In the Courts

Establishing Procurement Fraud

In United States v. Thompson, 06-3676 (7th Cir. April 20, 2007), the Seventh Circuit held that neither the fact that political factors are considered in a procurement decision, nor that state procurement procedures were not correctly followed, is sufficient to establish fraud.

Defendant, an employee of the Wisconsin Bureau of Procurement, was convicted at trial of mail fraud for allegedly improperly steering a state travel contract to a particular company. It was further alleged that she had done so for unspecified political reasons, and that she had been rewarded for doing so with a $1000 raise. On appeal, the Seventh Circuit reversed, holding that the mere fact that political factors are considered in a procurement decision is not enough to establish fraud. The court noted that many 'political' factors, such as awarding the contract to an in-state company or awarding the contract to the company with the lowest cost, are legitimate factors in a procurement decision. The court also held that showing that the defendant misapplied state procurement procedures is insufficient to establish fraud, noting that every violation of a state rule does not result in a federal crime.

Precise Proof of Amount of Loss Not Required to Support Restitution

The Seventh Circuit held that the government need not prove the precise amount of a loss to obtain restitution for that loss, and that it was clearly erroneous for the trial court to impose restitution of only $1258 where the total loss, was estimated to be over $5 million. United States v. Sriram, 05-2752 (7th Cir. Apr. 9, 2007).

Defendant, a cardiologist, pled guilty to health care fraud and tax fraud, admitting to receiving substantial payments for fraudulent claims. Despite the fact that the fraudulent claims were estimated in the presentence report to amount to between
$5 million and $10 million, the judge imposed a sentence of only five years' probation and $1258 in restitution, limiting the restitution to the amount of the two particular checks the defendant admitted he had received for services he had not performed. On appeal, the Seventh Circuit remanded for re-sentencing, holding that it was both unreasonable and erroneous of the trial court to require precise proof of the amount of loss because a reasonable estimate of the loss is all that is required by law. The court also gave guidance that on remand any restitution amount less than $1.4 million would be clear error under the facts of this case.

Actual Impediment of Justice Not Required to Sustain Obstruction of Justice Charge

The Eleventh Circuit recently held that false statements need not actually impede a government investigation in order to establish obstruction of justice.

In United States v. Johnson, 05-10015 (11th Cir. May 11, 2007), defendant, an environmental consultant, was convicted of obstruction of justice and false statements on charges related to statements he made during the course of an investigation into alleged violations of the Clean Water Act by one of his clients. On appeal, the defendant argued that there was insufficient evidence to convict him because even if he had made false statements, the statements were clearly not material, as they had not impeded the government from obtaining an indictment and conviction of his client. The Eleventh Circuit rejected this argument, noting that the statements were capable of interfering with the administration of justice and had a natural tendency to influence the government in its decision making process, which is all that is required to establish materiality.

Restitution Must Be Vacated Absent Evidence of Actual Pecuniary Loss.

In United States v. Hudson, — F.3d –, 2007 WL 1128895 (10th Cir. Apr. 17, 2007), the Tenth Circuit held that, even when a defendant has waived his right to appeal in a plea agreement, a restitution order that is not based on evidence of actual pecuniary loss must be vacated.

Defendant pled guilty to conspiracy to infringe a copyright on charges related to sales of counterfeit software to a Maryland company.
The crime was discovered when the suspicious buyer contacted the software manufacturer. At sentencing, the defendant was ordered to pay $321,663 in restitution, the actual value of the software sold, to the software company.

Despite having executed a general appeal waiver as part of his plea agreement, the defendant appealed the restitution order arguing that there was insufficient evidence of pecuniary harm to the software company to support the restitution order. The Tenth Circuit held that challenges to the legality of a restitution order cannot be waived by agreement. The court went on to vacate the restitution order, holding that there was no evidence presented that the conspiracy prevented the software company from making any sales or that it caused any other identifiable pecuniary loss to the company.

In the Courts and Business Crimes Hotline were written by Thomas M. Craig, Associate at Williams & Connolly, LLP, Washington, DC, and Associate Editor of this newsletter.

Advice of Counsel Does Not Excuse Bankruptcy Fraud or False Statements

In United States v. Roti, — F.3d –, 2007 WL 1287402 (7th Cir. May 3, 2007), the Seventh Circuit held that advice of counsel is not a free-standing defense to bankruptcy fraud, but merely a means to negate the required mental state for the crime charged. Because, on the facts presented, following advice of counsel did not negate scienter, the conviction was affirmed.

