Category: Fraud

FraudHealthcareLitigationSecurities

Securities Fraud: The United States v. Elizabeth Holmes

on October 13, 2021

In 2018, Experts.com uploaded a blog post regarding the separate SEC charges against Theranos founder, Elizabeth Holmes, and Chief Operating Officer, Ramesh “Sunny” Balwani, for securities fraud and injunctive relief. The post offered predictions of the types of experts expected to provide their insight on the situation due to the case’s multifaceted nature. As the trial began on September 8th, 2021, this month’s blog post will cover the events that have transpired since the SEC charge in 2018, the opening statements made in the trial thus far, and insight from Experts.com Member, Mr. James (Jim) Ellis, to help explain the legalities from an Expert Witness perspective.

2018 to the Present (Timeline by CNN)

As mentioned, the SEC has pressed separate charges against Holmes and Balwani for securities fraud in March 2018. Before these charges, Theranos had advertised how it could drastically change the healthcare industry by providing the world’s first portable, needle-free, and affordable blood analyzer sold in stores like Walgreens and Safeway. Essentially, people can test for various diseases and get results from a prick of a finger. Theranos would be a pioneer in modernizing blood tests without large vials with the help of their Edison blood analyzer machines. Investors were sold on this dream and the company was able to garner a net worth of $9 billion. Due to this seemingly revolutionary invention, she was heralded as the “next Steve Jobs” by multiple news outlets.

Since 2015, suspicions have been raised by various media and medical groups including the Wall Street Journal, Journal of the American Medical Association, Food and Drug Administration, Central for Medicare and Medical Services, and various investors, as the technology of Theranos’ product proved to be faulty. Holmes and Balwani not only denied any wrongdoings when criticized by skeptics, but they continuously reassured customers and investors that their blood analyzer was sure to be the next life-altering invention for the healthcare industry. As time went on, Theranos failed to execute its mission technologically, ethically, and by medical guidelines. Investors sued for fraud in 2016. The amount of money misappropriated by Theranos totaled approximately $700 million. 

This led to the eventual indictment of both Holmes and Balwani despite having separate SEC charges. According to ABC News, Holmes agreed to pay a $500,000 fine, relinquish her role as CEO of Theranos and any other publicly traded company for the next decade, and give back her $18.9 million in stocks. As for Balwani, it remains to be seen whether he will decide to settle with the Securities and Exchange Commission. ABC News also highlighted Balwani’s attorney, Jeffrey Coopersmith, stating his client, “accurately represented Theranos to investors to the best of his ability.” He will, however, still be tried in court after Holmes.

Since the settlement, the rise and fall of Theranos have been the subject of various documentaries like HBO’s “The Inventor: Out For Blood in Silicon Valley,” (2019) and ABC’s podcast “The Dropout: Elizabeth Holmes on Trial,” (2019). Holmes’ trial date was set to occur in 2020, but due to the pandemic and her pregnancy, the trial was delayed and set for 2021. 

The Trial (CNN Business)

On September 8th, 2021, the long-overdue trial between Elizabeth Holmes and the U.S. Government began. As this trial is ongoing, there is a limited amount of information. In his opening statement, Robert Leach, Assistant U.S. Attorney and lead prosecutor for the case stated, “This is a case about fraud, about lying and cheating to get money… Out of time and out of money, the defendant decided to mislead…. The defendant’s fraudulent scheme made her a billionaire. The scheme brought her fame, it brought her honor, and it brought her adoration.”

Holmes’ attorney, Lance Wade, shot back in an opening statement for the defense with, “Elizabeth Holmes did not go to work every day intending to lie, cheat and steal. The government would have you believe her company, her entire life, is a fraud. That is wrong… In the end, Theranos failed, and Ms. Holmes walked away with nothing. But failure is not a crime. Trying your hardest and coming up short is not a crime.”

There have been some predictions about what strategies Holmes’ legal team may use in court. In 2020, CNN reported the relationship between Holmes and Balwani was more than just business partners. As the two were romantically involved in the past, and according to recently unsealed court documents, Holmes may admit to experiencing emotional, psychological, and sexual abuse. Whether Holmes testifies regarding these claims remains to be seen. Balwani has vehemently denied the abuse allegations, and since his trial commences after Holmes’, only time will tell if this topic will be discussed in court.

