Second Circuit takes Grimm view of continuing conspiracy theory

Introduction
Background
Grimm majority
Grimm dissent
Why Grimm matters

Introduction

In December 2013 the Second Circuit issued a key decision that restricts the prosecution of cases where the US government aims to use routine payments within the limitation period to indict offences that should be time barred. The decision arose from the reversal of the convictions of three individuals in the municipal bonds conspiracies. A divided panel held that post-award interest payments by the defendants' unindicted employers were not overt acts in furtherance of the conspiracy to fix interest rates below market. Ultimately, the court concluded that:

"when anticipated economic benefit continues in a regular and ordinary course, well beyond the period 'when the unique threats to society posted by a conspiracy are present,' the advantageous interest payment is the result of a completed conspiracy, and is not in furtherance of one that is ongoing."(1)

This strikes directly at the government's aggressive posture in prosecuting economic crimes well beyond the applicable statute of limitations. As a result, this decision:

• restricts the prosecution of otherwise time-barred offences (including conspiracies, antitrust, bribery and fraud cases) by requiring the government to allege more substantive activity within the limitations period;
• forces lower courts to scrutinise the charged activity that brings an old offence within the statute of limitations;
• emboldens judges to find that certain activities could not be used to revive old offences and warrants dismissing indictments outright;
• limits the use of routine payments, without more, to revive otherwise time-barred offences;
• protects individuals and organisations against the never-ending threat of prosecution; and
• disincentivises self-reporting otherwise time-barred conspiracies, thereby limiting the impact of the government's leniency/amnesty programmes.

Background

In United States v Grimm(2) the government charged three individuals with antitrust conspiracies more than five years(3) after contracts were awarded. The government alleged that continuing payments of below-market interest rates by the defendants' employers satisfied the overt act requirement necessary to bring an otherwise time-barred conspiracy back within the statute of limitations. The three individuals were employees of two providers of guaranteed investment contracts (GICs). GICs are vehicles for municipalities to invest proceeds of tax-exempt bonds until needed for the intended capital projects. To prevent arbitrage, "the Internal Revenue Code and Treasury regulations require a municipality to rebate to the Treasury any excess over the municipal bond rate".(4) Federal law requires participating municipalities to use competitive bidding in order to obtain a fair market interest rate. Municipalities in turn hire "third party brokers to solicit closed bids from at least three providers".(5)

The government alleged that between August 1999 and May 2004, the three defendants paid brokers to rig the bidding process, including by:

• having brokers tell them what others were bidding;
• keeping competitive bidders off the bid list; and
• submitting complementary bids.

The scheme, the purpose of which was to depress the interest rates on municipal bonds artificially, defrauded municipalities of market rates and the Treasury of any excess over the bond rates. The defendants were indicted for conspiracies to defraud the United States in July 2010 and convicted by a jury.

Grimm majority

On appeal, the court admitted that the:

"crucial question in determining whether the statute of limitations has run is the scope of the conspiratorial agreement, for it is that which determines both the duration of the conspiracy, and whether the act relied on as an overt act may properly be regarded as in furtherance of the conspiracy."(6)

The government thus asked the appellate court to rely on United States v Salmonese,(7) which held that "where a conspiracy's purpose is economic enrichment, the jointly undertaken scheme continues through the conspirator's receipt of 'their anticipated economic benefits'".(8)

However, the Grimm court rejected the invitation and decided instead to follow United States v Doherty.(9) In Doherty the First Circuit rejected conspiracy charges against a police officer who "conspired to obtain copies of promotional exams, and thereby increased [his] salary payments, which continued for years after [it was] increased by means of fraud".(10) Doherty held that:

"where receiving the payoff merely consists of a lengthy, indefinite series of ordinary, typically non-criminal, unilateral actions, such as receiving salary payments, and there is no evidence that any concerted activity posing the special societal dangers of conspiracy is still taking place, we do not see how one can reasonably say that the conspiracy continues."(11)

The Second Circuit extracted from Doherty a non-exhaustive list of "features to describe serial payments that do not constitute overt acts: lengthy, indefinite, ordinary, typically noncriminal and unilateral".(12) Unsurprisingly, the court found that the interest payments fitted these factors. In particular, the court explained that the interest payments "are ordinary commercial obligations, made pursuant to a common form of commercial arrangement; they are noncriminal in themselves; they are made unilaterally by a single person or entity; and they are made indefinitely, over a long time".(13) Also, "'there is no evidence that any concerted activity posing the special societal dangers of conspiracy is still taking place'".(14) The majority concluded that:

"when anticipated economic benefit continues in a regular and ordinary course, well beyond the period 'when the unique threats to society posted by a conspiracy are present,' the advantageous interest payment is the result of a completed conspiracy, and is not in furtherance of one that is ongoing."(15)

