Freeman Lewis LLP

RECENT DEVELOPMENTS IN WHISTLEBLOWING LAW UNDER SOX AND DODD-FRANK

2011-09-28T08:54:00.000-07:00

By Robert Y. Lewis

On September 14, 2011, the Occupational Safety and Health Administration ordered Bank of America to reinstate Eileen Foster, a former Countrywide senior vice president, and to pay her $930,000 for firing her in retaliation for blowing the whistle on Countrywide’s practice of inflating borrowers’ incomes on mortgage applications. Foster ran Countrywide’s mortgage fraud investigation unit at the time of the Bank of America/Countrywide merger.

In interviews, Foster has said that she became concerned that fraud was being allowed to flourish at Countrywide because honest employees who tried to report wrongdoing were being targeted and fired. In her OSHA complaint she claimed that soon after she reported her concerns up the corporate ladder, the company began an investigation of her. That investigation continued after Bank of America took over Countrywide. Several months later, the Bank fired Foster, saying that she had engaged in “inappropriate and unprofessional conduct” and exercised “poor judgment as a leader.” OSHA rejected the Bank’s explanation for the firing, finding it to be in retaliation for her whistleblowing. The Bank is appealing to the Labor Department’s administrative law judge.

The Foster case highlights the importance, as well as the deficiencies, of the whistleblowing provision of The Sarbanes Oxley Act (SOX) under which Foster obtained relief. The SOX whistleblower law was intended to prevent another Enron and WorldCom, by encouraging insiders to blow the whistle before corporate wrongdoing caused severe harm. No such luck. Several years after passage of SOX, the mortgage-backed securities scandal led to the 2008 financial meltdown, and while a few whistleblowers such as Foster popped up, they were too few and too late to avert the economy’s collapse.

In this E-Update, we discuss the recent significant expansion of whistleblowing law contained in The Dodd-Frank Act of 2010, which Congress enacted in reaction to the 2008 financial crisis, and other developments that we believe will cause an increase in whistleblower litigation in the coming years.

I.          The SOX Whistleblower Provision

SOX, enacted in July 2002, makes it illegal for certain large corporate employers to retaliate against officers, employees, contractors, subcontractors and agents who bring to light fraud against shareholders. 18 U.S.C. § 1514A. The law permits such whistleblowers who believe they have been subject to retaliation to file a complaint with OSHA, and ultimately to obtain judicial review of their complaint. Id. Remedies include reinstatement, back pay and “special damages”, as well as costs, expert witness fees and attorneys’ fees. Id.

II.          Dodd-Frank Expansion of Whistleblower Law

Enacted on July 21, 2010, Dodd-Frank significantly expanded the whistleblower law by (i) strengthening SOX protections of whistleblowers, (ii) expanding those protections to reach more whistleblowers, and (iii) providing significant financial inducements to whistleblowers.

A. Strengthening and Expanding SOX Whistleblower Protection

First, Dodd-Frank strengthened and expanded SOX whistleblower protections.

(1) Extension of Protection to Rating Agency Employees – SOX originally only protected corporate insiders and certain outsiders -- contractors, subcontractors and agents. Recognizing that rating agencies shared part of the blame for the financial collapse by failing timely to downgrade mortgage-backed securities, Dodd-Frank extended whistleblowing protection to rating agency employees.

(2) Lengthening of the Statute of Limitations – Under SOX, a whistleblower had 90 days from the date “on which the violation occurs” to file a complaint with OSHA. 18 U.S.C. §1514A. OSHA had interpreted this statute of limitation’s accrual rule strictly, reading the date “on which to the violation occurs” to be the date the employer takes adverse action, such as firing or demoting the employee.

This created the possibility that an employee would not timely file a complaint with OSHA for retaliation not out of slothfulness, but because she did not learn facts which gave rise to her suspicion of retaliatory motive for the action until after the 90 days had run. That actually happened to a Nordstrom employee, who in May 2005 reported to her supervisor that she believed security vulnerabilities in Nordstrom’s information systems exposed the company to potential SEC violations. Shortly thereafter she received her first negative work-performance review, and in November 2004, was told that Nordstrom was eliminating her job duties and there were no other opportunities for her at the company.

The employee did not file a complaint for retaliation until October 2006. In the complaint she explained that she did not realize her firing was retaliatory until she learned in July and August 2006 from other employees that Nordstrom had lied to her -- her job duties had not been eliminated, but were being performed by others. But the Administrative Law Judge found this explanation for the late filing unavailing under SOX, dismissing the complaint as untimely because it was not filed within 90 days of the firing. In November 2010, the Ninth Circuit affirmed that dismissal. See Coppinger-Martin v. Solis, 627 F.3d 745 (9th Cir. 2010). Reflecting Congress’ concern about cases such as Coppinger-Martin, Dodd-Frank extended the statute of limitations period from 90 to 180 days, and changed the statute of limitations commencement date from the date the violation occurs to the date the employee becomes aware of the violation.