(photo credit: New York Post)

Insight from Our Members

Considering the charges of the trial, Experts.com Member and Private Investigation Expert Witness, Mr. James (Jim) Ellis, sheds light on the elements that constitute wire fraud and the situations for which the federal charge is used. According to Mr. Ellis, “Wire fraud, and mail fraud as well, are generally federal statutes that can be used against fraud schemes where no other federal statutes apply.” Since the statute is extensive, federal prosecutors use this to charge the varying types of fraud. Four characteristics constitute wire fraud (941. 18 U.S.C. 1343, United States Department of Justice Archives):

  1. The defendant was part of a scheme to defraud another person, such as obtaining money or something else of value through false pretenses.
  2. The defendant acted knowingly with the intent to defraud.
  3. The defendant made or caused to be made false representations that were material to the scheme to defraud.
  4. The defendant transmitted a material misrepresentation by wire, radio, or television communications in interstate or foreign commerce.

Mr. Ellis adds how the courts also include electronic communication in their interpretation of the statute due to the emergence of the internet and cellular devices in recent decades. This increases the odds of Ponzi schemes, phishing, catfishing, online shopping scams, and other duplicitous actions taking place. Most of these cases would not be considered wire fraud scams unless the dollar amount lost equals or surpasses $1 million. Anything less does not warrant federal attention. Although this is unrelated to the Theranos v. United States Government trial, Mr. Ellis mentioned, “According to the FBI, over $600 million was stolen from unsuspecting people in 2020 through online romance scams.” 

From the elements of the statute and the multitude of avenues wire fraud can be committed nowadays, it can be inferred that wire fraud cannot be an accidental crime. Due to the second element of wire fraud, federal prosecutors who use this charge must provide evidence of the defendant having the intent to scam individuals, knowingly providing promises under false pretenses, and doing so to acquire monetary gain from their victims.

To play devil’s advocate regarding Elizabeth Holmes’ trial, it is possible her intention at the beginning of building her business was not to scam investors and patients. From her interviews on various media channels, her belief in Theranos and its mission never wavered. Mr. Ellis imparts, “However… if the same person began to realize their company wasn’t sustainable or even profitable, or if their product wasn’t turning out as they thought it would; and they knowingly made misrepresentations about their company or product in the hope they could eventually turn it around; then they quite possibly have committed wire fraud.” Because it is difficult to distinguish a failed attempt from a duplicitous sale, law enforcement must be meticulous in looking for the elements of fraud (listed in the statute above) before starting an investigation.

This case is interesting not only because of the nature of Theranos’ inventive endeavor, but because we see two corporate executives being sued for wire fraud. Mr. Ellis mentioned, “Often the federal government will use civil statutes to target the corporate entity itself. The wire fraud statute is normally used against the employees of a corporation who is committing fraud.” Those who hold corporate positions, especially people that lead the corporations, tend to be entrepreneurs. Why is this important? Because those with an entrepreneurial spirit are most likely to find themselves in legal matters like Elizabeth Holmes if they are not careful enough. “These people who start new ventures, even with the best of intentions, could easily fall into a trap of telling a ‘white lie’ to not let a dream die,” Mr. Ellis added. The question of how often corporate executives find themselves in civil or criminal fraud lawsuits remains unanswered, but what is salient is the undesirable consequence of committing wire fraud, an outcome Elizabeth Holmes and Sunny Balwani are currently facing. 

It remains to be seen how this will all play out in the courtroom but investors, clients, and the general public are on the edge of their seats to learn the fate of these two infamous entrepreneurs.

Update:

On Monday, February 21st, 2022, Elizabeth Holmes was found guilty on four of eleven counts of conspiracy to commit wire fraud and wire fraud. The four counts are (WSJ):

  • Conspiracy to commit wire fraud against Theranos investors.
  • Wire fraud against Theranos investors: wire transfer of $38,336,632 from PMF Healthcare Master
  • Wire fraud against Theranos investors: wire transfer of $99,999,984 from Lakeshore Capital Management LLP
  • Wire fraud against Theranos investors: wire transfer of $5,999,997 from Mosley Family Holdings LLC

According to New York Times, Ms. Holmes “faces a maximum sentence of 20 years in prison for each count.” Her sentence will be finalized and announced on September 26th, 2022. Sunny Balwani’s trial commenced on March 23rd, 2022, so the verdict is yet to be determined.