Grimm dissent

In dissent, one judge argued that the court ignored the government's allegation that the defendants' employers were unindicted co-conspirators.(16) For her, the critical issue of whether the interest payments constituted overt acts was a jury question. The majority, she argued, minimised the purpose of the conspiracy, which had the effect of increasing the "profitability of investment agreements and other municipal finance contracts awarded to" the GIC providers.(17) She further rejected the majority's description of the result of the conspiracy, arguing that "[t]he 'result of the bid rigging is not, as the majority states, the providers' 'payments'; the result is the artificially arrived-at interest rate that gives the [GIC] providers an economic gain each time a payment is made".(18) However, even under the newly devised Doherty-Grimm factors, the dissent would have upheld the convictions.

Why Grimm matters

Continuing violation is too broad
In general, Grimm rejects the government's broad use of any activity within the limitations period to revive an otherwise time-barred conspiracy. It rebukes the longstanding view that the statute of limitations can be interminable where there is any performance of a long-term contract within the limitations period. This view fostered the fait accompli that the government would prevail when challenged and thus encouraged self-reporting and guilty pleas. However, Grimm now provides a strong basis for challenging the legal sufficiency of activities charged as the overt act and begins the rolling-back of the continuing conspiracy theory.

Indefinite payments may be insufficient to constitute overt act
Grimm matters most immediately because it calls into question the idea that indefinite payments, without more, could constitute overt acts in furtherance of an otherwise time-barred conspiracy. Although Grimm dealt with interest payments, the court's embrace of Doherty, where the payments were salaries, shows that Grimm is likely to have a larger footprint. Indeed, the Grimm court noted in dictum that it is absurd to suggest that "[a] conspiracy to corrupt the rent payable on a 99-year ground lease [would] prolong the overt acts until long after any conspirator or co-conspirator was left to profit, or to plot".(19) In due time, the Doherty-Grimm line of cases could be extended to contracts for the supply of goods, probably starting with cases where the government attempts to use later or deferred payments to bring old supply contracts within the statute.

Grimm protects both individuals and entities
The government may be tempted to construe Grimm as conferring a special protection on individuals who planned a long-term but self-executing conspiracy. But there is nothing in Grimm to support this limited reading. If the majority had been interested in drawing attention to the plight of hapless employee-defendants while keeping corporate liability viable, it would have written a narrower opinion. The court could have held that in cases involving the type of lengthy and indefinite series of ordinary payments, the government may overcome the statute of limitations only if it alleges that an individual co-conspirator received direct economic benefit from the ongoing effect of the conspiracy (eg, received commission, bonus or other personal benefit as a result of the fixed rates), or that the corporate co-conspirator engaged in an unlawful act to continue the conspiracy. But the Second Circuit did not write a narrow opinion; instead, it held that as a matter of law, below-market interest payments could not be considered overt acts in furtherance of the conspiracy, a protection that applies to individuals and companies alike.

More frequent use (and defence) of statutes with longer limitations period
If Grimm gains traction, the government may hope to mitigate its losses by also charging offences with longer statutes of limitations.(20) Notably, the original indictment in Grimm included a count for violation of 18 USC § 3293(2), which carries a 10-year statute of limitations "if the offense affects a financial institution".(21) But the district court dismissed the count because "the government has not alleged that the financial institutions suffered any actual loss or at most the risk of loss is de minimis".(22) Perhaps the government could have cured the deficiency in the indictment if it thought it would lose on the overt act issue.

Grimm may discourage reporting otherwise time-barred conspiracies under leniency programmes
Generally, government leniency programmes benefit from the broad theory of continuing conspiracy and the longstanding acquiescence by courts. Grimm provides good reasons to question the theory, especially in cases where the facts are analogous to Doherty, Grimm or the hypothetical 99-year ground lease. So Grimm's biggest impact may be that it creates a disincentive, however unintentional, to self-report, either because a company is convinced that its more recent actions are not overt acts or because there is greater appetite for the risks of not self-reporting since there is now a broader question about what constitutes an overt act.(23)

Grimm is valid for now
The Grimm fight is not over. The government has petitioned the Second Circuit for rehearing and rehearing en banc,(24) and it is likely to appeal to the Supreme Court if unsuccessful at the intermediate level.(25) Moreover, the vigorous dissent is a good indication that if Grimm stands for now, a prominent circuit conflict will emerge in the near future.

For further information on this topic please contact Samson Asiyanbi or Megan Dixon at Hogan Lovells US LLP by telephone (+1 415 374 2300), fax (+1 415 374 2499) or email ([email protected] or [email protected]). The Hogan Lovells website can be accessed at www.hoganlovells.com.