Over the past four years, corporations have gained significant new leverage in dealing with the U.S. Department of Justice regarding criminal investigations. Remarkably, corporations, their employees and their counsel may not be aware of this new-found leverage.
Collectively, 17 high-profile federal cases over the past four years may provide corporations with greater leverage in negotiating resolutions to federal criminal investigations. These cases all ended in at least partial defeat for the government, including acquittals, vacated jury verdicts, reversals of convictions and dismissed indictments due to judicial findings of prosecutorial misconduct and errors. These missteps by federal prosecutors have been noted by federal judges, who may now be more willing to second-guess the government’s charging decisions and sentencing recommendations.
Because so few corporations and their executives go to trial, the government assumes most companies will “settle at all costs.” Since companies rarely challenge the government on issues of jurisdiction, liability or fines associated with corporate criminal convictions, there is very little case law establishing limits on the government’s power in charging corporate criminal cases.
The recent spate of government missteps in contested white collar criminal proceedings appears to have started in 2009 with the prosecution of then-sitting United States Sen. Ted Stevens, R-Alaska, for making false statements in his Senate financial disclosure forms and not reporting gifts he had received. Stevens was convicted, but in April 2009, the conviction was set aside at the request of the DOJ because prosecutors failed to turn over potentially exculpatory material to the defense. Judge Emmet Sullivan said at the time that he had “never seen anything approaching the mishandling and misconduct [he had] seen in this case.” and described the case as symbolizing “the dangers of an overzealous prosecution and the risks inherent when the Government does not abide by its discovery obligations.”
Also in 2009, another federal judge criticized the government for the manner in which it handled the prosecution of Dr. Ali Shaygan, who was charged in Florida with 141 counts relating to prescription drugs that allegedly caused the overdose death of a patient in 2008. District Judge Alan Gold found that the government’s conduct was “profoundly disturbing ... [t]hey raise troubling issues about the integrity of those who wield enormous power over the people they prosecute,” and that the prosecution had engaged in “win at any cost behavior.”
Judge Gold found that the trial prosecutors and their supervisor had acted in bad faith by filing the superseding indictment out of “ill-will,” initiating an “unfounded” collateral investigation into witness tampering, authorizing two witnesses to tape their discussions with members of the defense team in violation of U.S. Attorney’s Office internal policy, and suppressing impeachment information. He referred them to bar authorities in their relevant jurisdictions for investigation.
In June 2009, a long-running environmental case ended in acquittals after a federal judge instructed a jury that the government had acted in bad faith. Chemical company W.R. Grace and seven executives were indicted for endangering residents of Libby, Mont., near W.R. Grace’s asbestos mining operations. Judge Donald Molloy barred the testimony of one of the government’s key witnesses, Robert Locke, regarding one defendant, because the government withheld exculpatory evidence regarding the witness’ credibility. The judge instructed the jury to be skeptical of Locke’s testimony against any of the other defendants.
That same month, another case was dismissed at the request of the DOJ after convictions were obtained because the government failed to disclose impeachment evidence regarding a key government witness. In United States v. Kott, a judge on the Ninth Circuit wrote that she was “deeply troubled by the government’s lack of contrition in this case. Despite their assurances that they take this matter seriously, the Government attorneys have attempted to minimize the extent and seriousness of the prosecutorial misconduct and even assert that Kott received a fair trial.”
In August 2009, a major stock option backdating case collapsed on appeal. The former CEO of Brocade Communication Systems, Gregory Reyes, had been convicted of securities fraud for approving company financial documents that failed to disclose backdated stock options. The government argued during closing arguments that the entire finance department had no knowledge of the backdating practice, when in fact the government had witness testimony to the contrary. In August 2009, the Ninth Circuit reversed Reyes’ conviction finding that the government knew that the statements during closing arguments were false or had a strong reason to doubt them. Judge Mary Schroeder wrote: “We do not lightly tolerate a prosecutor asserting as a fact to the jury something known to be untrue or, at the very least, that the prosecution had very strong reason to doubt.”
