Articles Posted in Federal Crimes

Federal criminal law in Texas and around the country deals with fraudulent acts that cross state lines, affect interstate commerce, or target or otherwise affect specific federal programs. Common charges in federal fraud cases involve the alleged use of mail or electronic communications in furtherance of a fraudulent scheme—these are known as mail fraud and wire fraud, respectively. Certain federal statutes apply to specific types of fraudulent activities, in which case prosecutors may pursue general fraud charges and charges under a specific statute. This was the case in a recent prosecution of a doctor for wire fraud, violations of the Anti-Kickback Statute and the Travel Act, and conspiracy to violate both of those statutes. United States v. Savino, No. 2:16-cr-00582, indictment (D.N.J., Dec. 20, 2016). In late 2017, a jury convicted the defendant on all 10 charges in the indictment.

The federal Anti-Kickback Statute addresses bribery in federal health care programs like Medicare and Medicaid. It prohibits soliciting or receiving anything of value in exchange for referring patients to any business “for which payment may be made in whole or in part under a Federal health care program.” 42 U.S.C. § 1320a-7b(b)(1)(A). Penalties may include a fine of up to $25,000 and up to five years in prison. The statute also covers the other side of such a transaction, making it a comparable offense to “offer[] or pay[] any remuneration” for making a referral. Id. at § 1320a-7b(b)(2)(A). The Fifth Circuit has held that “inducement…to refer patients” only needs to be one purpose of the payment, instead of the sole purpose, to constitute a violation of the statute. United States v. Davis, 132 F.3d 1092, 1094 (5th Cir. 1998).

The International Travel Act of 1961, or simply the Travel Act, prohibits the use of U.S. mail, or of interstate or international travel, in furtherance of criminal offenses related to racketeering. In other words, the act of traveling itself becomes criminal if the purpose of said travel is to commit a certain other offense, and the person commits or attempts to commit that offense upon arrival. The offenses include “distribut[ing] the proceeds of any unlawful activity” and otherwise participating in “the promotion, management, establishment, or carrying on, of any unlawful activity.” 18 U.S.C. §§ 1952(a)(1), (3). Penalties can include up to five years in prison, possibly not counting penalties for the underlying offense.

Cybersecurity has become an issue of national importance in recent years as people entrust more and more personal information to various companies, and as other companies compile massive amounts of personal information from various sources. Businesses that maintain databases of personal information must take reasonable measures to keep this information secure, and they must also disclose cybersecurity breaches to affected people or the general public. In early September 2017, a major credit reporting agency (CRA) disclosed a hack that potentially compromised millions of people’s personal data several months earlier. The Department of Justice (DOJ) has reportedly opened an investigation into several of the CRA’s executives for alleged actions between the time the company learned of the breach and the time it announced it to the public. The investigation does not concern the breach itself but allegations that the executives sold stock in the company because of the anticipated impact of the announcement on the stock price. This is also known, in both federal and Texas white-collar criminal laws, as insider trading.Federal securities statutes do not identify “insider trading” as a distinct offense. The Securities Exchange Act of 1934 prohibits the use of “manipulative and deceptive devices” in connection with publicly traded securities, including stocks. 15 U.S.C. § 78j. The Securities and Exchange Commission (SEC) expounds on this provision in its regulations. Rule 10b5-1 states that it is a manipulative and deceptive device to buy or sell a publicly traded security “on the basis of material nonpublic information.” 17 C.F.R. § 240.10b5-1(a). Willful violations of these provisions by an individual can result in a fine of up to $5 million and a prison sentence of up to 20 years, 15 U.S.C. § 78ff(a), but the burden of proof for the state is substantial.

The CRA, Equifax, is one of the main agencies in the U.S. that collect and compile consumer credit information, using this information to generate credit reports and credit scores. The company reportedly experienced a massive cybersecurity attack between May and July 2017. During this time, hackers obtained personal information, including names, addresses, and Social Security numbers, for about 143 million people. (For the sake of scale, this is somewhat less than half the total population of the United States, or about equal to the population of Russia.) The company reportedly learned of the hack in late July but did not announce it to the public until early September.