FraudSecurities

Nikola: The Next Tesla, Or A Fraud?

on October 8, 2020

Nikola founder, Trevor Milton, recently resigned from his position as Executive Chairman of the Board after facing accusations of fraud. Before delving into the fraud allegations, it is important to understand the genesis of the company, which adds to the gravity of the situation. You may recall, last week we delved into the upcoming fraud trial for former Theranos CEO Elizabeth Holmes. We wanted to continue covering this topic of high profile fraud.

Milton built Nikola in 2014 hoping to reform the transportation sector. His plan in accomplishing this goal was to create mainstream battery-electric and hydrogen-powered vehicles from state-of-the-art zero-emissions technology. Establishing a company based on the same inventor and mission as another company, Tesla to be specific, is not the only suspicious act Milton has committed.

According to Business Insider, on September 10th, 2020, a report published by the Hindenburg Research investment firm contains evidence of Milton providing false statements about his products. More specifically, the report accuses Milton of exaggerating the viability of his products and thus misinforming investors, partners, and consumers. An example of these fraudulent statements is based on a video demo advertising Nikola’s debut semi-truck, the allegedly hydrogen-powered “Nikola One.” The report revealed an exchange of text messages from a Nikola employee developing a plan to roll the vehicle down a hill to manipulate the “high-speed” aspect of the truck. Nikola diverted from the issue by stating the prototype was discarded and therefore irrelevant. To add, they thought the Hindenburg report was released as sabotage considering Nikola’s partnership with General Motors was finalized two days prior. It should be noted, Hindenburg is a short-seller, so they were interested in seeing Nikola’s stock price decline. (Photo Source: Twitter @HindenburgRes).

The company started trading on June 4th, after a reverse merger with VectoIQ. VectoIQ is a publicly-traded special purpose acquisition organization led by Stephen Girsky, the former Vice Chairman of General Motors. Before the Hindenburg report, Nikola was performing well in the stock market. A CNBC article stated that shares of Nikola Corporation increased by 20% at the end of the month. According to the closing price, Nikola was valued at almost $28.8 billion, making the corporation more valuable than Ford. However, Nikola’s stock market surge stemmed from Milton’s announcement of the company’s new battery-electric fuel-cell truck, the Badger. He followed his announcement confirming the company’s partnership with General Motors, a necessary move to get the new truck to market. Nikola did not anticipate to generate income until 2021, but investors were willing to provide a hefty sum for promising vehicles.

Despite the incident that led to his resignation, analysts think Milton’s exodus is a positive and necessary step for the progression of both Nikola and General Motors. Whether the motive for resigning was personal or strictly business, with Milton absent there will be less negative publicity.

What does this mean for Trevor Milton? Along with his resignation, he agreed to relinquish $166 million of equity and a two-year $20 million consulting contract. However, Milton gets to possess $3.1 billion in stock due to a recently finalized separation agreement. He agreed to assist the corporation as an unpaid consultant, but his role in company operations and decision-making are paused for at least three years. In the aftermath of Milton’s resignation, Nikola’s shares decreased significantly in premarket trading, opening Monday, September 21st, at $24.97, the lowest opening price since the company went public in June. It ended the day, closing down 19% at $27.58. As he continues to defend himself against the Hindenburg Research report, Milton’s legal expenses are paid for by Nikola as long as they receive copies of evidence.

With Milton out of the picture, Stephen Girsky has been appointed chairman of the board. General Motors’ main priority is to plan production of the battery-powered Badger truck starting late 2021 or early 2022, ultimately continuing the partnership with Nikola. Although General Motors bears the responsibility for its creation, Nikola will remain in charge of marketing and selling the product upon its release. Because Nikola lacks the cushion of intellectual property and revenue, they heavily rely on the investor’s contribution through the stock market. Nikola’s tarnished reputation requires damage control in order to maintain enough revenue until the Badger is released.

UPDATE: Now that time has passed from Nikola’s public fraud incident, the aftermath has unraveled. As of Monday, November 30th, 2020, General Motors decided to remove themselves from their deal with Nikola, thus relinquishing their $11 million equity stake. Because Nikola failed to live up to their “fast-paced” evolution of electric and hybrid vehicles, General Motors believed it was in their best interest to maintain distance for their future business ventures. Since the manufacture of Nikola’s hydrogen-powered Badger pickup truck relied on a partnership with an automaker, the vehicle’s production has been paused. According to The Verge, the two companies will cooperate to bring, “GM’s Hydrotec fuel-cell technology into Nikola’s Class 7 and Class 8 zero-emission semi-trucks for the medium- and long-haul trucking sectors.” With Nikola partly out of the picture, General Motors can focus on their multi-billion-dollar pursuit for a future involving all-electric vehicles. This requires the automaker to invest $2.2 billion to reconfigure their vehicle assembly plant and create the development process for its modular battery-electric platform, Ultium. They announced last week their $2.2 billion electrification investment will become $27 billion through 2025.  

