Yuengling to Settle Up on Expensive Tab after Feds Discover Excessive Suds Byproducts in Water

Someone at local D.G. Yuengling and Son, Inc. could probably go for a cold one right now, as settlement negotiations with the U.S. Environmental Protection Agency (“USEPA”) have finally come to a head.   In a consent decree filed this week in Pennsylvania federal court, the local brewer, Pennsylvania’s oldest, will pay nearly $10 million – a combination of civil penalties and investments in its water treatment systems – to resolve a long-running investigation by the USEPA and the U.S. Department of Justice (“DOJ”).

The agreement requires Yuengling to pay a $2.8 million civil penalty for discharges from its Pottstown breweries to a local sewage treatment plant that did not meet standards imposed in its discharge authorization. The brewery is alleged to have discharged excessive amounts of organic materials – primarily water, yeast, and sugars left over from the brewing process – to a local sewage treatment plant. That local treatment plant has a federal NPDES permit issued under the Clean Water Act for its discharge to the Schuylkill River upstream of public water supply intakes.  Yuengling has a pretreatment permit which establishes treatment standards and limits for its discharge to the local treatment plant. According to the DOJ and USEPA, Yuengling violated Clean Water Act provisions numerous times between 2008 and 2015, and failed to fully respond to prior orders from the local sewer authority and USEPA to correct the problems that led to the enforcement action. Among the violations were dozens of instances in which Yuengling’s brewing facilities exceeded pretreatment limitations, as well as reporting failures and missed resampling and monitoring of the wastewater it was discharging to the treatment plant.

In addition to the seven-figure penalty, Yuengling agreed to continue to take remedial actions to upgrade its water pretreatment capabilities, in addition to nearly $8 million it has already invested in new technology.  The consent decree includes other provisions to ensure proper compliance and reporting into the future. In a statement released yesterday, Yuengling emphasized its “long term commitment to the communities [it] operate[s] in,” and the priority it places on “protect[ing] the environment for generations to come.” “As America’s Oldest Brewery,” Yuengling said it strives “to reduce [its] carbon footprint, recycling and reusing materials whenever possible as well as conserving water and energy.” In line with this pledge, the new system collects leftover organic materials and converts them into methane to be reused by the brewery as a fuel source for on-site power and heat. Yuengling’s press release also notes that other brewing byproducts are to be recycled. For example, the “spent” grain collected after brewing is sent to local dairy farms to be used as feed and soil fertilizer, and the yeast will be reused by food processers as a protein supplement.

Clean Water Act violations can result in significant penalties, both civil and criminal, meaning they can lead to substantial civil liability and possibly jail time. Most Clean Water Act permits include periodic and detailed self-reporting and compliance certification requirements,  often making non-compliance a matter of public record and easy to recognize when reviewed by governmental agencies like the USEPA.  Companies and their executives confronting such potential or ongoing investigations should understand the potential implications of non-compliance, which can include severe penalties and significant operational limitations.  Identifying non-compliance early on also allows companies to evaluate strategies such as self-reporting violations in exchange for reduced penalties. As for Yuengling, its agreement with the government is subject to a thirty-day public comment period, and must still be approved by the district court judge overseeing the legal action.

Mickelson Seeks Relief from Insider Trading Hazard

Almost two years ago, the Wall Street Journal and New York Times first reported an insider trading investigation involving sports gambler William “Billy” Walters and pro golfer Phil Mickelson.  At the time, the investigation appeared to focus on trading activity surrounding a potential take-over bid of Clorox.  We didn’t think much of potential claims against Mickelson arising out of the Clorox investigation.  Yet, buried in both articles was a reference to a second investigation involving trading in Dean Foods.  Today, the Dean Foods investigation shot up the leaderboard with the announcement of criminal insider trading charges against Walters and former Dean Foods Chairman Thomas Davis.  The SEC also brought civil charges against the pair and has named Mickelson as a “relief defendant,” asserting that Mickelson profited from trading in Dean Foods stock based upon non-public information received from Walters.

