In the Courts

Upon receipt of the subpoenas, the law firms invoked Federal Rule of Criminal Procedure 17, requesting that the district court exercise its discretion in quashing the subpoenas. See Fed. R. Crim. P. 17. In its analysis of the law firms' motions, the United States District Court for the Northern District of California, having found no governing authority to rely upon, concluded that ” ' because the motions to quash raise novel issues with potentially far-reaching implications about the power of the grand jury and the relationship between grand jury proceedings and civil discovery of unindicted foreign defendants, the Court finds it is more prudent to quash the subpoenas and allow the DOJ to raise these issues on appeal to the Ninth Circuit.”

On appeal before Circuit Judges Noonan and Richard A. Paez, as well as District Judge Kevin Thomas Duffy, the firms argued that the district court had reasonably exercised its Rule 17 discretion, and thus, the Ninth Circuit should affirm. However, the Ninth Circuit disagreed, stating in part that “[w]e do not read the district court's decision as an exercise of discretion but as a passing of the decision to this court. We are not reviewing an exercise of discretion but a request for guidance.”

The Ninth Circuit noted that: 1) no collusion ' between the civil suit plaintiffs and the U.S. government ' had been established or even suggested by the law firms; and 2) no claims of privilege had been asserted. The court applied its per se rule prioritizing a grand jury subpoena over a civil protective order in reversing the district court and ordering that the subpoenas be enforced. See In re Grand Jury Subpoenas Served on Meserve, Mumper & Hughes, 62 F.3d 1222, 1226-27 (9th Cir. 1995). In further describing its reasoning, the Ninth Circuit stated that “[b]y a chance of litigation, the documents have been moved from outside the grasp of the grand jury to within its grasp. No authority forbids the government from closing its grip on what lies within the jurisdiction of the grand jury.”

Eleventh Circuit Vacates Conspiracy Convictions

On Dec. 22, 2010, in United States v. Kottwitz, No. 08-13740, the United States Court of Appeals for the Eleventh Circuit, in a per curiam opinion, vacated the convictions of Theresa L. Kottwitz, Gerard Marchelletta, Sr., and Gerard Marchelletta, Jr. for conspiracy to defraud the Internal Revenue Service. The court found that the defendants had introduced circumstantial evidence sufficient to merit a jury instruction that the defendants may have relied on the advice of an accountant. The court's decision followed its prior decision, United States v. Kottwitz, 614 F.3d 1241 (11th Cir. 2010), where the Eleventh Circuit had already vacated the defendants' convictions on three other counts due to the district court's refusal to issue an accountant-reliance jury instruction. The case has been remanded for retrial ' this time with the instruction ' on those counts.

The charges related to personal income tax returns of the defendants, as well as corporate returns for businesses owned by the Marchellettas. Kottwitz served as the bookkeeper and controller for one of the relevant entities.

In its analysis, the court noted that the burden for receiving a requested jury instruction in the Eleventh Circuit remains a low bar. As set forth in United States v. Opdahl, 930 F.2d 1530, 1535 (11th Cir. 1991), “any foundation in the evidence” for the instruction is sufficient. The court held that the defendants had cleared this bar, despite its finding that “no evidence directly showed that Defendants' accountant was involved in initially entering/hiding transactions on the corporate books.” The Eleventh Circuit found that the defendants had introduced enough circumstantial evidence to warrant the instruction that each may have relied on an accountant's advice.

Setting forth its reasoning, the court noted that the defendants had hired an accountant to assist with nearly all of the suspect transactions. Further, the accountant was authorized, and had exercised that authority, to review and reclassify certain entries in the corporate books. Finally, the court noted that the same accountant had prepared the tax returns at issue.

Based on this analysis, the court vacated the defendants convictions for conspiracy to defraud the IRS, stating that “[e]ven if it is not the only and not the most likely explanation of events leading to the guilty verdicts on Count One, an evidentiary basis existed for conviction under Count One that could have involved Defendants, in fact, relying on the advice of their accountant. For example, the jury might have believed that Defendants acted with the accountant's tacit approval of Defendants' accounting methods.”

Fifth Circuit Affirms Dismissal of Indictments Alleging Price Manipulation and Market Cornering By Traders

On Jan. 27, 2011, in United States v. Radley, No. 09-20699, the United States Court of Appeals for the Fifth Circuit, in an opinion authored by chief judge Edith H. Jones, affirmed the dismissal of indictments against four former BP Products North America Inc. commodities traders. In part, the court affirmed the dismissals based on its finding that the traders' conduct was shielded from prosecution by a statutory exemption contained within the Commodities Exchange Act (“CEA”), 7 U.S.C. ' 13(a)(2).