UPDATE – 07/29/2021

We sort of knew it was coming. The grand jury had been convened. Mr. Milton had a lot of very public statements that were likely false or misleading. So, it was no surprise today when the grand jury indicted him on three counts of fraud. Here’s an update on the matter from CNBC.

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Elizabeth Holmes Fraud Trial: Mental Disease & Defect Defense

on September 29, 2020

Before Nikola and the Trevor Milton scandal, there was a prominent blood-testing startup called Theranos. Its founder, Elizabeth Holmes, currently faces a criminal fraud trial.

If you’ve been tuning into business news recently, the latest scandal with Nikola, a electric-powered truck manufacturer, and its founder, Trevor Milton, is no surprise to you.

For those who have not been following along, a quick summary is as follows: Nikola (NKLA) recently became a publicly traded company alleging they had hydrogen fuel cell (battery) technology that would revolutionize the trucking business. The stock did well after IPO. Nikola then did a multi-billion dollar deal with General Motors. The stock went higher. A few days after the GM deal, a short-seller released a report that accused them of a being an intricately constructed fraud. The founder, Trevor Milton, contested the accusations on social media and asked for time so he could rebut all of the allegations. Within a couple of days he went silent, was removed as executive chairman, and deactivated his social media accounts. It has been widely reported that both the SEC and DOJ are conducting investigations related to his actions and claims as founder and executive chairman.

I share that story because some news agencies have suggested Trevor Milton’s story is similar to that of Theranos founder and CEO, Elizabeth Holmes. Ms. Holmes is now facing a criminal fraud trial and she is the focus of our our post today. Stay tuned next week for some further discussion on the issues surrounding Nikola.

Background:

Elizabeth Holmes founded a privately held biotechnology company called Theranos. The company intended to revolutionize blood tests, with just a drop of blood. No more needles and vials, just a small drop of blood, and the tests results would be available rapidly. Ultimately, they failed to deliver tangible results and led consumers to believe false promises. After receiving more than $700 million in private investment, the company began falling apart.

In Spring 2018, Holmes was charged with fraud by the SEC, as reported by Bloomberg. This being a civil action, Holmes settled it without admitting any of the allegations. The settlement required her to relinquish her shares to the company and abstain from being an officer or director of a public company for a period of 10 years. There was also a fine, according to Barron’s. To the best of my recollection, Ms. Holme’s settled with the SEC on the same day she was charged.

In the Summer of 2018, the US Attorney’s office filed charges against Holmes’ for conspiracy and wire fraud, as reported by CNN. This criminal indictment is the inspiration for this blog post.

For more than 2 years, we’ve followed the developments in the criminal prosecution of Elizabeth Holmes, wondering if it would lead us to an interesting analysis from an expert witness perspective. In September of 2020, I found this article from the New York Daily News. It seems Ms. Holmes is preparing for the use of a “mental disease or defect” defense.

More specifically, the article from the New York Daily News, indicated the judge had assigned a neuropsychologist and psychiatrist to conduct a two-day, 14 hour evaluation of Ms. Holmes. Additionally, this evaluation is to be recorded. Now, I had never heard of psychological evaluation being this long and I worked in the mental health field for years before joining Experts.com.

To the best of my knowledge, I had not heard about the “mental disease or defect” defense since law school. I remembered it as a mitigating factor to a crime. Something we learned about when we learned about defenses and factors related to defenses.

So, I did what I usually do with these blog posts, and reached out to the experts. This time, I thought it would be good to get insights from a federal public defender and a psychiatrist.

First, let’s see get a view of the legal opinion…

Analysis from Federal Defense Attorney, Diego Alcalá-Laboy:

Diego Alcalá-Laboy is a criminal defense attorney with his own practice Defensoria Legal, LLC, in Puerto Rico, where he represents federal criminal defendants and advises startups. He is also an adjunct professor at the Inter-American University, School of Law and teaches the Federal Evidence and Federal Criminal Procedure courses at the University of Puerto Rico Law School’s Federal Bar Review.

Nick Rishwain: Why would one use a defense of “mental disease” and what impact might it have on the case?