As a relief defendant, Mickelson is not accused of any wrongdoing. Rather, a relief defendant may be ordered to repay funds when that person has received ill-gotten gains and does not have a legitimate claim to those funds.  SEC v. Cavanagh, 155 F.3d 129, 136 (2d Cir. 1988).  In this case, the SEC alleges that Walters gave Mickelson, who at the time owed Walters for a gambling debt, inside information regarding Dean Foods (which Walters had received from Davis).  Mickelson then used that information to earn a $931,000 profit in just over a week from his $2.4 million position in the company.  That sure beats the $500 he made off of Mike Weir for betting that Jim Furyk would sink a bunker shot, a bet that put him in hot water for violating PGA Tour policy that provides that “player shall not have any financial interest, either direct or indirect, in the performance or the winnings of another player.”  In any event, the “ill-gotten” nature of Mickelson’s Dean Foods’ profit was not alleged to be the result of Mickelson’s conduct, but rather, Walters’.

It is not uncommon for the SEC to pursue disgorgement from individuals who are downstream tippees – traders who are a step or two distant from the insider who breached his or her fiduciary duty in disclosing material, non-public information.  See, e.g., SEC v. McGee, 895 F.Supp.2d 669, 686-689 (E.D. Pa. 2012).  By naming Mickelson as a relief defendant, not charging him civilly or criminally, the government need not prove that Mickelson knew that the insider – here, Davis – received a benefit from the immediate tippee – Walters – in exchange for the inside information. As tipees get further down the chain from the insider, the government faces an increasingly difficult task in proving the requisite knowledge of this benefit, particularly in light of the Second Circuit’s decision clarifying this requirement in United States v. Newman.  See our discussion of Newman here, here, and here.

As for Walters, he is a gambling man, and he’s now facing the gamble of his life.  He faces a federal indictment that alleges gains (and avoided losses) of more than $40 million.  Further, the government has announced that the corporate insider, Davis, has already pleaded guilty to conspiracy, securities fraud, wire fraud, obstruction of justice, and perjury, and is cooperating with the government.

For Mickelson, as the SEC announced today, he has agreed to repay the full disgorgement of his trading profits of $931,738.12 plus interest of $105,291.69.  He has neither admitted nor denied the allegations.  In a statement, Mickelson noted the return of the funds and said that he had “no desire to benefit from any transaction that the SEC sees as questionable.”  Mickelson appears to be identified in Walters’ indictment as “Individual-2” and may well play an ongoing role as a witness in any civil or criminal trial arising out of the SEC’s complaint or the criminal case against Walters.

Supreme Court Takes On “Another” in Upholding Hobbs Act Conviction

The Hobbs Act – a law promulgated in 1946 to deal with the infiltration of racketeering activity in labor unions – got a “W” in its column yesterday with the Supreme Court’s issuance of Ocasio v. United States.  Justice Alito, writing for the 5-3 majority, affirmed the convictions of a Baltimore police officer for Hobbs Act extortion and conspiracy to commit the same for accepting kickbacks in exchange for directing cars post-accident to his co-conspirator’s auto body shop for repairs.

The Hobbs Act is a vehicle typically used by federal prosecutors to charge a public official “who took ‘by colour of his office’ money that was not due to him for the performance of his official duties,” or more simply put, the Hobbs Act provides for the prosecution of law enforcement officials and politicians who accept bribes or extort others via their professional office.  Evans v. United States, 504 U.S. 255, 260 (1992). The definition of extortion under the Hobbs Act requires the obtaining of property (think money, gifts, entertainment, etc.) from another with his consent.  Id. at 265.

In a strict constructionist argument that would have made the late Justice Scalia proud, Ocasio argued that the Government did not carry its burden on this requisite element of the Hobbs Act by failing to prove that he had obtained property “from another.”  Sure, Ocasio accepted money in exchange for routing beat up cars to his co-conspirator’s repair shop, but he shrewdly pointed to the fact that he accepted the said property, i.e. his kickbacks, directly from his co-conspirator and not from another individual outside the conspiracy.  Therefore, he concluded that although his co-conspirators paid him off, there was no agreement – and could be no agreement – to obtain property from another individual or individuals. Clever argument?  Yeah.  Successful?  No.