The allegations centered on the trading of futures contracts for TET propane. The latter is the primary supply of propane between Gulf Coast producers and consumers in both the Northeast and Midwest. Principally, the indictments alleged that the traders attempted to drive up the price of TET propane by “stacking” multiple bids on an electronic interface known as Chalkboard, attempting to trick market participants with regard to the strength and source of TET propane demand. The four were also accused of enticing transactions at higher prices, withholding information, and making false denials. The traders were charged with price manipulation, attempted price manipulation, market cornering, attempted cornering, wire fraud, and conspiracy.

The CEA criminalizes the price manipulation and/or cornering of any commodity in interstate commerce, as well as attempts at both practices. However, ' 2(g) of the act provides that the CEA shall not “apply to or govern any agreement, contract, or transaction in a commodity other than an agricultural commodity,” upon satisfaction of three elements. At the district court level, the defendants' motion to dismiss the indictments was granted, in part because the court held that the traders' actions met the requirements of the CEA exemption. On appeal, the government did not challenge whether the three elements for the exemption were satisfied. Rather, it argued for a narrow interpretation of the terms “transaction” and “agreement” for purposes of ' 2(g), such that the traders' alleged actions ' also not a contract ' would not be eligible for exemption.

In its analysis, the Fifth Circuit, starting with the term “transaction,” could not find a definition within Fifth Circuit or Supreme Court precedent. The court also noted that sister courts had not produced a definitive test for identifying conduct “sufficiently disconnected from a purchase and sale to fall outside the definition of a transaction.”

Ultimately, the Fifth Circuit used a reference to “transactions” within a separate section of the CEA, as well as the term's plain meaning, to reach a definition that encompassed the activities allegedly undertaken by the traders. Specifically, in affirming dismissal of the indictments, the court stated “[a]s we conclude that the statutory exemption covers all aspects of a transaction, Appellees' risky campaign of buying propane futures in the hope that other traders would not detect their efforts was lawful.” The court also affirmed dismissal of the wire fraud counts.

Ninth Circuit Reverses District Court Order Quashing Grand Jury Subpoenas for Documents Obtained from Outside
The U.S.

On Dec. 7, 2010, in In re Grand Jury Subpoenas served on White & Case LLP, Lieff, Cabraser, Heinemann, Bernstein LLP, K&L Gates LLP, and Nossaman LLP, No. 10-15758, the United States Court of Appeals for the Ninth Circuit reversed a district court order quashing subpoenas directed to the law firms named in the case. The subpoenas sought nonprivileged documents that originated outside the United States; the respective firms received the documents as part of civil discovery for private antitrust lawsuits. The opinion was authored by Judge John T. Noonan.

The lawsuits, which followed public reports in 2006 of a U.S. government antitrust investigation into potential criminal conduct at several companies, were filed against the companies named as part of the investigation. As part of the discovery for that litigation, the law firms came to possess a number of documents that originated outside the United States, upon their production by the civil defendants. Subsequently, the United States government subpoenaed these nonprivileged documents as part of a grand jury investigation into the clients of the firms.

Upon receipt of the subpoenas, the law firms invoked Federal Rule of Criminal Procedure 17, requesting that the district court exercise its discretion in quashing the subpoenas. See Fed. R. Crim. P. 17. In its analysis of the law firms' motions, the United States District Court for the Northern District of California, having found no governing authority to rely upon, concluded that ” ' because the motions to quash raise novel issues with potentially far-reaching implications about the power of the grand jury and the relationship between grand jury proceedings and civil discovery of unindicted foreign defendants, the Court finds it is more prudent to quash the subpoenas and allow the DOJ to raise these issues on appeal to the Ninth Circuit.”

On appeal before Circuit Judges Noonan and Richard A. Paez, as well as District Judge Kevin Thomas Duffy, the firms argued that the district court had reasonably exercised its Rule 17 discretion, and thus, the Ninth Circuit should affirm. However, the Ninth Circuit disagreed, stating in part that “[w]e do not read the district court's decision as an exercise of discretion but as a passing of the decision to this court. We are not reviewing an exercise of discretion but a request for guidance.”

The Ninth Circuit noted that: 1) no collusion ' between the civil suit plaintiffs and the U.S. government ' had been established or even suggested by the law firms; and 2) no claims of privilege had been asserted. The court applied its per se rule prioritizing a grand jury subpoena over a civil protective order in reversing the district court and ordering that the subpoenas be enforced. See In re Grand Jury Subpoenas Served on Meserve, Mumper & Hughes, 62 F.3d 1222, 1226-27 (9th Cir. 1995). In further describing its reasoning, the Ninth Circuit stated that “[b]y a chance of litigation, the documents have been moved from outside the grasp of the grand jury to within its grasp. No authority forbids the government from closing its grip on what lies within the jurisdiction of the grand jury.”