Defendant, the sole shareholder of an Illinois corporation, was convicted of bankruptcy fraud on charges that during bankruptcy proceedings he attempted to hide assets from creditors and the bankruptcy trustee. On appeal, he argued that he should have been acquitted because he took those actions upon advice of his lawyer, and that his lawyer had managed the details of the scheme. He also argued that the trial court erred in barring him from introducing evidence that he had sued his lawyer, resulting in a $150,000 settlement. The Seventh Circuit disagreed with both arguments. The circuit court noted that advice of counsel is not a free-standing defense. Advice of counsel may be relevant to the defendant's state of mind where it can be shown that the defendant strictly followed the advice of an attorney in the belief that the attorney was directing him in accord with the law. In this case, the defendant did not argue that his lawyer told him that hiding assets and lying about his actions were lawful, so the advice is not relevant to scienter. The court also held that the fact that he later sued his lawyer was not relevant to any element of the crimes charged.

Establishing Procurement Fraud

In United States v. Thompson, 06-3676 (7th Cir. April 20, 2007), the Seventh Circuit held that neither the fact that political factors are considered in a procurement decision, nor that state procurement procedures were not correctly followed, is sufficient to establish fraud.

Defendant, an employee of the Wisconsin Bureau of Procurement, was convicted at trial of mail fraud for allegedly improperly steering a state travel contract to a particular company. It was further alleged that she had done so for unspecified political reasons, and that she had been rewarded for doing so with a $1000 raise. On appeal, the Seventh Circuit reversed, holding that the mere fact that political factors are considered in a procurement decision is not enough to establish fraud. The court noted that many 'political' factors, such as awarding the contract to an in-state company or awarding the contract to the company with the lowest cost, are legitimate factors in a procurement decision. The court also held that showing that the defendant misapplied state procurement procedures is insufficient to establish fraud, noting that every violation of a state rule does not result in a federal crime.

Precise Proof of Amount of Loss Not Required to Support Restitution

The Seventh Circuit held that the government need not prove the precise amount of a loss to obtain restitution for that loss, and that it was clearly erroneous for the trial court to impose restitution of only $1258 where the total loss, was estimated to be over $5 million. United States v. Sriram, 05-2752 (7th Cir. Apr. 9, 2007).

Defendant, a cardiologist, pled guilty to health care fraud and tax fraud, admitting to receiving substantial payments for fraudulent claims. Despite the fact that the fraudulent claims were estimated in the presentence report to amount to between
$5 million and $10 million, the judge imposed a sentence of only five years' probation and $1258 in restitution, limiting the restitution to the amount of the two particular checks the defendant admitted he had received for services he had not performed. On appeal, the Seventh Circuit remanded for re-sentencing, holding that it was both unreasonable and erroneous of the trial court to require precise proof of the amount of loss because a reasonable estimate of the loss is all that is required by law. The court also gave guidance that on remand any restitution amount less than $1.4 million would be clear error under the facts of this case.

Actual Impediment of Justice Not Required to Sustain Obstruction of Justice Charge

The Eleventh Circuit recently held that false statements need not actually impede a government investigation in order to establish obstruction of justice.

In United States v. Johnson, 05-10015 (11th Cir. May 11, 2007), defendant, an environmental consultant, was convicted of obstruction of justice and false statements on charges related to statements he made during the course of an investigation into alleged violations of the Clean Water Act by one of his clients. On appeal, the defendant argued that there was insufficient evidence to convict him because even if he had made false statements, the statements were clearly not material, as they had not impeded the government from obtaining an indictment and conviction of his client. The Eleventh Circuit rejected this argument, noting that the statements were capable of interfering with the administration of justice and had a natural tendency to influence the government in its decision making process, which is all that is required to establish materiality.

Restitution Must Be Vacated Absent Evidence of Actual Pecuniary Loss.

In United States v. Hudson, — F.3d –, 2007 WL 1128895 (10th Cir. Apr. 17, 2007), the Tenth Circuit held that, even when a defendant has waived his right to appeal in a plea agreement, a restitution order that is not based on evidence of actual pecuniary loss must be vacated.

Defendant pled guilty to conspiracy to infringe a copyright on charges related to sales of counterfeit software to a Maryland company.
The crime was discovered when the suspicious buyer contacted the software manufacturer. At sentencing, the defendant was ordered to pay $321,663 in restitution, the actual value of the software sold, to the software company.

Despite having executed a general appeal waiver as part of his plea agreement, the defendant appealed the restitution order arguing that there was insufficient evidence of pecuniary harm to the software company to support the restitution order. The Tenth Circuit held that challenges to the legality of a restitution order cannot be waived by agreement. The court went on to vacate the restitution order, holding that there was no evidence presented that the conspiracy prevented the software company from making any sales or that it caused any other identifiable pecuniary loss to the company.

In the Courts and Business Crimes Hotline were written by Thomas M. Craig, Associate at Williams & Connolly, LLP, Washington, DC, and Associate Editor of this newsletter.