Justice Alito rejected this argument, in sum, agreeing with the Government that Ocasio’s acceptance of kickbacks from his conspiring bribe payors, satisfied the “from another” element of the Hobbs Act.  Any suggestion proffered by the defense that the bribe must have been paid from an individual outside or beyond the conspiracy was swiftly dismissed by majority Justices Alito, Kennedy, Ginsburg, Breyer, and Kagan.  Moral of the story:  just like the man who becomes his own grandpa, one can now be both a victim and a co-conspirator under the Hobbs Act.

 

 

D.C. Circuit Reins In District Court for Second-Guessing Government’s Deferred Prosecution Agreement

This guest post was authored by our colleague Jeremy A. Gunn, an associate in the firm’s Litigation Department.

In an unusual win for both the U.S. Department of Justice and corporate defendants, the D.C. Circuit last week reversed a district court’s refusal to pause the speedy-trial clock pursuant to a deferred prosecution agreement.  United States v. Fokker Servs. B.V., — F.3d —, No. 15-3016, slip op. at 1 (D.C. Cir. Apr. 5, 2016).  The district court’s action was the first time that any federal court had denied a motion to exclude time under the Speedy Trial Act based on a deferred prosecution agreement being too lenient on corporate defendants.  On appeal, the D.C. Circuit held that the Speedy Trial Act does not confer authority on a district court to withhold exclusion of time based upon a disagreement with the Department of Justice’s charging decisions.

In 2010, Fokker Services – a Dutch aerospace company that provides aircraft manufacturers with technical support and equipment – voluntarily notified the Government that it had potentially violated federal sanctions by engaging in illicit transactions with Iran, Sudan, and Burma.  United States v. Fokker Servs. B.V., 79 F. Supp. 3d 160, 161 (D.D.C. 2015), vacated and remanded, No. 15-3016 (D.C. Cir. Apr. 5, 2016).

Fokker fully cooperated with the Government’s investigation for more than four years. As a result of that investigation, the Government negotiated a global settlement with Fokker that provided an 18-month deferred prosecution agreement (“DPA”).  As part of the DPA, Fokker was required to pay $21 million in fines and accept responsibility for violating U.S. sanctions and export laws.  In return, the Government agreed to dismiss its charges upon Fokker’s compliance. Continue reading

Supreme Court: Courts Cannot Bar Use of Untainted Assets to Mount Criminal Defense

In a decision of significant importance to the white-collar world, the United States Supreme Court held yesterday that the Sixth Amendment right to counsel extends to permit those accused of crimes to use their “untainted” personal assets to fund their defense. Put another way, this means that if the government accuses you of a crime, and you have legitimate assets with which you want to pay the lawyer of your choice, the government can no longer stand between you and doing so.

A federal statute provides that a court may freeze some assets belonging to those accused of certain federal health care or banking laws. Those assets include: (1) property “obtained as a result of” the crime; (2) property “traceable” to the crime; and (3) other “property of equivalent value.” In October of 2012, a federal grand jury charged Sila Luis with such crimes (related to an alleged $45 million Medicare fraud scheme). Luis had about $2 million dollars remaining in her possession at the time, and the government secured a pretrial order prohibiting her from dissipating those assets, which belonged to the third category above, regardless of whether they had anything to do with her criminal conduct. The district court observed the potential Sixth Amendment complications presented in this case, but held that Amendment did not provide Luis a right to use her untainted assets to pay for her defense, and the Court of Appeals for the Eleventh Circuit affirmed.

The Supreme Court, in a decision divided along uncommon lines, reversed. It concluded that this pretrial restraint on the use of otherwise wholly legitimate assets violated the Sixth Amendment. In reaching this result, Justice Breyer (joined by Chief Justice Roberts and Justices Ginsburg and Sotomayor), reasoned that the nature and grave importance of the right to counsel, taken together with the type of untainted assets at issue led to this conclusion.