Diego Alcala: A prosecutor must prove that a defendant intended to commit an act (mens rea), and that he committed the act (actus rea). And most crimes require that the defendant acted intelligently, knowingly, or willfully, and on some occasions recklessly or negligently. The type of “mens rea” a crime requires is defined by Congress and the interpretations given by the courts. On some occasions, an offense may not even require a mens rea, such as with strict liability offenses.

Crimes may have different elements, and a prosecutor may have to prove that the defendant had the required mens rea to commit each element of the offense. If the prosecutor cannot prove this, the defendant may be found not guilty.

Congress also recognized that a defendant may show that because of a medical defect he was unable to appreciate the nature and quality of his or her acts because of a severe mental disease or defect. After the John Hinkley trial, Congress amended its statutes and eliminated the affirmative defense of diminished capacity but allowed a defendant the possibility to attack an element of an offense because of a mental condition.

This is a lot harder than it sounds. The Courts are the gatekeepers of the any scientific testimony intended to be presented at trial. Therefore, whenever a defense of mental defect is offered by a defendant, the Court must ensure that the evidence offered is grounded in sufficient scientific support. This scientific evidence then must be scientifically sound and must also show that the medical condition negates mens rea of an element of the offense. So, a defense of mental defect, if grounded on scientific basis, and shows that it negates an element of the charged crime, will clear the defendant from a particular case.

NR: Have you ever seen a “mental disease” defense used in a criminal fraud matter?

DA: I have never seen a mental disease defense presented before. But I did find some cases where the defense tried to introduce this type of evidence but was ruled inadmissible because it did not satisfy the Court that the proffered evidence: a) was based on sound scientific principles, or b) even if it was based on sound principles, it failed to negate mens rea for the element(s) of the offense. In fraud cases, a defendant is accused of committing some type of false representation. It follows that the evidence of mental disease must show that if his/her medical condition can be logically connected to a subjective belief that his/her assertions were not false, baseless, or reckless vis-a-vis the truth.[1] I have not found a fraud case in which the defense has been able to overcome this burden.

NR: If it is established that Elizabeth Holmes is suffering from “mental disease,” can she still be held criminally liable for her actions?

DA: If a defendant presents a successful mental disease defense, the federal law states that she will be found not guilty. But a finding of not guilty does not necessarily mean that she is free to leave. A determination of not guilty by reason of mental defect will then place a defendant in a “suitable facility” and may be release only after showing that she is no longer a threat.

NR: Does a “mental disease” defense have much success in federal criminal trials?

DA: As mentioned, I have not found a successful case, and primarily the difficulty lies in the very narrow type of cases that may meet the discussed admissibility standard. Even if she can get this evidence into trial, it is still up to the jury to accept this defense.

Now that we have some idea of the application of the law for fraud in federal criminal cases, we need to review the science as outlined by Mr. Alcalá.

Analysis from Forensic Psychiatrist and Expert Witness Dr. Sanjay Adhia:

Dr. Sanjay Adhia is triple-Board-Certified in Forensic Psychiatry, Brain Injury Medicine, and Psychiatry. Dr. Adhia serves as a Psychiatrist and Brain Injury Medicine specialist at TIRR Hermann Memorial, a Rehabilitation and Research hospital treating those with brain and spinal cord injuries and psychiatric elements of their injury and recovery. In private forensic practice he conducts Independent Medical Examinations (IMEs), and renders his opinions by report and testimony. Dr. Adhia serves on the faculty of McGovern Medical School at UTHealth. You can visit his website at: forensicpsychiatrynow.com.

Nick Rishwain: According to the psychiatric community, what constitutes “mental disease” and “mental defect?”

Sanjay Adhia, MD: These are more legal terms rather than actual formal psychiatric definitions.

According to Merriam-Webster, the legal definition of “mental disease” is “an abnormal mental condition that interferes with mental or emotional processes and internal behavioral control and that is not manifest only in repeated criminal or antisocial conduct”.

Examples would include Schizophrenia, Schizoaffective Disorder and Bipolar Disorder which are considered Severe Mental Illness (SMI). These conditions may lead to psychiatric hospitalization. The conditions maybe associated with and loss of touch with reality and a lack of volitional control.

