Pre-Trial Detention and White-Collar Defendants

The Madoff Case

The arrest of Bernard Madoff raised difficult questions about the propriety of pretrial detention where the defendant allegedly committed serious economic crimes, and the government believed that his pretrial release might result in the dissipation of assets that could be used to compensate his victims. Madoff was arrested in Manhattan after he reportedly confessed to perpetrating the largest Ponzi scheme in history. He was originally released on bail with the consent of the government, under conditions that included a $10-million personal recognizance bond, the filing of confessions of judgment against his and his wife's properties, the surrender of his and his wife's passports, and, critically, home detention with 24-hour private security paid for by Madoff's wife. Then, after Madoff and his wife allegedly mailed $1 million worth of personal items to family members and friends, the government moved to revoke Madoff's bail and have him held in custody pending trial, arguing that the transfers made him a risk of flight, constituted obstruction of justice, and threatened the continued availability of assets that he might have secreted, thereby making him a danger to the community.

The government's motion first was considered by Magistrate Judge Ronald Ellis. Although he accepted the government's argument that not all of Madoff's assets could be effectively restrained prior to trial, Judge Ellis nevertheless found that the government had failed to articulate how the disputed mailing of valuables justified detention when the government had done no more than make a “bare assertion that there remains some risk of flight.” Judge Ellis noted that the Bail Reform Act authorizes detention only when there is a serious risk of flight ' not merely “some” risk of flight ' and concluded that Madoff's transfers did not present a “serious” risk of flight because the government “failed to articulate any flaw in the current conditions of release,” which, as noted, included around-the-clock armed security.

Judge Ellis also rejected the government's argument that the possible dissipation of assets by Madoff constituted a danger to the community sufficient to justify pretrial detention. Although earlier cases stated that the abstract possibility that economic harm inflicted while on pretrial release could constitute “danger to the community” under the Bail Reform Act, the magistrate judge nevertheless concluded that the significant restrictive conditions already in place sufficiently curbed any potential danger, especially when combined with the injunction on accessing bank accounts entered in the SEC's civil action against Madoff and which was made a condition of bail. Accordingly, Judge Ellis denied the government's motion for detention.

In so ruling, Judge Ellis gives teeth to the Bail Reform Act's requirement that the court determine whether any condition or combination of conditions of release will “protect the safety of the community and reasonably assure the defendant's appearance at trial.” This is important for white-collar defendants. In many white-collar cases, the defendants arguably will be a flight risk because they are likely to have financial resources, and because deception is a hallmark of many white-collar crimes. Further, many white-collar defendants arguably will continue to pose an economic danger to the community because of the possibility of dissipation of assets. But the Madoff decision suggests that it will rarely be the case that no set of bail conditions can sufficiently reduce these risks.

The magistrate judge's decision was affirmed without opinion by the district court, but Madoff's victory was short-lived. Two months later, after Madoff pleaded guilty, District Judge Denny Chin ordered him to jail to await sentencing, and that decision was upheld by the Second Circuit in an opinion that succinctly observed that a convicted defendant “no longer has a substantive constitutional right to bail pending sentencing.”

The Dreier Case

Of similar notoriety ' at least in the legal community ' is the case of renowned litigator Marc Dreier, who was arrested on federal charges that he engaged in a scheme to defraud investors of as much as $700 million by selling worthless promissory notes. After initially being detained, Dreier was released on bail by Magistrate Judge Douglas Eaton of the Southern District of New York. The bail carried significant conditions, including a 24-hour guard paid for by Dreier's family and a $10-million cash bond.

Both sides appealed this decision. Dreier argued that the $10-million dollar cash bond constituted “excessive” bail because the government had frozen his assets. Meanwhile, prosecutors opposed bail entirely, arguing that Dreier was a flight risk given his alleged propensity for deception as reflected in the sophistication of the alleged fraudulent scheme, including that he had assumed a false identity with his victims.

On appeal to the district court, Judge Jed S. Rakoff, over the government's objection, ordered Dreier's pretrial release. In particular, although Judge Rakoff agreed with the government that Dreier was a substantial flight risk and that his motive to flee was “palpable,” the court nevertheless found that Dreier's proposed bail package ' including a multi-million-dollar personal recognizance bond and home detention with 24-hour monitoring by armed security guards ' sufficiently minimized the risk of flight.

The court's adoption of Dreier's proposal to have armed security guards monitor him around-the-clock at his family's expense mirrored a release condition that, as noted above, had been imposed in the Madoff case. That two recent courts embraced this condition of release may establish it as a new standard proposal for wealthy defendants charged with non-violent offenses. In essence, in order to obtain pretrial release, these defendants paid to transform their own homes into jails. The idea was not without controversy. Judge Rakoff lamented that it gave Dreier “an opportunity for release that poorer people could never obtain.” Nevertheless, the court endorsed that release condition, noting that bail conditions often favor the rich, whose resources are used to secure their pretrial release while less affluent defendants often must remain in custody pending trial.