In November 2009, two hedge-fund managers were acquitted of all charges relating to allegations that they mislead investors about how safe an investment in the failed hedge fund they managed was.  The charges were brought in June 2008, and this was the first major prosecution stemming from the financial meltdown that resulted in the collapse of Bear Stearns. Jurors were quoted as saying that there simply was not enough evidence to convict the defendants, and that emails the government relied upon to prove the deception were ambiguous.
The year 2009 ended in a similarly embarrassing fashion for the DOJ when federal Judge Cormac Carney dismissed the indictment against William Ruehle, the former chief financial officer of Broadcom Corp. and Dr. Henry Nicholas, Broadcom’s co-founder and former CEO for stock-option backdating. Judge Carney found that “the government embarked on a campaign of intimidation and other misconduct to embarrass [a witness] and bring him down.” He concluded that submitting the case to the jury would “make a mockery of Mr. Ruehle’s constitutional right to compulsory process and a fair trial.”
The spring and summer of 2011 brought similar setbacks. A high-profile prosecution of baseball pitcher Roger Clemens, the indictment of another former Sen. John Edwards, and a large “sting” case, all ended in defeat for the department, and all eventually added more media attention to what many viewed as a growing number of at best ill-advised, and at worst over-the-top and unfounded, prosecutions.
The Department of Justice charged Lauren Stevens, the former GlaxoSmithKline vice president and in-house counsel, with concealing information, falsifying records and making false statements to the U.S. Food and Drug Administration while conducting an internal investigation relating to an FDA inquiry regarding allegations of off-label marketing of the drug Wellbutrin in November 2010.
In May of 2011, U.S. District Judge Roger Titus of the District of Maryland granted the defense’s motion to acquit at the conclusion of the prosecution’s presentation of its case. Judge Titus found that “it would be a miscarriage of justice to permit this case go to the jury,” and concluded “that only with a jaundiced eye and with an inference of guilt that’s inconsistent with the presumption of innocence could a reasonable jury ever convict this defendant.” Judge Titus found that Stevens had acted in good faith in advising her client.
That same month in 2011 saw the collapse of another case widely marketed to the press by the DOJ as a showcase prosecution involving the Foreign Corrupt Practices Act involving the military and law enforcement products industry. After an undercover sting, 21 arrests were made at the Shooting, Hunting, Outdoor Trade Show (SHOT Show) in Las Vegas.
The first trial of four of the defendants ended in a mistrial, and six other defendants were then tried. During that trial, Judge Richard Leon struck a portion of a key government witness’s testimony after learning that the prosecution had not told defense counsel about notes that the witness had made of a post-arrest conversation with one of the defendants. This is a “telling insight into the extent in which the Government has consistently strained for every possible advantage in this hotly contested series of cases,” Judge Leon stated.
The jury acquitted two defendants and Judge Leon declared a mistrial for the remaining three defendants, and in February 2012, the DOJ filed a motion to dismiss the case. Judge Leon granted the motion, stating: “This appears to be the end of a long and sad journey in the annals of white collar prosecutions.”
In July 2011, former National Security Agency senior executive Thomas A. Drake was sentenced after having pled guilty to a misdemeanor to resolve a 10-count felony indictment concerning the willful retention of classified information, obstruction of justice and making false statements. Drake admitted later to having revealed unclassified information to a reporter regarding the NSA’s activities, but claimed he did so in order to report fraud, waste and abuse of resources at the agency.
At the sentencing hearing, Judge Richard D. Bennett commented on the “four years of hell” Drake had endured at the hands of the government. At the hearing, Drake was sentenced to a year of probation, and the judge refused to impose the $50,000 fine the Government requested, noting that “it sure as heck shouldn’t take two and a half years before someone’s charged after that event.”
That same month U.S. District Judge Reggie Walton declared a mistrial in the perjury trial of former baseball pitcher Roger Clemens,, after prosecutors played a video containing hearsay testimony that the judge had prohibited. Judge Walton stated that he thought “a first-year law student would know that you can’t bolster the credibility of one witness or a witness with clearly inadmissible statements ... I can’t in good faith leave this case in a situation where a man’s liberty is at risk when the Government should have taken steps to ensure that we were not in this situation.” A retrial resulted in the acquittal of Roger Clemens.