It is well-established that every criminal defendant is entitled to counsel of his or her choosing, and settled precedent provides that such persons are entitled “to be represented by an otherwise qualified attorney whom that defendant can afford to hire.” While the government argued that it, too, had a substantial interest (that of preserving criminal defendants’ assets to pay statutory penalties and restitution), the Court first reasoned that this interest was not weighty enough to counteract the criminal defendant’s need to use innocent funds to select counsel of his or her choosing. The Court also noted a lack of support for the government’s position in the common law, remarking that it could find “no decision of this Court authorizing unfettered, pretrial forfeiture of the defendant’s own ‘innocent’ property….” Moreover, it noted “as a practical matter” that to accept the government’s position may “unleash a principle of constitutional law that would have no obvious stopping place,” since Congress could simply “write more statutes” authorizing such pretrial forfeitures.

Justice Thomas, writing for himself, would have held that this balancing act unnecessary, indeed inappropriate, in light of his view that the Sixth Amendment’s “text and common-law backdrop” supplied all the authority necessary to hold such asset freezes unconstitutional.

This ruling is a significant victory for the Sixth Amendment right to counsel and for property rights. It is also a huge win for Luis, whose case will return to the district court, where she must now be permitted to pay her chosen lawyer with her untainted assets.

Questions Linger: Is Fraud on Freddie and Fannie Fraud on the Government

 

This guest post was authored by our colleague Priya Roy, an associate in the firm’s Litigation Department and member of its Data Privacy and Cybersecurity practice group. Priya focuses her practice in the areas of higher education and white collar and government investigations. She also serves an editor of the firm’s Data Privacy Alert blog, which focuses on data privacy and cybersecurity issues.

In the wake of the mortgage crisis, there has been an uptick in False Claims Act (“FCA”) claims against banks, lenders, and mortgage servicers based on loans involving Government Sponsored Enterprises (“GSE”) such as Freddie Mac and Fannie Mae.  Yet on February 22, 2016, the Ninth Circuit rejected claims against certain financial institutions arising out of allegedly false representations and warranties made in seller / services contracts with Freddie Mac and Fannie Mae, holding that Fannie and Freddie were not governmental instrumentalities for purposes of the FCA.  United States ex rel. Adams v. Aurora Loan Servs., Inc., 2016 WL 697771 (9th Cir. Feb. 22, 2016).  The court, however, refused to take a bright line rule that GSEs could never be governmental instrumentalities.  The opinion nonetheless sheds light on the scope of the FCA in cases involving GSEs.

The FCA is the government’s primary tool to recover damages for fraud involving government funds. Importantly, the FCA has a qui tam mechanism that allows citizens who purport to have evidence of fraud against the government contracts and programs to sue on the government’s behalf. Such qui tam plaintiffs are called “Relators,” and stand to be awarded between fifteen to twenty-five percent of the ultimate recovery in the case.  The government has the right to intervene in the proceedings.  Even if the government declines intervention, the Relator may proceed with the action.

In Adams, the Relator asserted that servicer defendants violated the FCA when they falsely certified to the GSEs that they were in compliance with their seller/servicer agreements and representations when they were not.  Further, he alleges that servicers caused the GSEs to pay for certain homeowner association assessments and charges for which the GSEs are not liable.

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Ninth Circuit Sharply Circumscribes Cell-Phone Searches in Light of Riley

We here at White Collar Alert get excited by Riley v. California.  We’ve previously written about it here, here, and here.  And with good reason—smartphones have become a central part of most of our daily lives, and contain some of our most sensitive personal information.  Well, we’re back with Riley news out of the Ninth Circuit, where last week the court reaffirmed the digital-privacy rights of smartphone users by suppressing evidence illegally obtained from a criminal defendant’s cell phone.

As we’ve noted before, the Supreme Court has observed that cell phones are so important to many of us that a “proverbial visitor from Mars might conclude they were an important feature of human anatomy,” which “place vast quantities of personal information literally in the hands of individuals.”  That’s why police ordinarily must have a warrant to search a phone, even incident to an arrest.

But what happens when you’re on probation?  That was the question resolved yesterday in United States v. Lara.  As is quite often the case when a defendant is placed on probation, Lara agreed to certain conditions in order to secure his release from jail to probation.  One of those things was a blanket “Fourth Amendment Waiver,” which permitted the government to search his “person and property, including any residence, premises, container or vehicle under [his] control” at any time. Lara, ___ F.3d ___, No 14-50120, slip op. at 4 (9th Cir. Mar 3, 2016).  When the police came knocking at Lara’s door to conduct a “probation search,” one of the officers found Lara’s cell phone in the living room and searched it. Id. at 5.  Lo and behold, Lara was trying to sell an acquaintance a gun, and had sent him pictures of guns using the smartphone. Id.

