The Supreme Court’s February 24 decision in Kaley v. United States creates a significant hurdle for white-collar defendants seeking to retain qualified counsel to defend against the government’s allegations. Ruling that defendants cannot, prior to trial, challenge a grand jury’s probable cause determination that allows the government to bar a defendant’s access to assets linked to the alleged crime, the Court’s decision, according to the dissent, allows the government “to initiate a prosecution and then, at its option, disarm its presumptively innocent opponent by depriving him of his counsel of choice – without even an opportunity to be heard.” In cases such as Kaley, where the government convinced the grand jury to charge on a novel or untested theory, the result poses a particularly difficult challenge for a white-collar defendant.
Federal forfeiture statutes are used by prosecutors to “strip criminals of their illicit wealth.” In fiscal year 2013 alone, the Justice Department collected over $2 billion in forfeiture assets from criminal defendants. These funds are used to recompense victims (over $1.5 billion was returned to more than 400,000 crime victims between January 2012 and April 2013), improve conditions in communities ravaged by crime, and support police training and other law enforcement activities. Although an individual must first be convicted of a crime before his property can be forfeited, statutes designed to prevent the secreting of assets frequently are relied upon by the government to freeze assets pretrial. The government’s aggressive pursuit of assets in this manner, long before any determination of guilt, and the resulting collision with an accused’s constitutionally protected rights to counsel and a fair trial was the subject of the Court’s decision in Kaley.
Mrs. Kaley, a sales rep for Ethicon, a Johnson & Johnson JNJ +0.32% subsidiary, received outmoded or surplus devices from staff members at the medical facilities she served and, with Mr. Kaley’s assistance, sold the unwanted devices and shared the proceeds with other sales representatives. When the Kaleys learned that the government was investigating the legitimacy of these transactions, they took out a home equity line on their house and deposited $500,000 in a certificate of deposit to secure funds to pay for their defense. They also retained an attorney, who immediately started to work.
In 2007, a federal grand jury charged Mr. and Mrs. Kaley with conspiracy to transport stolen property and transportation of stolen property. The Kaleys vehemently denied the charges, arguing that Mrs. Kaley owed no fiduciary duties to Ethicon, that Ethicon never asserted any property rights in the outdated devices, and that the government’s theory previously had been rejected in a separate prosecution of another Ethicon employee for the same actions.
As permitted by statute, the government froze all of the defendants’ assets which supposedly constituted “proceeds” of the alleged crimes, including the funds set aside for legal fees. When it failed to trace the frozen funds to the alleged criminal conduct, the government obtained a superseding indictment adding a count of conspiracy to commit money laundering, which contains a much broader forfeiture provision.
The Kaleys appealed the pre-trial freeze, arguing that it violated their Sixth Amendment right to counsel because they needed the funds to continue to retain the attorney who was intimately familiar with the case and had worked with them before the indictment was handed down. They did not contest that the funds were related to the conduct at issue, but that the government lacked probable cause to determine that the conduct was criminal. The Supreme Court granted certiorari to determine whether defendants who need potentially forfeitable money to hire counsel are entitled to challenge the evidentiary support and legal theory of the underlying charges at a pretrial hearing, or are limited to challenging the determination that the restrained assets are connected to the alleged criminal activity. The Circuit Courts of Appeal were split on the issue.
A six-justice majority of the Court held that the grand jury’s probable cause determination was inviolable and that a pretrial hearing on an asset freeze order could only reach the question of whether the assets were linked to the crimes charged. Justice Kagan, writing for the majority, observed that to allow judicial review of the grand jury’s finding regarding the existence of probable cause to believe the accused committed the crimes charged would undermine the grand jury’s “integral, constitutionally prescribed role” because “every prosecution involving a pre-trial asset freeze would potentially pit the judge against the grand jury as to the case’s foundational issue.”
In a strongly-worded dissent, Chief Justice Roberts, joined by Justices Breyer and Sotamayor, disagreed with the majority, opining that defendants should not be “hobbled” with a pre-trial asset freeze without an opportunity to challenge the government. “Neither the Government nor the majority gives any reason why the District Court may reconsider the grand jury’s probable cause finding as to traceability – and in fact constitutionally must, if asked – but may not do so as to the underlying charged offense.” The majority opinion recognized that a pretrial restraint of assets is constitutionally permissible only where there is probable cause to think 1) that the defendant has committed an offense permitting forfeiture, and 2) that the property at issue is connected to the alleged crime. However, the majority decision cuts off one of the legs of this test, effectively eliminating any review of the grand jury’s findings as to the first question.
In the dissent, Chief Justice Roberts wrote, “Federal prosecutors, when they rise in court, represent the people of the United States. But so do defense lawyers – one at a time.” And yet an inherent imbalance exists in the forfeiture regime – the government presents only its side to the grand jury, has extensive statutory authority to freeze a defendant’s assets before trial and, as in Kaley, can make charging decisions that maximize the assets that can be seized. In white-collar cases, where the issue frequently is not whether the defendant is the person who engaged in the conduct, but whether the conduct is in fact criminal, the defendant’s ability to hire specialized counsel familiar with their case is critical. Unfortunately, the Supreme Court’s recent decision fails to sufficiently weigh the significance a defendant’s choice of counsel and tips the scales further in the government’s favor.