“Mental defect,” on the other hand, is defined by Merriam-Webster as a “an abnormal mental condition (as mental retardation) that may be of a more fixed nature than a mental disease”.   “Fixed” disorders would include Intellectual Developmental Disorder (IDD; formerly known as mental retardation), Autism and Brain Injury. According to this definition, Antisocial Personality Disorder (ASPD) would be excluded. ASPD is marked by a tendency to lie, break laws, and act impulsively. It shares some features with psychopathy or sociopathy. A number of states do not permit the use of ASPD in the insanity defense.[2] Allowing ASPD would have unintended repercussions. For example, it could potentially permit a defendant like Ted Bundy or Jeffrey Dahmer to avoid prison.

NR: In the court order, it limits the evaluation of Ms. Holmes to a 14 hour, 2-day, psychiatric examination. Is this out of the ordinary in a criminal matter?

SA: There is a wide range of exam times in criminal cases. It would depend on a variety of factors including the type of case, the jurisdiction, the funding available and the severity of the charge. Assessment time in a misdemeanor will not be identical to a capital case. Ms. Holmes’ case is not a capital case, but it helps to understand differences in how long the examination might take. The exam time in a Competency to Stand Trial for a misdemeanor trespassing case would likely be under two hours. I have seen some examiners spend 30 minutes for the interview in such cases. The other extreme would be Capital cases which could go over 8 hours or several days; this is especially true if neurocognitive testing is required, which can take an entire day.

Again, in a capital case the threshold and the stakes are very high—especially in death penalty cases that often go to the appeals court.

In misdemeanor cases, you may have a single mental health expert and the findings may be accepted without the need for an opposing expert. In Capital cases, the defense itself may retain several mental health and other medical experts (i.e. Fetal Alcohol Syndrome experts). In the Holmes case, the 14 hours is to be shared between a forensic neuropsychologist and a forensic psychiatrist.

As it is a high-profile case, it is possible that the court may allow additional funds or there maybe a willingness of the expert to work within a budget.

It is my experience that the examination in insanity cases take more time than other types of cases as you have to elicit a detailed account of the crime from the defendant and then determine the mental state at a time in the past and consider malingering (lying for secondary gain—like a lesser sentence). I suspect in the Holmes case, it is likely the charges are not limited to one circumscribed incident so it could take additional time. It is worth noting that time spent reviewing records and preparing a report could exceed twenty hours or more.

NR: What information might you need to establish or rebut an insanity defense?

SA: In addition to interviewing the defendant, it would be helpful to review medical records, legal records along with police records and videos. I often will interview collateral informants as well. In Ms. Holmes’s case there maybe, media accounts, if admissible, as well as financial records and corporate documents. Of course, an expert would review the other expert witness reports. Records in a violent crime could include an autopsy, or blood splatter expert reports, for example. In the Holmes case, there may be a forensic accounting or fraud expert report.  Other sources of data could include polygraph testing, school records and employment records.

NR: In the Holmes case, the defense has retained a trauma expert. Is it common to successfully assert an insanity defense in cases of PTSD?

SA: Insanity defenses are more commonly associated with other diagnoses that are considered to be more severe forms of mental illness such as schizophrenia, bipolar disorder and IDD because they have a different impact on decision-making and regulating behavior. Although many individuals with PTSD do suffer with severe symptoms, they are generally able to maintain awareness of the nature of their acts and appreciate the wrongfulness of such acts. In jurisdictions that allow for the volitional prong, individuals with PTSD are generally considered to be able to behave lawfully. Of course, there are cases where PTSD is successfully asserted as an insanity defense.[3] In cases where the defense attorney realizes the PTSD does not lend itself for an insanity defense, they may successfully utilize it for sentence mitigation.

[1] United States v. Bennett, 29 F. Supp. 2d 236 (E.D.Pa. 1997), aff’d 161 F.3d 171, 183 (3d Cir.1998), cert. denied, 528 U.S. 819, 120 S. Ct. 61, 145 L. Ed. 2d 53 (1999)

[2]Does A Psychopath Who Kills Get to Use the Insanity Defense? NPR, 8/3/16, by NATALIE JACEWICZ

[3]PTSD as a Criminal Defense: A Review of Case Law by Omri Berger, Dale E. McNiel and Renée L. Binder; Journal of the American Academy of Psychiatry and the Law Online December 2012, 40 (4) 509-521;

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Trump Lawyer Michael Cohen’s Home and Office Searched by Feds: Attorney-Client Privilege?

on April 10, 2018

Yesterday, news broke about the FBI raiding the home and office of longtime Donald Trump attorney, Michael Cohen. All the major news outlets and talking heads are discussing the matter. Naturally, I felt I should join in and add some food for thought from the expert witness perspective. Assuming the case against Michael Cohen goes to trial, there are likely to be a variety of experts called to opine on different issues. At the time of this writing, reports indicate the federal government is investigating Mr. Cohen for both bank fraud and wire fraud.

