Meet The Press

United States v. Treacy, No. 09-3939-cr (2d Cir. March 9, 2011) (McLaughlin, Hall, CJJ, Restani, JCIT)

James J. Treacy, former COO and President of the parent company of Monster.com, was convicted of securities fraud and related offenses based on a scheme in which he backdated stock options. On appeal, the circuit held that the district court violated Treacy’s confrontation rights by restricting his cross-examination of a Wall Street Journal reporter who had written an article about the backdating of options at Monster that seemingly contained false exculpatory statements made by Treacy, but that the error was harmless. The court also found that the district court improperly calculated the forfeiture amount with respect to one of the options grants.

The Confrontation Issue

At trial, the government introduced into evidence a WSJ article that opined that the odds were one in nine million that a pattern of options grants as favorable or more favorable than those Treacy received would have occurred if dates were selected randomly. The article also contained extensive quotes from Treacy himself, in which he denied any wrongdoing, and the government called the reporter to the stand to verify the accuracy of the statements he attributed to Treacy.

The reporter tried to quash the subpoena, citing the journalist’s privilege. The district would not quash, but tightly limited both the direct and the cross-examination. As for the direct, the questioning was to be limited only to the reporter’s work on the particular article; he would only be asked to verify that Treacy made statements to him that he subsequently reported, and to identify the specific things that they said to each other in the interview. As for the cross, since Treacy argued only that the statements were taken out of context, and not that he did not make them or that they were otherwise misreported, his questioning of the reporter was limited to going over the questions that the reporter asked of him “immediately before those that elicited the responses quoted in the story.”

In the event, when the reporter testified, the court sustained the reporter’s attorneys objections to questions asked by Treacy that went beyond the court’s ruling - such as why he interviewed Treacy, and questions about a post-interview that the reporter sent to Monster’s public relations consultant - holding that Treacy could not make an “open ended attack” on the reporter’s credibility. The court, however, did allow Treacy to introduce the email itself.

The circuit began its discussion with the journalist’s privilege, noting that “at least in the civil context” a “journalist possesses a qualified privilege protecting him or her from the compelled disclosure of even nonconfidential materials.” Here, there was no claim that the reporter was trying to protect a source or other confidential materials. To the contrary, he was trying to protect materials that the source wanted disclosed. In this situation, the nature of the press interest protected by the privilege is narrower, and the privilege is more easily overcome. In civil cases where this is the issue, the privilege yields if a litigant can establish that the materials are of likely relevance to a significant issue in the case and are not “reasonably obtainable from other sources.”

The court rejected the argument - made by Dow Jones, as an amicus - that there should be a higher standard for overcoming the journalist’s privilege in criminal cases. Without delving into the competing constitutional concerns, the court simply noted that Dow Jones had not provided “any convincing reason why” the test should be different in criminal cases where only nonconfidential materials are sought. Thus, “in instances where a reporter is not protecting a confidential source or confidential materials, the showing required to overcome the journalist’s privilege is the same in a criminal case as it is in a civil case.” This is true “whether the party seeking to overcome the privilege is the prosecution or the defense.”

The district court correctly applied these principles in limiting the direct examination of the reporter. Treacy’s statements to the reporter appeared to be false exculpatories, and were thus “likely relevant.” And, since Treacy could not be compelled to testify, the reporter was the only source of the information. The district court’s limitations protected the journalist’s privilege by tailoring the questions to the showing of relevance and necessity.

But the limitations on the cross-examination, by contrast, went too far. Even taking into account the district court’s broad discretion in setting the parameters of cross-examination, curtailing cross-examination that “keeps from the jury relevant and important facts bearing on the trustworthiness of crucial testimony” is an abuse of discretion. Accordingly, here, it was an abuse of discretion to forbid cross-examination of the reporter beyond the ways that the ordinary rules regarding scope of direct and relevancy would restrict the examination of any other witness. Since the privilege issue was the same on cross as it was on direct, the district court should not have treated the reporter’s “interest as a competing interest to be balanced against Treacy’s Confrontation Clause rights.”