Armed with the photographs, the police were able to use GPS data to determine the pictures were taken at Lara’s mother’s house – somewhere the police would have had absolutely no reason to look – and found a gun there that belonged to Lara.  It’s illegal under federal law for a felon to possess a gun (though Justice Thomas suggested at argument in Voisine v. United States last week he thinks otherwise about misdemeanors), and so Lara, a felon, was charged with a federal firearms offense.

Before trial (and before Riley), the district court denied Lara’s suppression motion, and he appealed.

The Ninth Circuit, with the benefit of the intervening Riley decision, reversed.  While it noted that Lara’s acceptance of the waiver bore on the reasonableness of the search, it held that searching Lara’s phone was unreasonable, since his privacy interests outweighed the government’s interest in combatting recidivism and integrating probationers back into their communities. Lara, ___ F.3d. ___, No 14-50120, slip op. at 14-15.  While Lara’s probationary status diminished his privacy interest, it did not extinguish or waive it.  Of particular interest, the court held that the “waiver” was no waiver at all because it was equivocal and unclear.  Looking to Riley, the court observed that it made “no sense to call a cell phone a ‘container,’” and that a phone is not the kind of “property” meant to be encompassed by the waiver, when read in conjunction with the other types of things that waiver included. Id. at 11-12.  It also rejected the government’s suggestion (as “almost fanciful”) that Lara’s decision to Anglicize his name (from “Paolo” to “Peter”) on his phone bill somehow diminished his privacy interest.  Under the exclusionary rule, Lara’s case goes back to the district court, where the government will be unable to present the fruits of its illegal search.

And so, go out into the light and breathe, and text, freely.  Riley’s advance continues to sweep the nation’s courts, and data-privacy supporters have scored another significant legal victory.

Seventh Circuit Finds Clear Error on Loss Calculation in Trade Secrets Sentencing

The Seventh Circuit Court of Appeals on Wednesday found clear error in the sentencing of a quantitative finance professional who pleaded guilty to unlawfully possessing and transmitting trade secrets.  The defendant, twenty-eight year old Yihao Pu, stole expensive and proprietary high-speed securities trading software with the hope to use it for his own pecuniary gain.  Unfortunately for Pu, he ended up losing money on the scheme.  Already out $40,000, things got worse for him when his employer, financial giant Citidel, caught on.

From 2009 through 2011, Pu worked at two financial companies using their software systems to conduct trades for their clients.  He illegally copied files during his time at both companies using personal electronic storage devices and employed those files to conduct personal trades for his own benefit.  The wheels came off when Citadel grew increasingly suspicious of activity on Pu’s work computer and conducted an internal investigation revealing the extent of his criminal actions.

Charged by a grand jury with twenty-three criminal offenses, Pu avoided trial by pleading guilty to one count of unlawfully transmitting a trade secret as to Citadel and another count of unlawfully possessing a trade secret as to the other company.  At sentencing, the parties agreed, and the district court found, that there was no actual monetary loss—again, Pu had himself lost $40,000 by the time the government put a stop to his illegal trading.  The district court instead looked to how much money the companies paid their employees to develop the algorithms and source code that Pu stole, arriving at a loss amount of over $12,000,000.  This large-dollar loss calculation increased what would have been a sentencing offense level of nine by twenty points—more than 200-percent for those keeping score.  After a departure downward from the guidelines, the court sentenced Pu to three years’ imprisonment.  The court also ordered Pu to pay more than $750,000 in restitution for the money Citadel paid forensic analysts and attorneys to investigate his conduct based largely, if not solely, on a letter from Citadel reflecting its claimed expenses.