Not all courts have accepted the idea that wealthy defendants should be able to obtain pretrial release by funding their own home detention. In Borodin v. Ashcroft, 136 F. Supp.2d 125, 134 (E.D.N.Y. 2001), U.S. District Judge Eugene Nickerson denied habeas corpus for a detainee in an extradition proceeding. The petitioner offered to pay for 24-hour surveillance, but the court rejected this proposal on grounds that “it is contrary to underlying principles of detention and release on bail that individuals otherwise ineligible for release should be able to buy their way out by constructing a private jail.” Other judges have expressed similar views. See, e.g., United States v. Agnello, 101 F. Supp. 2d 108 (E.D.N.Y. 2000); United States v. Patriarca, 948 F.2d 789, 796 (1st Cir. 1991) (Hill, J., concurring). The issue remains open, however, and the Second Circuit has declined to address it in the past. See United States v. Sabhnani, 493 F.3d 63, 78 n.18 (2d Cir. 2007). Thus, the two decisions highlighted in this article may foretell a shift in judicial thinking about the permissibility of self-funded home detention under the Bail Reform Act.

Conclusion

The Madoff and Dreier decisions are important signposts for white-collar defendants for two reasons. First, the fact that both defendants were released prior to trial reaffirms the vitality of the general presumption that non-violent offenders ' even those charged with serious economic crimes amid a financial crisis ' should be released prior to trial unless the government makes a strong showing of factors for denying bail. Second, the two cases establish the legitimacy today of release under a condition requiring self-funded house arrest ' a condition that has in the past been the subject of disagreement among courts.

Steven F. Reich ([email protected]), a member of this newsletter's Board of Editors, is co-chair of the Corporate Defense and Government Investigations practice group at Manatt, Phelps & Phillips, LLP, where Arunabha Bhoumik is an associate.

The Eighth Amendment commands that “excessive bail shall not be required.” Despite this prohibition, there is no guarantee that those accused of federal crimes will remain at liberty while awaiting their day in court. This article reviews pretrial bail decisions in two recent federal prosecutions: United States v. Bernard Madoff and United States v. Marc Dreier. These cases arose during the recent financial meltdown and provide a very recent window into how courts assess the right to bail in cases where the defendant allegedly has inflicted massive economic harm on the public.

The Bail Reform Act

The constitutional prohibition against excessive bail is implemented through The Bail Reform Act of 1984, which provides the statutory framework for pretrial release decisions in federal courts. The statute sets forth a presumption favoring release prior to trial for most federal defendants. However, a court may still order pretrial detention of the defendant in certain specified situations. Two have particular relevance in white-collar cases. The government may seek a detention hearing in a case that involves a serious risk that the defendant will: 1) flee prior to trial; or 2) obstruct justice. If either of these two conditions is met, the court must then determine “whether any condition or combination of conditions of release will protect the safety of the community and reasonably assure the defendant's appearance at trial.”

The Madoff Case

The arrest of Bernard Madoff raised difficult questions about the propriety of pretrial detention where the defendant allegedly committed serious economic crimes, and the government believed that his pretrial release might result in the dissipation of assets that could be used to compensate his victims. Madoff was arrested in Manhattan after he reportedly confessed to perpetrating the largest Ponzi scheme in history. He was originally released on bail with the consent of the government, under conditions that included a $10-million personal recognizance bond, the filing of confessions of judgment against his and his wife's properties, the surrender of his and his wife's passports, and, critically, home detention with 24-hour private security paid for by Madoff's wife. Then, after Madoff and his wife allegedly mailed $1 million worth of personal items to family members and friends, the government moved to revoke Madoff's bail and have him held in custody pending trial, arguing that the transfers made him a risk of flight, constituted obstruction of justice, and threatened the continued availability of assets that he might have secreted, thereby making him a danger to the community.

The government's motion first was considered by Magistrate Judge Ronald Ellis. Although he accepted the government's argument that not all of Madoff's assets could be effectively restrained prior to trial, Judge Ellis nevertheless found that the government had failed to articulate how the disputed mailing of valuables justified detention when the government had done no more than make a “bare assertion that there remains some risk of flight.” Judge Ellis noted that the Bail Reform Act authorizes detention only when there is a serious risk of flight ' not merely “some” risk of flight ' and concluded that Madoff's transfers did not present a “serious” risk of flight because the government “failed to articulate any flaw in the current conditions of release,” which, as noted, included around-the-clock armed security.

Judge Ellis also rejected the government's argument that the possible dissipation of assets by Madoff constituted a danger to the community sufficient to justify pretrial detention. Although earlier cases stated that the abstract possibility that economic harm inflicted while on pretrial release could constitute “danger to the community” under the Bail Reform Act, the magistrate judge nevertheless concluded that the significant restrictive conditions already in place sufficiently curbed any potential danger, especially when combined with the injunction on accessing bank accounts entered in the SEC's civil action against Madoff and which was made a condition of bail. Accordingly, Judge Ellis denied the government's motion for detention.