Thus, Treacy should have been permitted to “challenge [the] reporter’s credibility about the specific content of his direct testimony.” In addition, while the district court had the discretion to prevent a “general attack on credibility,” in application the restriction here went too far. The purpose of the reporter’s direct testimony was to confirm the accuracy of the statements attributed to Treacy in the article. Thus, Treacy should have been able to test the reporter’s memory with respect to the writing of the article. If the district court truly believed that “Treacy could not fully exercise his Confrontation Clause rights” due to the reporter’s “assertion of the privilege, it ought to have” either quashed the subpoena or stricken the reporter’s direct testimony.

A confrontation error does not require reversal if the government establishes that the error was “harmless beyond a reasonable doubt,” after assuming that the “damaging potential of the cross-examination were fully realized.” That standard was met here, even though the government in summation repeatedly emphasize Treacy’s statements to the reporter as evidence of his mendacity. Here, “the other evidence in the prosecution’s case was vastly more significant to demonstrating Treacy’s actual actions.” The court noted that Treacy was able to introduce the reporter’s post-interview email and that this allowed him to argue, even if with less force, that the statements attributed to him in the article were taken out of context. Second, in this circuit, false exculpatory statements are considered to be weak circumstantial evidence of guilt. Finally, other evidence in the case convincingly established Treacy’s guilt, and the court was “confident that the jury would not have been persuaded otherwise by an ambiguous newspaper article.”

The Forfeiture Issue

The circuit did agree, however, that the district court erred in for calculating the forfeiture amount as to one of the options grants because the court used an incorrect measurement date. According to Treacy, if a different date were used it would result in a smaller forfeiture. The court thus vacated this portion of the forfeiture and remanded for recalculation.

Payoff Games

United States v. Kalish, No. 08-3374-cr (2d Cir. November 24, 2010) (Newman, Winter, Lynch, CJJ)

Defendant Kalish was convicted of mail and wire fraud in connection with an advance loan fee scheme. The district court ordered him to pay $ 1.2 million in restitution, and also ordered a $ 3.9 million forfeiture.

On appeal, Kalish claimed that the district court should have reduced the forfeiture amount by the amount of the restitution order. The circuit affirmed, finding that the claim was premature. There is no error in imposing both a forfeiture order and a restitution order, since each is authorized by a separate statute.

However, once “some payment has been made by way of restitution, a defendant would be in a position to argue that such a payment should be a credit against any then remaining forfeiture amount.” Since the forfeiture amount represents “ill-gotten gains,” it is “at least arguable” that any money returned to a victim has reduced the amount of “ill-gotten gains” remaining in the defendant’s possession. But Kalish did not claim that he had made any restitution payments, so the court did not need to “decide whether such an argument would prevail.”

Second Time Aground

United States v. Castello, No. 09-2784-cr (2d Cir. July 7, 2010) (Jacobs, Winter, McLaughlin, CJJ)

Joseph Castello was convicted of failing to file CTRs in connection with his check cashing business. When last we heard from him, see Cashed and Burned, posted 2/6/2009, the circuit vacated a 12 million dollar-plus forfeiture order and remanded for more complete findings under United States v. Bajakajian, 524 U.S. 321, 337-39 (1998), and its Eighth Amendment-derived excessive fines test. On remand, the district court made findings on the four factors set out in Bajakajian, and reduced the amount of the forfeiture to zero. On this, the government’s appeal, the circuit vacated the zero and ordered reimposition of the original forfeiture amount.

Reviewing the district court’s findings de novo, the circuit found fault with all of them. The first Bajakajian factor requires consideration of “the essence of the crime of the defendant and its relation to other criminal activity.” Here, while Castello was convicted only of failing to file CTRs and nothing else, his conduct was still very serious because it conduct permitted thousands of his check-cashing customers to commit fraud.

The second Bajakajian factor considers “whether the defendant fit[s] into the class of persons for whom the statute was principally designed.” The circuit concluded that this factor weighed in favor of full forfeiture. While Castello himself was not a money launder, drug trafficker or tax evader, the main targets of the statute of conviction, his conduct facilitated such conduct "in just the way the statute was designed to frustrate."

Third, Bajakajian considers “the maximum sentence and fine that could have been imposed.” For this factor, the court concluded that the Guidelines are a “more indicative” measure of offense severity than the statutory maximum penalties. Castello received the statutory maximum sentence - five years’ imprisonment and a $250,000 fine. But the Guideline range based on his actual conduct was far greater than five years, even though the court could not impose it because of the statutory maximum. Accordingly, this factor weighed in favor of full forfeiture.