After the announcement of the hack, Equifax’s share price reportedly dropped by more than a third over several weeks. Federal securities regulators apparently noticed, through regulatory filings, that several executives at the CRA had sold some of their stock in the company before the announcement. Specifically, they are investigating allegations that three executives sold $1.8 million worth of stock outside of any scheduled plans for stock trades.

The term “white collar crime” refers to a wide range of offenses involving financial and commercial activities. Many federal statutes dealing with financial regulations have both civil and criminal enforcement provisions. This means that the government can bring a civil lawsuit, which could result in penalties and damages, or a criminal prosecution, which could result in a fine and a prison sentence. Antitrust law deals with monopolistic and other anticompetitive practices by businesses. Most federal antitrust cases involve civil enforcement, but one statute allows criminal prosecution by the Department of Justice (DOJ). An online retail company recently pleaded guilty to criminal antitrust violations in a Texas white collar prosecution. United States v. Zaappaaz, Inc., No. 4:17-cr-00477, information (S.D. Tex., Aug. 7, 2017). Its president also pleaded guilty to a similar charge. United States v. Makanojiya, No. 4:17-cr-00478, information (S.D. Tex., Aug. 7, 2017).

The Sherman Antitrust Act of 1890 was the first major federal statute addressing anticompetitive business practices. It prohibits contracts and conspiracies “in restraint of trade or commerce” across state lines. 15 U.S.C. § 1. The purpose of this statute, according to the Supreme Court, “is to protect the public from the failure of the market” by prohibiting “conduct which unfairly tends to destroy competition itself.” Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 458 (1993). Criminal penalties may include up to 10 years in prison. Congress has amended the statute over the years to increase the monetary penalties. Originally, the law provided for a fine of up to $5,000. Since 2004, the maximum penalty has been $100 million for a corporation, or $1 million for an individual or an organization other than a corporation. Additionally, private parties may be able to file civil lawsuits for antitrust violations that directly caused them harm.

The corporate defendant is a Texas corporation that sells “customized promotional products, including wristbands and lanyards,” through several websites. Zaappaaz, information at 1. The government alleged that the defendant conspired with other e-commerce businesses involved in the sale of similar products “to suppress and eliminate competition by fixing and maintaining prices.” Id. at 2. The defendant allegedly made these agreements at in-person meetings or in communications through text messaging and social media platforms. This occurred from approximately October 2014 until about June 2016. The information in Makanojiya makes almost identical allegations against that defendant, identifying him as the president and director of the corporate defendant.

Individuals and businesses that work in the financial sector may be subject to a wide range of statutes at the federal and state levels. These laws can impose both civil and criminal penalties for actions ranging from overt malfeasance to failure to keep up with record-keeping requirements. They have national reach, meaning they could apply to someone on Wall Street as well as individuals in Texas. Criminal prosecutions for alleged financial crimes often require the government to meet a difficult burden of proof regarding a defendant’s state of mind, such as intentional or willful action. Regulators sometimes pursue civil actions, with their lower burden of proof, instead of criminal ones. They may also offer incentives, of a sort, to potential defendants to encourage them to cooperate with investigations. The U.S. Department of Justice (DOJ) recently announced a settlement with a financial company accused of violating the Banking Secrecy Act (BSA). The company’s “extensive remedial measures” reportedly led the DOJ to enter into a non-prosecution agreement, resulting in penalties that were possibly less than what the company might have faced had the case gone to court.

The BSA effectively enlists certain businesses to assist in federal law enforcement, tax, regulatory, and counter-terrorism efforts. See 31 U.S.C. § 5311. It primarily applies to “financial institutions,” which it defines very broadly to include federally insured banks, securities brokers, investment banks, insurance companies, finance companies, vehicle dealers, casinos, and other businesses “whose cash transactions have a high degree of usefulness in criminal, tax, or regulatory matters.” Id. at § 5312(a)(2). Money laundering is an area of particular focus, since financial institutions are often an essential component of that process. The statute requires financial institutions “to report any suspicious transaction relevant to a possible violation of law or regulation.” Id. at § 5318(g). This is commonly known as a “suspicious activity report” (SAR).

