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.

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.

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.
Continue reading

Supreme Court Holds General Statute of Limitations is Not Jurisdictional Defense

It appears that not even this weekend’s colossal winter snowstorm could deter the Supreme Court from its business, today deciding several criminal cases on its docket.  In addition to the landmark Montgomery v. Louisiana decision, which gives retroactive effect to Miller v. Alabama and will have massive implications for those juvenile defendants serving life sentences for murder who may now seek resentencing or parole, the Court affirmed the convictions of Michael Musacchio, a former logistics industry executive who was convicted of improperly penetrating his past employer’s computer system with help from another former employee.

Musacchio had been president of Exel Transportation Services until he resigned in 2004. In 2005, he started a rival logistics company, Total Transportation Services, and soon thereafter hired Roy Brown, Exel’s former chief of information-technology.  Using a password Brown supplied, both Brown and Musacchio continued to access Exel’s computer system until 2006.

In 2010, a grand jury indicted Musacchio for computer fraud under 18 U.S.C. § 1030(a)(2)(C), which makes it illegal to “intentionally access[ ] a computer without authorization or [to] exceed[ ] authorized access,” and in doing so “obtain[ ]… information from any protected computer.” Id. (emphasis supplied).  Although initially charged under both statutorily provided theories of liability, the government’s superseding indictment limited both the conspiracy-based and substantive charges (Counts 1 and 2, respectively) to the cohorts’ unauthorized access to the Exel computer system.

At Musacchio’s 2012 jury trial, his counsel apparently overlooked that the general five-year federal statute of limitations (codified at 18 U.S.C. § 3282) might have barred Count 2, and so he raised no defense on that basis.  And, for the government’s part, it raised no objection to a clearly erroneous jury instruction that diverged from the indictment and the proposed instructions, and directed the jury to consider whether Musacchio had both “intentionally accessed a computer without authorization” and “exceeded authorized access.” Musacchio v. United States, No. 14-1095, 577 U.S. ___, slip op. at 3 (filed Jan. 25, 2016) (emphasis supplied).  Little did the parties likely know that these omissions would catapult Musacchio’s case all the way to the High Court.

After the Fifth Circuit affirmed Musacchio’s sentence of sixty months’ incarceration, the Supreme Court granted certiorari to (1) determine the proper standard of review of a sufficiency-of-the-evidence claim where the court erroneously instructs the jury and adds an element to the offense as charged, and (2) determine whether Section 3282’s statute of limitations was a nonwaivable defense that could be asserted for the first time on appeal.

Unfortunately for Musacchio, he fared no better at the Court, but his case does provide guidance to practitioners. Continue reading