Here is what we have learned since yesterday. According to NBC News:

“On Monday, the FBI raided the law office of Michael Cohen, President Donald Trump’s personal lawyer. They were seeking information about a $130,000 payment the attorney says he personally made to adult film star Stormy Daniels days before the 2016 election, sources told NBC News.

The search warrants were sought and executed by FBI agents and federal prosecutors in New York in coordination with special counsel Robert Mueller’s team after an initial referral from Mueller’s office.”

We have further discovered that Special Counsel Robert Mueller would have to consult with Deputy Attorney General Rod Rosenstein if his investigation discovered evidence unrelated to Russian interference in the US election. If such information was discovered, Rosenstein would then have to decide to expand the scope of Mueller’s investigation or refer the new investigation to another US Attorney’s office. It appears the Cohen investigation was referred to the US Attorney’s office for the Southern District of New York.

In essence, search and seizure of a lawyers office, where that lawyer maintains protected attorney-client communications, had to go near the top of the Justice Department. Thereafter, a warrant had to be approved by a federal judge, before the FBI could conduct the raid and seize these protected communications (among other evidence).

What about attorney-client privilege?

We should start with a simple definition of the attorney-client privilege. Here is a definition from Nolo.com: “The attorney-client privilege is a rule that preserves the confidentiality of communications between lawyers and clients. Under that rule, attorneys may not divulge their clients’ secrets, nor may others force them to.”

Finding the violation of attorney-client privilege a little disconcerting (note, I am not addressing the possible crime-fraud exception to the rule), I reached out to one of our legal and judicial ethics experts for comment. Experts.com member, Mark Harrison, Esq., is an Arizona-based civil and appellate litigator at the firm of Osborn Maledon, PA. He has extensive experience litigating and testifying in cases involving legal malpractice, legal ethics, and judicial ethics.

My request of Mr. Harrison was as follows, “Do you see any issues arising from this seizure related to fiduciary duties, attorney-client privilege, judicial ethics, or other items?”

Mr. Harrison provided me with a rather thorough explanation based on available information. Details about the subpoena or the documents seeking the subpoena have not been reported at this time. I have included several pertinent comments from Mr. Harrison, below:

“As I am sure you are aware, in order to get a subpoena issued in this situation the US Attorney had to satisfy a magistrate judge or a federal district judge that there was good cause for the issuance of the subpoena.

The potentially dicey ethics aspect involved in a situation of this kind is the risk that confidential client information – other than the information clearly covered by the subpoena – is inadvertently or unintentionally taken by the FBI officers executing the subpoena.”

According to news reports, none of us know whether Mr. Cohen has clients other than President Trump. If he does have other clients, Mr. Harrison explained, “the FBI officers executing the subpoena must exercise great care not to compromise the confidentiality afforded the information of other clients in Mr. Cohen’s files or to compromise the confidentiality of information relating to Mr. Trump that is beyond the scope of the subpoena.”

My personal experience in law firms and my professional responsibility education in law school left me with the belief that the attorney-client relationship was sacred. There was good reason for this as it encouraged clients to be open and honest with counsel so counsel could zealously represent their interests. As such, I am hoping the FBI does exercise great care in the review of these files. However, in reviewing documents, the FBI has to view the documents to know whether or not they are “beyond the scope of the subpoena.”

I had one follow up question for Mark Harrison. I asked if he thought a judge would ask an expert on legal ethics to oversee the review of attorney-client files to make sure the federal agents didn’t go beyond the scope of the subpoena? In asking this question, I also realized that the judge is likely to fill that role. However, I was interested to see if additional oversight might be necessary in this case.

Mr. Harrison said “I would be surprised if the judge or magistrate appoints an expert for that purpose unless Cohen’s lawyer seeks that oversight.”

So, based on information available to us at this point, the attorney-client privilege has or will be breached by the federal agents in their review of documents maintained by Mr. Cohen.

It’ll be interesting to see how this case develops and what other expert witnesses may be involved in a future criminal prosecution.

Does this open Michael Cohen to professional malpractice?

