecutions.

I recommend reading Chief Judge Kozinski’s concurring opin-ion in the case of U.S. v. Goyal (629 F.3rd 912, 922 (9th Cir. 2010)). In a lengthy opinion, the Ninth Circuit unanimously reversed Mr. Goyal’s securities fraud conviction arising from the McAfee managed earnings case, and directed the district court to enter a judgment of acquittal. The court found that no crime had been committed. In a very short, concurring opinion, Judge Kozinski states “[T]his is not the way criminal law is supposed to work.” Mr. Goyal and others, including a client of mine who ultimately was not prosecuted, were subjected to years of anguish, uncertainty, and a crushing financial burden, only to have the court of appeals find that no crime had been committed. Every prosecutor and defense counsel should read that opinion, consider what went wrong, and perhaps reflect on the objectives of criminal investigations and prosecutions. n

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