The company involved in the DOJ investigation operates a money services business that allows customers to send money abroad. This fits within the BSA’s definition of a “financial institution,” since it involves the “transmission of funds.” Id. at § 5312(a)(2)(R). The DOJ alleged that the company failed to maintain an “anti-money laundering compliance program” (AML) in accordance with the BSA. It claimed that the company processed over 30 million “remittance transactions,” totaling over $8.8 billion, between the U.S. and Mexico from 2007 to about 2012. The company’s own monitoring system, according to the DOJ, alerted on more than 18,000 transactions during that time. The company allegedly failed to investigate all but about 10 of those alerts, and it only submitted nine SARs. The DOJ maintained that these failures were “willful.”

The term “white collar crime” encompasses a wide range of offenses involving elements of theft or fraud. The offense of embezzlement, for example, involves outright theft from an employer. Other white collar offenses are more complicated and much more difficult for prosecutors to prove. Federal securities laws do not define a specific offense called “insider trading,” but it is a well-known term in this area of law. Insider trading is a type of securities fraud that involves the use of information that is not available to the public. This is usually “inside information” about a corporation that affects trades in that company’s stock. A recently filed indictment goes in a different direction, alleging the use of nonpublic information from a government agency. United States v. Blaszczak, et al., No. 1:17-cr-00308, indictment (S.D.N.Y., May 24, 2017). The case involves a relatively unknown industry known as “political intelligence,” in which consultants obtain information about government operations for clients.

The Securities Exchange Act of 1934 regulates the trading of securities. Insider trading occurs when a person who has inside access to a corporation with publicly traded stock uses information that is available to them as an insider, and therefore not available to the public, to make a decision about trading that corporation’s stock. This puts all other stockholders and potential stockholders at a disadvantage, and it can affect the market as a whole. If, for example, a corporate insider learns that the corporation is going to be the target of an upcoming government investigation, it might constitute insider trading for that insider to sell all or most of their stock before any public announcement of the investigation. The news is likely to have a negative effect on the stock’s price, but the insider has an unfair advantage because of their access to information.

Rather than corporate inside information, the Blaszczak case involves inside information about a government agency. The field of “political intelligence” is difficult to define. It essentially involves consultants with access to government officials. The consultants are able to obtain useful information about government operations for their clients, who are often hedge funds and other investors. In order to be valuable, the information must not be generally available to the public. In this way, it resembles inside corporate information.

Continue reading

Federal prosecutors recently announced the settlement of a civil claim against a former money transfer company executive, which related to acts allegedly performed by the defendant in his executive capacity. U.S. Treas. Dept. v. Haider, No. 1:14-cv-09987, complaint (S.D.N.Y., Dec. 18, 2014), transferred to No. 0:15-cv-01518 (D. Minn., Mar. 17, 2015). For certain “white collar” offenses, prosecutors and regulators may bring a civil lawsuit to recover penalties and damages, rather than a criminal case. One reason is that the burden of proof is usually lower in civil cases. Instead of proving guilt beyond a reasonable doubt, the state must prove liability by either a preponderance of evidence or clear and convincing evidence. The government filed suit against the defendant for alleged violations of the Currency and Foreign Transactions Reporting Act, more commonly known as the Bank Secrecy Act (BSA) of 1970.

The BSA requires financial institutions in the U.S. to take certain actions to assist government investigations of alleged financial crimes, such as money laundering, as well as “intelligence or counterintelligence activities” intended “to protect against international terrorism.” 31 U.S.C. § 5311. For example, financial institutions must establish anti-money laundering programs (AMLs) according to guidelines established by the government. 31 U.S.C. § 5318(h), 31 C.F.R. § 1020.210. They are also required to keep records of various transactions and to report “suspicious” transactions in a “suspicious activity report” (SAR). 31 U.S.C. § 5318(g), 31 C.F.R. § 1020.320.