Some questions I have for future blog posts are as follows: Does the breach of attorney-client privilege by the FBI, expose Mr. Cohen to malpractice liability? Does the attorney have a duty to conduct himself in a way that would have precluded the FBI or anyone else from seizing all of his files? Does an attorney have a professional responsibility to avoid suspicion that may potentially place confidential client information at risk of being breached? Or, does the issuance of a search warrant protect the attorney from civil liability?

 

 

 

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Paul Manafort Indicted: What expert witnesses can we expect to see from defense and prosecution?

on October 30, 2017

Robert Mueller’s investigation into Russian interference in the US Presidential Election has resulted in the indictment of Paul Manafort and one of his business associates, Rick Gates. It has been reported that a third individual, George Papadopolous, has pleaded guilty for making false statements to the FBI.

None of this is particularly surprising. On Friday we learned the first indictments would be handed down as early as today, and that is exactly what happened. As of this writing, Paul Manafort has turned himself into the FBI’s Washington Field Office.

ABC News reported the list of charges against Mr. Manafort and Mr. Gates. The 12 counts include: “conspiracy against the United States, conspiracy to launder money, serving as an unregistered agent of a foreign principal, false and misleading Foreign Agents Registration Act statements, false statements, and seven counts of failure to file reports of foreign bank and financial accounts.”

We are not writing to take any political side and it should be noted that an indictment does not mean the defendants are guilty of the charges. In fact, they are innocent until proven guilty. Rather, we wanted to discuss the expertise which may come into play in this matter.

What types of expert witnesses can you expect to see?

Forensic Accountants:

Based on the counts enumerated above, it appears the FBI has followed the money. As such, we expect the forthcoming prosecution will hinge on financial transactions and accounting related issues. As stated above, Manafort and Gates were charged with seven counts of failure to file reports of foreign bank and financial accounts in addition to conspiracy to launder money. If money is flowing in and out of multiple bank accounts forensic accountants are going to be needed to analyze the transactions and explain those transactions to the trier of fact.

Money Laundering / Anti-Money Laundering Experts:

Are you surprised to hear this type of expertise exists? Money laundering experts may have a background in forensic accounting, financial fraud, banking, and banking compliance. Again, there was a charge of failure to file reports of foreign bank and financial accounts. Failure to report these accounts might be a compliance issue. The prosecution could argue such a failure was purposeful and intended to evade reporting. Whereas, the defense may contend failure to report was accidental or negligent. We expect to see both sides presenting expert evidence on financial transactions and reporting.

Computer/ Digital Forensics:

Nothing in the counts of the indictment specify a digital forensics expert will be necessary. We are assuming that many of the financial transactions were done electronically and therefore attributing the transactions to the defendants may require electronic discovery and other digital forensic investigation / analysis.

This list should not be viewed as exhaustive. Looking at the counts in the indictment, it appears the upcoming case will be heavily litigated on financial matters. Going forward, we will look for news items related to forensic accounting and inform our readers as we know more.

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FORENSIC ACCOUNTING EXPERT WITNESSES & CONSULTANTS

on January 12, 2011

In the fall-out from the past few years’ financial debacle, there has been no shortage of work for Forensic Accountants.  From the Bernie Madoff scheme to Lehman Brothers and all the financial scams in between, Forensic Accountants have been called upon to apply the concept of accounting to help lawyers adjudicate and resolve the resulting legal problems.

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The Accountant’s Handbook of Fraud & Commercial Crime offers a definition which has been informally accepted by many Forensic Accounting Experts.  The definition is as follows:

“Forensic and investigative accounting is the application of financial skills and an investigative mentality to unresolved issues, conducted within the context of the rules of evidence. As a discipline, it encompasses financial expertise, fraud knowledge, and a strong knowledge and understanding of business reality and the working of the legal system. Its development has been primarily achieved through on-the-job training, as well as experience with investigating officers and legal counsel.”

Forensic Accountants apply their knowledge to many different financial transactions such as

  • Bank Fraud & Embezzlement
  • Bank Operations & Practices
  • Check Kiting
  • Electronic Transactions
  • Embezzlement
  • Money Laundering
  • Payment Processing & Fraud Detection/Prevention
  • Royalty Audits
  • Claims Analysis
  • Determination of Compliance

A Forensic Accountant’s area of expertise is not limited to financial crimes and fraud. They apply their knowledge to civil matters as well. Their services are useful for breach of contract, business valuations and marital / family law.

Considering the amount of financial litigation out there today, whether it be civil or criminal, the Forensic Accountant’s docket is most likely as full as the courts in which they testify.