Articles Posted in Federal Crimes

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.

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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.

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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.
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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.

Federal and state laws regarding both medical and recreational use are coming more and more into conflict. More than half of the states in the U.S., as well as the District of Columbia, allow the possession and use of marijuana for medical purposes. Federal law, on the other hand, classifies it alongside the most highly restricted controlled substances. The current U.S. Attorney General (AG) has repeatedly stated an intention to crack down on legal state medical marijuana programs. A group of medical marijuana patients, including a father and daughter who relocated from Texas to Colorado so that the daughter could obtain relief from intractable epilepsy, have filed suit against the AG and other federal officials and agencies. Washington, et al. v. Sessions, et al., No. 1:17-cv-05625, complaint (S.D.N.Y., Jul. 24, 2017). The plaintiffs allege that the federal government’s scheduling of marijuana as a controlled substance violates the Due Process Clause of the Fifth Amendment, unlawfully restricts some plaintiffs’ freedom of travel between states, and exceeds the authority conferred by the Commerce Clause.

Of the five schedules established by the Controlled Substances Act (CSA), Schedule I is the most restrictive. It is defined to include substances with a “high potential for abuse,” “no currently accepted medical use,” and a “lack of accepted safety for use…under medical supervision.” 21 U.S.C. § 812(b)(1). Schedule I has included “marihuana” since its original enactment. Id. at § 812(c)(I)(c)(10). The Washington lawsuit alleges that “the Federal Government does not believe, and…never has believed” that marijuana meets these three criteria. Washington, complaint at 4.

Texas is among the states that have authorized medical marijuana to some extent, although in Texas’ case, the extent is not far at all. The Texas Compassionate-Use Act only applies to “low-THC cannabis.” This means cannabis products that contain, at most, “0.5 percent by weight of tetrahydrocannabinols” and at least “10 percent by weight of cannabidiol.” Tex. Occ. Code § 169.001(3). This essentially minimizes the active component of marijuana, THC. It may only be prescribed for the treatment of intractable epilepsy after a patient has tried two “maximally titrated antiepileptic drugs” without success. Id. at § 169.001(2).

A jury in a federal court convicted a former hedge fund manager of three out of eight counts related to securities fraud in early August 2017. The government had charged the defendant with multiple counts related to alleged defrauding of investors and misuse of corporate funds, as well as conspiracy to commit various fraudulent acts. United States v. Shkreli, No. 1:15-cr-00637, superseding indictment (E.D.N.Y., Jun. 3, 2016). The case is notable in part because of the high degree of infamy gained by the defendant for reasons unrelated to this case. The securities and wire fraud charges in this case added to the defendant’s unpopularity, presenting challenges for the defense team.

The Securities Exchange Act of 1934 regulates the trading of various securities, particularly corporate stocks. It prohibits “any manipulative or deceptive device or contrivance” connected to “the purchase or sale of any security.” 15 U.S.C. § 78j(b). This broad phrasing has been applied to a wide range of actions deemed fraudulent by securities regulators and prosecutors. The statute allows criminal prosecution for “willful” violations, allowing penalties for individuals of up to 20 years’ imprisonment and a fine of up to $5 million. Id. at § 78ff(a).

Proving the required elements of securities fraud in a federal or Texas criminal case can be very difficult, but federal law also allows the government to charge a person with conspiracy to commit an offense. 18 U.S.C. § 371. A conspiracy charge requires evidence that two or more persons, which could include individuals or certain organizations, conspired to commit an offense and that the defendant took an “overt act” in furtherance of the conspiracy. If the underlying offense is a felony, the conspiracy statute provides for imprisonment of up to five years.

The federal Controlled Substances Act (CSA) defines five schedules of controlled substances and prescribes penalties for their production, distribution, and possession. Texas drug crime laws contain similar schedules. The CSA includes a list of substances in each schedule, but it also gives some authority to the Department of Justice (DOJ) to modify or adjust the schedules. The DOJ has delegated this authority to the Drug Enforcement Administration (DEA). One factor considered in the scheduling of controlled substances involves the potential for medical use. A different federal agency, the U.S. Food and Drug Administration (FDA), deals with drugs used for medical purposes. Recently, the FDA announced that it will allow further research into the medical potential of a Schedule I controlled substance known as MDMA. While this research could lead to FDA approval of MDMA for medical purposes, the DEA or Congress would still have to remove it from Schedule I.

The CSA places the most highly restricted controlled substances in Schedule I. MDMA, scientifically known as 3,4-methylenedioxymethamphetamine and colloquially known as ecstasy, among other names, was not among the drugs originally added to Schedule I by Congress. The DEA designated MDMA as a Schedule I “hallucinogenic substance” in the 1980s. 21 C.F.R. § 1308.11(d)(11). Texas places MDMA in Penalty Group 2. Tex. Health & Safety Code § 481.103(a)(1).

The CSA’s criteria for inclusion in Schedule I are “high potential for abuse,” a lack of “currently accepted medical use,” and “a lack of accepted safety for use…under medical supervision.” 8 U.S.C. § 812(b)(1). Other well-known Schedule I controlled substances include heroin, lysergic acid diethylamide (LSD), and marijuana. Id. at §§ 812(c)(I)(b)(10), (c)(9), (c)(10). Many controlled substances commonly associated with the illegal drug trade are actually listed in Schedule II, including cocaine and methamphetamine. Id. at § 812(c)(II)(a)(4), 21 C.F.R. § 1308.12(d)(2).

The legal status of marijuana at the state level is changing across the country, with more than half of all U.S. states now allowing the possession and use of marijuana to some extent. Federal law, however, still considers marijuana to have no medical use and therefore no acceptable reason for possession, cultivation, or sale. The disparity between federal law and many state laws has produced numerous unusual and unfortunate results. A ruling by the Ninth Circuit Court of Appeals from last year, while not binding on Texas, ought to be concerning to many Texas drug crime defendants, since the court held that federal law may bar lawful medical marijuana users from purchasing firearms. Wilson v. Lynch, 835 F. 3d 1083 (9th Cir. 2016).

Marijuana is a Schedule I controlled substance under federal law. 21 U.S.C. § 812(c)(I)(c)(10). Texas enacted a medical marijuana law in 2015 that allows the use of “low-THC cannabis,” with a prescription, to treat “intractable epilepsy.” See Tex. Occ. Code § 169.001 et seq., Tex. Health & Safety Code § 487.001 et seq. This is one of the most restrictive medical marijuana laws in the country, but it is still far less restrictive than federal law. The Wilson case involves Nevada law, which exempts individuals from prosecution for marijuana possession if they have a valid state registration card. See Nev. Rev. Stat. § 453A.010 et seq.

Federal law makes it a crime for certain individuals to possess firearms in a manner that affects interstate commerce, which has often been interpreted as prohibiting the sale of a firearm to someone covered by the statute. This includes “unlawful user[s] of…any controlled substance.” 18 U.S.C. § 922(g)(3), 21 U.S.C. § 802(6). The law further states that it is a crime for someone to sell a firearm to someone they know or have “reasonable cause to believe” meets this criterion. 18 U.S.C. § 922(d)(3).