In so ruling, Judge Ellis gives teeth to the Bail Reform Act's requirement that the court determine whether any condition or combination of conditions of release will “protect the safety of the community and reasonably assure the defendant's appearance at trial.” This is important for white-collar defendants. In many white-collar cases, the defendants arguably will be a flight risk because they are likely to have financial resources, and because deception is a hallmark of many white-collar crimes. Further, many white-collar defendants arguably will continue to pose an economic danger to the community because of the possibility of dissipation of assets. But the Madoff decision suggests that it will rarely be the case that no set of bail conditions can sufficiently reduce these risks.

The magistrate judge's decision was affirmed without opinion by the district court, but Madoff's victory was short-lived. Two months later, after Madoff pleaded guilty, District Judge Denny Chin ordered him to jail to await sentencing, and that decision was upheld by the Second Circuit in an opinion that succinctly observed that a convicted defendant “no longer has a substantive constitutional right to bail pending sentencing.”

The Dreier Case

Of similar notoriety ' at least in the legal community ' is the case of renowned litigator Marc Dreier, who was arrested on federal charges that he engaged in a scheme to defraud investors of as much as $700 million by selling worthless promissory notes. After initially being detained, Dreier was released on bail by Magistrate Judge Douglas Eaton of the Southern District of New York. The bail carried significant conditions, including a 24-hour guard paid for by Dreier's family and a $10-million cash bond.

Both sides appealed this decision. Dreier argued that the $10-million dollar cash bond constituted “excessive” bail because the government had frozen his assets. Meanwhile, prosecutors opposed bail entirely, arguing that Dreier was a flight risk given his alleged propensity for deception as reflected in the sophistication of the alleged fraudulent scheme, including that he had assumed a false identity with his victims.

On appeal to the district court, Judge Jed S. Rakoff, over the government's objection, ordered Dreier's pretrial release. In particular, although Judge Rakoff agreed with the government that Dreier was a substantial flight risk and that his motive to flee was “palpable,” the court nevertheless found that Dreier's proposed bail package ' including a multi-million-dollar personal recognizance bond and home detention with 24-hour monitoring by armed security guards ' sufficiently minimized the risk of flight.

The court's adoption of Dreier's proposal to have armed security guards monitor him around-the-clock at his family's expense mirrored a release condition that, as noted above, had been imposed in the Madoff case. That two recent courts embraced this condition of release may establish it as a new standard proposal for wealthy defendants charged with non-violent offenses. In essence, in order to obtain pretrial release, these defendants paid to transform their own homes into jails. The idea was not without controversy. Judge Rakoff lamented that it gave Dreier “an opportunity for release that poorer people could never obtain.” Nevertheless, the court endorsed that release condition, noting that bail conditions often favor the rich, whose resources are used to secure their pretrial release while less affluent defendants often must remain in custody pending trial.

Not all courts have accepted the idea that wealthy defendants should be able to obtain pretrial release by funding their own home detention. In Borodin v. Ashcroft , 136 F. Supp.2d 125, 134 (E.D.N.Y. 2001), U.S. District Judge Eugene Nickerson denied habeas corpus for a detainee in an extradition proceeding. The petitioner offered to pay for 24-hour surveillance, but the court rejected this proposal on grounds that “it is contrary to underlying principles of detention and release on bail that individuals otherwise ineligible for release should be able to buy their way out by constructing a private jail.” Other judges have expressed similar views. See, e.g., United States v. Agnello , 101 F. Supp. 2d 108 (E.D.N.Y. 2000); United States v. Patriarca , 948 F.2d 789, 796 (1st Cir. 1991) (Hill, J., concurring). The issue remains open, however, and the Second Circuit has declined to address it in the past. See United States v. Sabhnani , 493 F.3d 63, 78 n.18 (2d Cir. 2007). Thus, the two decisions highlighted in this article may foretell a shift in judicial thinking about the permissibility of self-funded home detention under the Bail Reform Act.

Conclusion

The Madoff and Dreier decisions are important signposts for white-collar defendants for two reasons. First, the fact that both defendants were released prior to trial reaffirms the vitality of the general presumption that non-violent offenders ' even those charged with serious economic crimes amid a financial crisis ' should be released prior to trial unless the government makes a strong showing of factors for denying bail. Second, the two cases establish the legitimacy today of release under a condition requiring self-funded house arrest ' a condition that has in the past been the subject of disagreement among courts.

Steven F. Reich ([email protected]), a member of this newsletter's Board of Editors, is co-chair of the Corporate Defense and Government Investigations practice group at Manatt, Phelps & Phillips, LLP, where Arunabha Bhoumik is an associate.