Not okay on either count, said the Seventh Circuit.
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Former Texas Governor Rick Perry’s Indictment Dismissed as Unconstitutional

Today, the Texas Court of Criminal Appeals held that the prosecution of former Texas Governor Rick Perry was as much an “oops” as his own slip that famously felled his 2012 Presidential campaign.  The court remanded the case to the district court with orders to dismiss the two-count indictment, charging him for the threat and actual veto of state funds for a district attorney who had been arrested for drunk driving but refused to resign.  We said it back in 2014 and say it again now:  Governor Perry should not have been charged.  Or, as better articulated by Judge David Newell’s concurring opinion in this appeal:

Come at the king, you best not miss.

– Omar Little, The Wire (HBO 2002).

Indeed, the indictment was a miss from the start (as detailed in the amicus brief of constitutional and criminal law scholars filed in the Court of Criminal Appeals).

Count I alleged that the vetoing the funds constituted “abuse of official capacity” under Texas Penal Code § 39.02.  Count II alleged that the threat to veto constituted a “coercion of a public servant” pursuant to Texas Penal Code § 36.03.  The Court of Criminal Appeals rejected the government’s arguments on both counts.

The court concluded that the legislature could not directly or indirectly limit the governor’s veto power.  Because it was the veto that was the alleged illegal act, the prosecution violated the separation of powers.  In a footnote, the court distinguished the indictment with a hypothetical bribery prosecution in which a governor accepted money in exchange for the veto.  In such a case, “the illegal conduct is not the veto; it is the agreement to take money in exchange for the promise.”  Slip op. at 24 n.96.

With respect to the threat and the “coercion of a public servant,” the court concluded that the definition of “coercion” as “a threat, however communicated . . . to take or withhold action as a public servant” is unconstitutionally overbroad in violation of the First Amendment. Id. at 51 (citing Tex. Penal Code § 1.07(a)(9)(F)).

When we first called the indictment a “weak case that shouldn’t have been charged,” we lamented that “it is often a very long road to reveal the truth.”  The appeal tells us that the wait was not necessarily for the “truth” – the facts were undisputed – but the law.  Not without dissent (actually, two), the Court of Criminal Appeals nonetheless rightfully applied the law and ordered the dismissal of the indictment.

 

 

Second Circuit Accepts Rajat Gupta’s Insider Trading Appeal

This week I spoke with Fox Business reporter Serena Elavia about the Second Circuit’s decision to grant a certificate of appealability in the Rajat Gupta insider trading prosecution.  Gupta is the high-profile former McKinsey & Co. Managing Director and Goldman Sachs board member who was prosecuted and convicted for providing insider information to former Galleon Group hedge fund manager Raj Rajaratnam.

Gupta, who was first convicted in 2012 and whose direct appeal was denied in 2014, received another bite at the apple earlier this month.  He now has an opportunity for the Second Circuit to determine whether his conviction should be vacated because the jury was erroneously instructed and whether any procedural default may be excused for cause and prejudice or actual innocence.  This opportunity flows directly from the Second Circuit’s United States v. Newman decision, which altered the proof needed for the “personal benefit” to the insider that is required under Dirks v. S.E.C., 463 U.S. 646 (1983).

Newman held that merely “maintaining a good relationship” is not enough to prove the required “personal benefit.”  Instead, the insider must be the beneficiary of “an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.”  Yet, at the time that Gupta was convicted, the district court instructed the jury that the benefit received did “not need to be financial or to be tangible in nature.  It could include, for example, maintaining a good relationship with a frequent business partner, or obtaining future financial benefits.”  Gupta did not object at the time to the instruction (Newman had not been decided).  Gupta and others, including Bassam Salman, whose petition for certiorari the Supreme Court just granted, have argued that Newman did, in fact, change the personal benefit test and thus their convictions under the less stringent “relationship” test should be vacated.

For Gupta personally, the Second Circuit’s order agreeing to hear the appeal is a significant step, although, procedurally, the Second Circuit may have accepted the appeal to put it in a holding pattern.  The Supreme Court will have the final say on this issue as it addresses Salman’s petition on the question of whether the personal benefit:

requires proof of “an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature,” as the Second Circuit held in United States v. Newman, or whether it is enough that the insider and the tippee shared a close family relationship, as the Ninth Circuit held in this case.

Salman’s Supreme Court brief is due in May.