Finally, Bajakajian invites an analysis of “the nature of the harm caused by” the offense conduct. Castello cashed thousands of checks in excess of $10,000, totaling over $200 million, without filing the required CTRs, and he did so knowingly and willfully. This helped his customers evade taxes, cash fictitious checks, and commit securities fraud. The victims included private parties as well as the federal government. Accordingly, this final factor also weighed in favor of full forfeiture.

PC World

United States v. Muse, No. 07-4483-cr (2d Cir. March 11, 2010)(Walker, Calabresi, Wesley, CJJ) (per curiam)

Two defendants in a large khat prosecution appealed the multi-million dollar forfeiture orders against them, arguing that a defendant in a drug case is not subject to forfeiture where he does not have assets to satisfy the judgment at the time of sentencing. The court joined the First, Third, Seventh and Ninth Circuits in rejecting that argument and holding that 21 U.S.C. § 853 permits imposition of a money judgment on a defendant who has no assets at the time of sentencing. The court noted that this was consistent with the statute’s language and purpose and that a contrary interpretation “could have the undesirable effect of creating an incentive for an individual involved in a criminal enterprise to rid himself of his ill-gotten gains to avoid the forfeiture sanction.”

Cashed and Burned

United States v. Varrone, No. 07-4533-cr (2d Cir. January 30, 2009) (Calabresi, Sotomayor, Parker, CJJ)

Joseph A. Castello ran a check cashing business. He cashed more than $200 million in checks that exceeded $10,000 - charging a four percent check-cashing fee - for which he was obligated to file currency transaction reports (CTR’s). He did not, however, and was convicted by a jury of violating 31 U.S.C. §§ 5313 and 5322(a). On appeal, he challenged a restitution order, and claimed that the forfeiture order violated the Excessive Fines Clause of the Eighth Amendment. The circuit vacated.

The Restitution Order

The restitution order involved a fraud victim, who was induced to send a $300,00 check to a bogus financial firm. This had nothing at all to do with Castello, except that the firm cashed the check at his establishment. When the victim contacted Castello, he falsely represented that he was an “honest man,” who always paid his taxes. The district court ordered, as a condition of Castello’s supervised release, that he repay the $300,000.

Addressing a question of first impression in this circuit, the court reversed. Under 18 U.S.C. §§ 3583(d) and 3653(b)(2), a district court can order a defendant to “make restitution to a victim of the offense” as a condition of supervised release. However, it has long been clear that, under the restitution statutes, restitution can be ordered only for the “losses caused by the specific conduct that is the basis for the offense of conviction.” Here, the court agreed that this is also true for the restitution provisions of the supervised release statute. “[R]estitution can be ordered as a condition of supervised release ... only to compensate for losses caused by the specific conduct that is the basis for the offense of conviction.” Since the loss here was caused by an unrelated fraud scheme, and not Castello’s failure to file CTR’s, the restitution order was not authorized.

The Forfeiture

In the district court, the government sought, and obtained, a forfeiture order that included: a money judgment of more than $9 million, which represented four percent of the value of the checks exceeding $10,000 that Castello cashed without filing CRT’s; Castello’s interest in real property that he purchased with tainted funds; and about $2.7 million in funds that went through a Citibank account that Castello used to conduct his check cashing business.

On appeal, he challenged the forfeiture under the Excessive Fines Clause of the Eighth Amendment. A forfeiture is excessive if it is “grossly disproportional to the gravity of a defendant’s offense.” In United States v. Bajakajian, 524 U.S. 321, 337-39 (1998), the Court identified four considerations for determining whether a forfeiture is excessive: the “essence of the [defendant’s] crime” and its relation to other criminal activity; whether the defendant “fit into the class of persons for whom the statute was principally designed; the maximum authorized sentence and fine; and the nature of the harm caused by the offense.

Here, the district court neither evaluated the Bajakajian factors nor made factual findings regarding them. The circuit noted that the forfeiture order against Castello was more than forty times the maximum permissible fine, thus it was not presumptively permissible under the Eighth Amendment. It also noted that this - the third Bajakajian factor - was the only one conclusively established by the record, and it weighed against the constitutionality of the forfeiture. The other three factors were “not clearly established by the record.” In the absence of “factual development by the district court regarding” the three other Bajakajian factors, the court concluded that the record was insufficient to evaluate the Eighth Amendment claim, and remanded the case for further proceedings.