(3) Right to Jury Trial. Under SOX, where OSHA fails to issue a decision on an employee complaint within 180 days of its filing, the aggrieved employee may file a lawsuit in federal court. SOX did not explicitly give the employee the right to a jury trial in such an action, and courts had disagreed on whether the claim was of the sort which the Constitution requires be triable to a jury. Dodd-Frank makes explicit the plaintiff’s right to a jury trial on SOX retaliation claims.

B. Monetary Awards to Those Reporting to the SEC and CFTC

In addition to giving more protection to whistleblowers under SOX, Dodd-Frank sought to encourage whistleblowing to regulatory agencies by offering to individuals who provide original information to the SEC or CFTC monetary awards equal to 10 to 30 percent of civil or criminal monetary sanctions exceeding $1 million, which are obtained using the information. Section 21F of the Securities Exchange Act of 1934 (15 U.S.C. 78a, et seq.). The purpose of this reward program is to “motivate those with inside knowledge to come forward and assist the Government to identify and prosecute persons who have violated securities laws and recover money for victims of financial fraud.” S. Rep. No. 176, 111th Cong., 2d Sess. 110-111 (2010). Unlike the SOX whistleblower protection law, this whistleblower law is not limited to whistleblowers whose information relates to “fraud against shareholders.”

C. New Private Right of Action for Retaliation

Dodd-Frank also created a new private right of action for employees who have suffered retaliation because of their (i) whistleblowing to regulatory agencies or (ii) internal-company disclosures required or protected under SOX. Dodd-Frank § 922. This private cause of action is more robust than that provided by the SOX anti-retaliation provisions, even after Dodd-Frank strengthened it (see discussion above). For instance, here the whistleblower need not exhaust administrative remedies before bringing the retaliation action in federal court, and the remedies include double back pay.

D. New Protection for Employees in the Consumer Financial Products and Services Industry

Dodd-Frank created a new regulatory body known as the Bureau of Consumer Financial Protection tasked with regulating businesses providing consumer financial services and products. Section 1057 of Dodd-Frank created a new cause of action for whistleblowers working in this industry. In particular, the new cause of action is given to employees who blow the whistle on what they reasonably believe to be a violation of any law which falls within the newly created Bureau’s jurisdiction. Remedies include reinstatement, back pay, compensatory damages, attorney’s fees, litigation costs and expert witness fees. If reinstatement is not practicable, front pay may also be awarded.

Significantly, the law contains a burden-shifting provision very favorable to employees: Once the whistleblower has shown by a preponderance of the evidence that whistleblowing was a “contributing factor” to the adverse action by the employer, the burden shifts to the employer to show by “clear and convincing” evidence that it would have taken the adverse action absent the whistleblowing.

Much like the original SOX whistleblowing cause of action for retaliation (see discussion above), this claim is brought first to OSHA and can be removed to federal court if OSHA does not timely issue a ruling.

IV .          OSHA’s Efforts to Improve Whistleblowing Protection

As the above review of whistleblowing law shows, OSHA plays the critical role of conducting the initial review and investigation of many whistleblowing retaliation complaints. Late last year the Government Accountability Office, the Labor Department’s Inspector General, issued several critical Reports of OSHA’s investigation of whistleblowing complaints. The GAO Reports noted numerous procedural deficiencies in OSHA’s investigations, including often failing to obtain a list of suggested witnesses from the complainant or interviewing pertinent witnesses. The Reports also criticized OSHA for not providing its investigators with the legal training concerning the statutes they were supposed to enforce.

The GAO Reports also noted that of the 1,602 complaints resolved in a recent 12 month-period, 71 percent were dismissed or withdrawn, 21 percent were settled for money or reinstatement, and only 2 percent resulted in a decision favorable to the whistleblower.

On August 1, 2011, in response to these critical GAO Reports, OSHA announced measures to improve whistleblower protection. These included:

(i) Restructuring – The Whistleblowing Program will begin reporting directly to the head of OSHA, OSHA hired 25 new investigators, and the Program now has a separate budget line item for better tracking and accountability.

(ii) New Investigations Manual – OSHA issued a new Whistleblowers Investigations Manual, which was last updated in 2003.

(iii) Internal Systems – Data collection systems have been modified and the audit program strengthened to ensure complaints are properly handled on a timely basis.

(iv) Training – OSHA will hold a September 2011 national whistleblower training conference that all investigators must attend.

V.          Conclusion

Because fraud is often difficult to detect until it’s too late to remedy the harm – see Madoff, Enron, Worldcom, and mortgage-backed securities – lawmakers have increasingly sought to protect and encourage whistleblowers (especially those with inside information about corporate financial workings) in hopes that they will ferret out and expose the fraud at an early stage. With monetary incentives and robust legal protections for whistleblowers now in place, time will tell whether whistleblowers, as well as governmental agencies, corporations and the courts, are up to the task.