Eleventh Circuit Vacates Conspiracy Convictions

On Dec. 22, 2010, in United States v. Kottwitz, No. 08-13740, the United States Court of Appeals for the Eleventh Circuit, in a per curiam opinion, vacated the convictions of Theresa L. Kottwitz, Gerard Marchelletta, Sr., and Gerard Marchelletta, Jr. for conspiracy to defraud the Internal Revenue Service. The court found that the defendants had introduced circumstantial evidence sufficient to merit a jury instruction that the defendants may have relied on the advice of an accountant. The court's decision followed its prior decision, United States v. Kottwitz , 614 F.3d 1241 (11th Cir. 2010), where the Eleventh Circuit had already vacated the defendants' convictions on three other counts due to the district court's refusal to issue an accountant-reliance jury instruction. The case has been remanded for retrial ' this time with the instruction ' on those counts.

The charges related to personal income tax returns of the defendants, as well as corporate returns for businesses owned by the Marchellettas. Kottwitz served as the bookkeeper and controller for one of the relevant entities.

In its analysis, the court noted that the burden for receiving a requested jury instruction in the Eleventh Circuit remains a low bar. As set forth in United States v. Opdahl , 930 F.2d 1530, 1535 (11th Cir. 1991), “any foundation in the evidence” for the instruction is sufficient. The court held that the defendants had cleared this bar, despite its finding that “no evidence directly showed that Defendants' accountant was involved in initially entering/hiding transactions on the corporate books.” The Eleventh Circuit found that the defendants had introduced enough circumstantial evidence to warrant the instruction that each may have relied on an accountant's advice.

Setting forth its reasoning, the court noted that the defendants had hired an accountant to assist with nearly all of the suspect transactions. Further, the accountant was authorized, and had exercised that authority, to review and reclassify certain entries in the corporate books. Finally, the court noted that the same accountant had prepared the tax returns at issue.

Based on this analysis, the court vacated the defendants convictions for conspiracy to defraud the IRS, stating that “[e]ven if it is not the only and not the most likely explanation of events leading to the guilty verdicts on Count One, an evidentiary basis existed for conviction under Count One that could have involved Defendants, in fact, relying on the advice of their accountant. For example, the jury might have believed that Defendants acted with the accountant's tacit approval of Defendants' accounting methods.”

Fifth Circuit Affirms Dismissal of Indictments Alleging Price Manipulation and Market Cornering By Traders

On Jan. 27, 2011, in United States v. Radley, No. 09-20699, the United States Court of Appeals for the Fifth Circuit, in an opinion authored by chief judge Edith H. Jones, affirmed the dismissal of indictments against four former BP Products North America Inc. commodities traders. In part, the court affirmed the dismissals based on its finding that the traders' conduct was shielded from prosecution by a statutory exemption contained within the Commodities Exchange Act (“CEA”), 7 U.S.C. ' 13(a)(2).

The allegations centered on the trading of futures contracts for TET propane. The latter is the primary supply of propane between Gulf Coast producers and consumers in both the Northeast and Midwest. Principally, the indictments alleged that the traders attempted to drive up the price of TET propane by “stacking” multiple bids on an electronic interface known as Chalkboard, attempting to trick market participants with regard to the strength and source of TET propane demand. The four were also accused of enticing transactions at higher prices, withholding information, and making false denials. The traders were charged with price manipulation, attempted price manipulation, market cornering, attempted cornering, wire fraud, and conspiracy.

The CEA criminalizes the price manipulation and/or cornering of any commodity in interstate commerce, as well as attempts at both practices. However, ' 2(g) of the act provides that the CEA shall not “apply to or govern any agreement, contract, or transaction in a commodity other than an agricultural commodity,” upon satisfaction of three elements. At the district court level, the defendants' motion to dismiss the indictments was granted, in part because the court held that the traders' actions met the requirements of the CEA exemption. On appeal, the government did not challenge whether the three elements for the exemption were satisfied. Rather, it argued for a narrow interpretation of the terms “transaction” and “agreement” for purposes of ' 2(g), such that the traders' alleged actions ' also not a contract ' would not be eligible for exemption.

In its analysis, the Fifth Circuit, starting with the term “transaction,” could not find a definition within Fifth Circuit or Supreme Court precedent. The court also noted that sister courts had not produced a definitive test for identifying conduct “sufficiently disconnected from a purchase and sale to fall outside the definition of a transaction.”

Ultimately, the Fifth Circuit used a reference to “transactions” within a separate section of the CEA, as well as the term's plain meaning, to reach a definition that encompassed the activities allegedly undertaken by the traders. Specifically, in affirming dismissal of the indictments, the court stated “[a]s we conclude that the statutory exemption covers all aspects of a transaction, Appellees' risky campaign of buying propane futures in the hope that other traders would not detect their efforts was lawful.” The court also affirmed dismissal of the wire fraud counts.