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White Collar Roundup - August 2019

Publisher: Day Pitney Newsletter

Beware the Parallel DOJ and SEC Investigation

Judge Jesse M. Furman of the United States District Court for the Southern District of New York ultimately declined a request for disclosure of communications alleged to show that a civil investigation by the U.S. Securities Exchange Commission was being used by federal prosecutors to secretly gather evidence for a criminal prosecution. But his opinion provides an apt reminder of the perils for criminal defendants of navigating between the shoals of parallel investigations.

In late 2016, the SEC and U.S. Attorney's Office began investigating a Ponzi-like scheme at hedge fund Sentinel Growth Fund Management LLC, which was co-founded by Jason Rhodes. Rhodes provided email and cell phone records in response to an SEC subpoena, and appeared and testified before the SEC. The SEC engaged in settlement discussion with Rhodes in the summer of 2018, but never reached a resolution. Fast forward to the fall of 2018, when Rhodes was arrested and charged with various acts of fraud while with Sentinel. The charging documents relied on, among other things, text messages produced by Rhodes to the SEC.

Rhodes sought disclosure of all documents concerning coordination between the SEC and Department of Justice, arguing that prosecutors had improperly used the SEC civil process to further their criminal investigation. In an initial hearing, Judge Furman reserved decision on the request when he failed to receive adequate assurances that there was no inordinate coordination between the agencies. Thereafter, the Assistant U.S. Attorney filed an affidavit swearing that he "had no role in formulating the content" of the SEC subpoena, which Judge Furman described as "conspicuously limited," prompting him to order another affidavit for review in-chambers "detailing, with specificity, the nature and extent of any and all communications" with the SEC, along with copies of the communications.

In his most recent decision, Judge Furman found that the emails revealed sharing both ways between the SEC and prosecutors, and that the SEC did not immediately funnel evidence related to Rhodes to the U.S. Attorney's Office, "as one would expect if the SEC was simply doing the USAO's bidding." Although denying the request for production, Judge Furman questioned why the SEC never charged Rhodes "despite its extensive investigation," describing it as a "mystery."

Treasury Warns Against Iranian Dealings

The U.S. Treasury Department's Office of Foreign Assets Control (OFAC) issued an advisory warning companies that dealings with certain Iranian airlines may be subject to sanctions. "Entities that provide services for designated Iranian airlines, including financing, reservations and ticketing as well as procurement of aircraft parts, could be at risk of enforcement actions or economic sanctions from the U.S.," according to The Wall Street Journal. OFAC also cautioned that the "civil aviation industry should be alert to deceptive practices used by some Iranian persons, designated airlines, and their agents or affiliates to acquire unauthorized U.S.-origin aircraft or related goods, technology, or services subject to U.S. jurisdiction in violation of U.S. sanctions prohibitions." Among those deceptive practices are "[u]sing front companies and other pass-through entities … to conceal or obfuscate the ultimate Iranian beneficiary"; "[m]isrepresenting to suppliers, dealers, brokers, re-insurers, and other intermediaries that sanctions against Iran have been lifted"; and "[u]sing general trading firms located in free trade zones, which do not ordinarily appear to deal in aviation goods." The advisory includes a list of currently sanctioned Iranian airlines as well as a reminder to review OFAC's Specially Designated Nationals List for designated persons and entities, Iranian or otherwise.

The Crime Victims' Rights Act in the News

The Crime Victims' Rights Act (CVRA), 18 U.S.C. § 3771, which became law in 2014, enumerates rights afforded to victims in federal criminal cases and reflects a legislative compromise built on efforts to create a constitutional "Bill of Rights" for victims of crimes. Many of the rights in the statute are focused on ensuring that victims have the ability to meaningfully engage in the criminal justice process. Victims have a "right to reasonable, accurate, and timely notice of any public court proceeding"; to "confer with the attorney for the Government"; and to be "heard at any public proceeding in the district court involving release, plea, sentencing, or any parole proceeding." Since its passage, the law has been relatively uncontroversial. But recently the CVRA has been in the headlines in connection with the indictment of Jeffrey Epstein in the Southern District of New York. Epstein recently died in jail awaiting trial.