The Financial Crimes Enforcement Network (FinCEN), part of the U.S. Department of the Treasury, is responsible for investigating and prosecuting alleged BSA violations. Civil liability for violations may extend not only to the financial institution itself but also to “a partner, director, officer, or employee.” 31 U.S.C. § 5321. Criminal penalties may apply to any “person,” defined by federal law to include both individuals and business entities. Id. at § 5322, 1 U.S.C. § 1.

Continue reading

The protection of intellectual property is critically important for many businesses, particularly in the electronics and technology industries. Computer and software companies rely extensively on copyright, trademark, and patent protections. Most acts of alleged copyright infringement result in civil claims, but federal criminal law allows prosecution in some situations. An individual often described as a “e-waste recycler” is facing a prison sentence for acts that he stated were intended to help extend the lives of personal computers, but which a major software company considered infringement. Prosecutors indicted him on 21 counts in 2016. United States v. Lundgren, No. 16-cr-80090, superseding indictment (S.D. Fla., Feb. 2, 2017). Last year, he pleaded guilty to two counts, criminal copyright infringement and conspiracy to traffic in counterfeit goods. An appeals court has now affirmed the district judge’s sentence of 15 months’ imprisonment and a $50,000 fine. United States v. Lundgren, No. 17-12466, slip op. (11th Cir., Apr. 11, 2018).

Copyright infringement involves the use of copyrighted material without a license from the copyright owner. It becomes a criminal offense when a person infringes a copyright “willfully,” and “for purposes of commercial advantage or private financial gain.” 17 U.S.C. § 506(a)(1)(A). The penalty for criminal copyright infringement depends in part on the number of copies made of any infringed works and their total value. If a defendant is found to have produced or distributed 10 or more copies, “including by electronic means,” they could face up to five years in prison and a fine. 18 U.S.C. § 2319(b)(1).

The defendant in Lundgren operated a business that refurbished discarded electronic devices, such as cell phones, for resale. His legal problems began when he attempted to take on the issue of “planned obsolescence.” This is a practice by many designers and manufacturers to set a limit on the useful life of a product or device, requiring consumers to purchase a new one. Light bulbs offer one example. While they reportedly could last much longer, light bulb manufacturers design them with a limited life span. Computers and cell phones become effectively unusable as newer software and hardware enter the market.

As more and more U.S. states enact measures allowing marijuana possession and use for medical or even recreational purposes, federal laws regulating marijuana look increasingly out of step with the rest of the country. More than half of all U.S. states, including Texas, allow medical marijuana use as of early 2018, although Texas’ medical marijuana program is one of the country’s most restrictive. The federal Controlled Substances Act (CSA), however, still classifies marijuana in its most restricted schedule. Various efforts to challenge the constitutionality of the CSA’s marijuana classification have failed. A recent lawsuit filed by medical marijuana users, including a young girl from Texas who had to move to Colorado for epilepsy treatment, challenged the CSA’s marijuana scheduling on Due Process grounds. The court ruled against them and granted the defendants’ motion to dismiss, partly on procedural grounds. Washington, et al. v. Sessions, et al., No. 1:17-cv-05625, opinion (S.D.N.Y., Feb. 26, 2018).

According to the CSA, a Schedule I controlled substance “has a high potential for abuse,” has “no currently accepted medical use,” and “lack[s]…accepted safety for use…under medical supervision.” 21 U.S.C. § 812(b)(1). The statute classifies “marihuana” directly alongside drugs like LSD, peyote, and heroin. Id. at § 812(c)(I). The Attorney General has authority to review the schedules and to remove a drug upon a finding that it “does not meet the requirements for inclusion in any schedule.” Id. at § 811(a)(2).