The end of 2011 brought another major setback for the DOJ involving the FCPA. The government charged Lindsey Manufacturing Company, its CEO, CFO and a third-party agent with engaged in a scheme to inflate commissions it paid to agents, so the agents would pass a portion of these payments to officials of the Mexican government in order to influence the award of contracts. In May 2011, the jury found the defendants guilty. Almost two months later, the DOJ informed the Court that it had not turned over a transcript from one of the FBI case agent’s grand jury appearances to the defense.
During his grand jury testimony, the FBI agent had made misstatements regarding the evidence the FBI and Department of Justice had against the Lindsey defendants. On Dec. 1, 2011, Judge A. Howard Matz vacated the convictions against Lindsey Manufacturing and the executives, on the grounds of prosecutorial misconduct, and dismissed the indictment. In a 41-page opinion, in which he described a long list of missteps by the DOJ prosecutorial team and the FBI agents, including “reckless failure to comply with ... discovery obligations.”
Judge Matz described the case as “a result of a sloppy, incomplete and notably over-zealous investigation, an investigation that was so flawed that the Government’s lawyers tried to prevent inquiry into it.” He concluded that the government “should not be permitted to escape the consequences of that conduct.”
The year 2012 started with another DOJ defeat involving the FCPA. U.S. District Judge Lynn Hughes granted defendant O’Shea’s motion for acquittal on FCPA counts. O’Shea was charged with bribing officials at a Mexican utility company. After the government rested its case, Judge Hughes granted the motion to acquit citing a lack of foundation, a lack of specifics, incomplete evidence, and evidence that did not prove the charges.
In a case involving off-label drug marketing, Stryker Biotech LLC and its former national sales director and two former regional managers were indicted for marketing an unapproved mixture of two products used to generate human bone growth The indictment named seven surgeons who had allegedly been misled, but the defense claimed in opening statements that the DOJ had not even spoken to those surgeons, and that the surgeons would testify for the defense that they had not been deceived. In January 2012, the DOJ dismissed all charges against the individuals, and permitted Stryker to plead to a single misdemeanor count of misbranding a medical device.
In March 2012, a jury in Alabama federal court acquitted six state legislators of bribery and corruption-related charges in the so-called “bingo trial.” Casino operators allegedly pledged major political donations to state officials in exchange for backing an amendment to the state constitution that would have permitted certain forms of gambling. Judge Myron Thompson challenged the credibility of certain prosecution witnesses for having “ulterior motives rooted in naked political ambition and pure racial bias.”
Former Sen. John Edwards was charged with violating federal campaign contribution laws to cover up an extramarital affair in connection with his bid for the presidency. On May 31, 2012, Edwards was found not guilty on one count, and the judge declared a mistrial on the remaining five charges. On June 13, 2012, the Department of Justice announced that it would not retry Edwards, bringing the case to a close.
These cases establish a stunning string of government defeats in white collar cases over the past four years. Although each case has unique facts, collectively they demonstrate that the government is vulnerable in contested criminal litigation. In addition, the significant missteps by government prosecutors, ranging from egregious, intentional misconduct to unintentional errors, may have undermined the way in which judges view the government, making it more likely that courts will view government conduct far more skeptically and with greater scrutiny than they have in the past.
This changing climate for white collar litigation makes it more likely that courts will give government charging decisions and sentencing recommendations independent and critical review. It also increases the leverage that corporate defendants have in resolving cases short of trial as well as their chances of avoiding conviction at trial. Corporate defendants and their counsel would do well to familiarize themselves with the cases in this article, and to closely scrutinize the government’s conduct in white collar investigations and subsequent litigation. They should also ensure that judges are made aware at all steps of the case of any missteps on the government’s part, in order to maximize their bargaining power before and during trial.
The government can no longer credibly profess confidence that it will prevail at trial most of the time, as this series of cases dating back to 2009 clearly and unequivocally demonstrate an abysmal track record in the cases that matter most to the government.
This article originally appeared in Law360.