In years past, Epstein had been the subject of an investigation by the Federal Bureau of Investigation and the Palm Beach Police Department related to multiple allegations of sexual assault of minor girls. The investigation eventually resulted in the involvement of both the U.S. Attorney for the Southern District of Florida and the State's Attorney for Palm Beach County. Eventually, the two offices reached an agreement by which the federal prosecution was terminated by a non-prosecution agreement, and the state case was resolved by a plea to violation of Florida state crimes, for which Epstein received a short sentence.

In the wake of the resolution, some of the victims brought suit in federal court, alleging that their rights under the CVRA had been violated and seeking relief. Earlier this year, Judge Kenneth A. Marra of United States District Court for the Southern District of Florida granted the victims summary judgment, writing a lengthy and detailed opinion and ruling: "In the context of plea agreements, the CVRA provides victims with rights prior to the acceptance of plea agreements. Based on this authority, the Court concludes that the CVRA must extend to conferral about non-prosecution agreements."

Judge Marra's opinion, along with in-depth investigative reporting by Julie K. Brown of the Miami Herald, soon led to renewed focus on Epstein and likely influenced his indictment. More broadly, however, the case has also resulted in increased focus on the CVRA. Its provisions are significant for both victims and their attorneys, providing opportunities to impact prosecutorial decisions, and are not limited to high-profile cases. As a result, practitioners will do well to remind themselves of the statute and should be prepared to counsel clients who are victims and engage with prosecutors and courts on their behalf.

Once FARA-way, Now Here to Stay

The once obscure Foreign Agents Registration Act (FARA), which requires individuals serving as agents, including lobbyists, to disclose any work they do to further the interests of foreign principals, including governments, has newfound prominence. This follows the high-profile criminal indictment of Paul Manafort last year and an announcement by a Department of Justice official earlier this year that DOJ was strengthening its FARA unit and intended to treat FARA as an enforcement priority. Indeed, over the past two years, there have been nearly as many criminal prosecutions for FARA violations as there were in the preceding half century, underscoring DOJ's commitment to FARA enforcement.

The surge in DOJ's enforcement of FARA has ensnarled not only individuals, like Manafort, but also an international law firm and its former partner. The firm previously agreed to pay $4.6 million to settle a DOJ investigation into the firm's work in connection with Manafort and the Ukrainian government, and the former partner is on trial this month for making false statements in connection with that activity. Although FARA contains certain exemptions for serving foreign clients—including a so-called Lawyer Exemption and Commercial Exemption set forth in 22 U.S.C. § 613 (d), (g)—those exemptions are narrow and by no means insulate all legal or commercial activity from exposure to FARA. When that activity may extend to public relations or lobbying matters or involve clients that are state-owned or closely affiliated with a foreign government, professional services firms and those who advise them will do well to closely analyze whether an exemption is applicable and if not, ensure compliance with FARA throughout the engagement.

New Jersey Fights the Good (Cyber) Fight

As commerce continues to shift online, New Jersey's Office of the Attorney General is pushing ahead with litigation to mitigate cybersecurity risk. This past month, for example, New Jersey Attorney General Gubir S. Grewal and the New Jersey Bureau of Securities filed a three-count suit against a blockchain-driven online rental marketplace and its president alleging that the company had offered and sold unregistered securities in the form of a cryptocurrency called PINNS Tokens. Cryptocurrency is a popular but often untraceable online currency which is not backed by banks or governments. Common cryptocurrencies are Bitcoin and Ethereum. As described in the announcement, a recent survey of state securities regulators revealed that 94 percent believe there is a "high risk of fraud" involving cryptocurrencies.

The Princeton-based company at issue and its president were not registered with the Bureau of Securities. In addition, the complaint alleges that the company and its president failed to take reasonable steps to ensure that investors were properly accredited, and only 11 of the over 200 investors provided documentation to substantiate their accredited investor status. In light of all of these risks, the Acting Director of the Division of Consumer Affairs warned investors "to be extra vigilant about fully vetting what is being sold, especially before investing with cryptocurrency."

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