The U.S. Supreme Court struck down a challenge to the CSA under the Commerce Clause in Gonzales v. Raich, 545 U.S. 1 (2005). The plaintiffs argued that Congress did not have the power to prohibit them from growing marijuana for their own personal use in compliance with state medical marijuana laws. The court compared the CSA’s marijuana prohibition to federal laws regulating wheat production, and it held that the CSA “is squarely within Congress’ commerce power” because even production solely for personal use “has a substantial effect on supply and demand in the national market.” Id. at 19.
Continue reading

While drug laws at the federal and state levels classify a vast array of “controlled substances,” two in particular have stood out in recent political and legal debates. The legalization of marijuana for medical use is now a reality in at least 26 states, including Texas. Several states have gone a step further and legalized the distribution and possession of small amounts of marijuana for recreational use. At the same time, opioid use is on the rise across the country, and the number of deaths resulting from overdoses have led many to call it an “epidemic.” Both drugs are scheduled as controlled substances, but the similarities mostly end there. Some research suggests that allowing medical marijuana use may reduce the number of opioid overdose deaths. Federal officials, however, continue to view opioid use as a matter of criminal enforcement rather than public health. The federal government’s approach to these issues is likely to influence the Texas criminal justice system’s response.

The term “opioid” can refer to almost any drug derived from opium, including heroin. In its current usage, it usually refers to prescription painkillers like hydrocodone and oxycodone, as well as synthetic products like fentanyl. Heroin is classified as a Schedule I controlled substance, meaning it has “a high potential for abuse” and “no currently accepted medical use.” 21 U.S.C. §§ 812(b)(1), (c)(I)(b)(10), (c)(I)(c)(10). Fentanyl and many other pharmaceutical opioid products are Schedule II controlled substances, meaning that, while addictive, they have medical uses. Id. at §§ 812(b)(2), (c)(II)(b)(6). The Drug Enforcement Administration moved hydrocodone from Schedule III to Schedule II in 2014, largely because of the increase in overdose deaths. 79 Fed. Reg. 49661 (Aug. 22, 2014).

Scientific studies have not shown marijuana to have addictive properties at all similar to those of opioids. It is nevertheless classified in Schedule I alongside heroin. 21 U.S.C. §§ 812(c)(I)(c)(10). Numerous state medical marijuana laws dispute the assessment that the drug has no accepted medical use. The Texas medical marijuana law is among the most restrictive in the country, and it allows the use of “low-THC cannabis” only in the treatment of intractable epilepsy. See Tex. Health & Safety Code § 487.001 et seq., Tex. Occ. Code § 169.001 et seq.

Marijuana’s legal status has recently undergone major changes. The federal Controlled Substances Act (CSA) still places marijuana in its most highly restricted category, but more than half of the states in the U.S., including Texas, now allow medical marijuana to some extent. Colorado, California, and several other states have legalized the production, sale, and possession of small amounts of marijuana for recreational purposes. This has led to legal disputes over whether states like Colorado have exceeded their constitutional authority. For criminal justice advocates in Texas, where marijuana remains a highly controlled substance, law enforcement attention to suspected interstate drug trafficking raises a variety of constitutional civil rights questions.

The CSA classifies “marihuana” as a Schedule I controlled substance. 21 U.S.C. § 812(c)(I)(c)(10). The statute prohibits “manufactur[ing], distribut[ing], or dispens[ing]” a controlled substance, or “possess[ing] with intent to” do any of the aforementioned acts with a controlled substance. Id. at § 841(a)(1). Penalties depend on the identity and amount of the controlled substance involved. Texas marijuana law classifies THC, the active component of marijuana, in Penalty Group 2. Tex. Health & Safety Code § 481.103(a)(1). It identifies numerous offenses related to the manufacture, delivery, and possession of both Penalty Group 2 controlled substances in general and marijuana in particular. See, e.g. id. at §§ 481.116, 481.121.

The U.S. Constitution’s Commerce Clause authorizes Congress “to regulate Commerce…among the several States.” U.S. Const. Art. I, § 8, cl. 3. The CSA has faced constitutional challenges alleging that the federal government lacks jurisdiction to enforce federal drug laws within states that have legalized marijuana to various extents. The Supreme Court rejected this argument in Gonzales v. Raich, 545 U.S. 1 (2005), but it remains a controversial question. The federal government’s authority to deal with controlled substances that cross state lines, on the other hand, rather unambiguously falls within the federal government’s constitutional authority. This is where many recent legal challenges have arisen.

Contact Information