New York State Supreme Court Retroactively Applies Liquidated Damages Provision of the Wage Theft Prevention Act

2011-09-26T13:29:00.001-07:00

Possible Split Between State and Federal Courts

Means Plaintiffs Might Want to Bring Claims in State Court

On April 8, 2011, the Wage Theft Prevention Act went into effect, amending New York labor law in various ways. Under both federal and state law, a wage-and-hour plaintiff is entitled to damages equal to actual losses sustained, plus “liquated damages”, equal to some percentage of actual damages. As we reported previously, until the passage of the New York State Wage Theft Protection Act, which became effective April 8, 2011, liquidated damages available under New York Labor Law was 25 percent; the WTPA increased this to 100 percent (the same amount of liquidated damages available for claims under the Federal Fair Labor Standards Act).

This change significantly increases the damages available to plaintiffs in actions for unpaid minimum wage and overtime because the statute of limitations for such claims under the New York Labor Law is six years, whereas the statute of limitations for claims brought under the Federal Fair Labor Standards Act is three years. Thus, as of April 8, 2011, Plaintiffs can seek 100 percent liquidated damages going back six years, whereas previously they were limited to 25 percent for any claims brought between three and six years after accrual of the cause of action.

An issue of whether the WTPA’s increase in liquidate damages is retroactive to claims arising before April 8, 2011 has now divided federal and state courts. Justice Jane Solomon of the New York County Supreme Court has ruled that liquidated damages under the WTPA applies retroactively to violations that took place before its effective date of April 8, 2011. Ji v. Belle World Beauty, Inc., No. 603228/2008 (Sup., NY, Decided August 22, 2011). Justice Solomon held that the WTPA should be given retroactive effect because it is a remedial statute, it does not affect any vested interest of the Defendants, and it did not create a new right of recovery.

By contrast, in Wicaksono v. XYZ 48 Corp., 2011 WL 2022644 at note 2 (May 24, 2011, S.D.N.Y. 2011), Judge Lewis A. Kaplan of the United States District Court, Southern District of New York, adopting a Report and Recommendation of Magistrate Judge James C. Francis IV, ruled that the WTPA should not be given retroactive effect. The court reasoned that “‘retroactive operation is not favored by [New York] courts and statutes will not be given such construction unless the language expressly or by necessary implication requires it” (id at note 2, internal citations omitted), and that “[t]here is no indication in the Act itself, nor in the Sponsor's Memorandum or any previous drafts of the Act, that it was intended to have retroactive effect. See 2010 N.Y. Sess. Laws ch. 564; N.Y. Spons. Memo.2010 S.B. 8380; 2009 N.Y. S.B. 8380 (June 27, 2010).” Thus, Judge Kaplan applied the liquidated damages provisions under New York Labor Law as they existed at the time of the defendant's violations.

This split between state and federal courts could be a critical factor for plaintiffs deciding in which court to bring their wage and hour claims. Since current federal court precedent limits 100% liquidated damages to claims arising within three years of the filing of the action, plaintiffs with violations going back more than three years might want to file in state court where they can get 100% liquidated damages going back six years, even where those claims accrued before April 8, 2011.

New York’s Anti-Workplace Abuse Bill: An Unreasonable Burden on Employers?

2011-03-25T08:21:00.001-07:00

As an employment lawyer I am often contacted by individuals who have been fired or disciplined at work. In most cases, these individuals believe that they have been subjected to unfair treatment by their bosses, citing, for example, instances of a boss yelling at them, making inappropriate remarks, excluding them from office events, and other such behavior as evidence that their bosses are “out to get them”.

These situations can be very difficult for an employee. The employee feels mistreated, betrayed, and in many cases, scared for the future. They want to know what steps they can take to protect themselves, and some want revenge against their employer. Often, aggrieved employees want to know if they can sue the employer for subjecting them to unfair treatment.

I respond by telling these employees that employment in New York is generally at-will, with certain crucial exceptions, and that at-will employees can be fired for any reason, so long as it is not an illegal reason, such as a firing motivated by discrimination. I tell them that poor treatment, and even abusive treatment in the workplace is usually not enough to sue. “Unfortunately,” I tell them, “there’s no law against your boss being a jerk.”

That may be about to change. On February 2, 2011, Assemblyman Englebright introduced the anti-workplace abuse bill (Bill No. A04258) in the Labor Committee. A similar bill is expected to be introduced in the State Senate soon. Bill A04258 mirrors the anti-workplace abuse bill that was actually passed by the New York Senate in May of last year, but was effectively killed in the Assembly by the Labor Commission.

If passed, Bill A04258 would hold employers civilly liable for the existence of an “abusive work environment” within any workplace under its control. The statute defines “abusive work environment” as a workplace in which an employee is subjected to abusive conduct that is so severe that is causes physical or psychological harm to such employee….”

“Abusive conduct” is defined as

“conduct, with malice, taken against an employee by an employer or another employee in the workplace, that a reasonable person would find to be hostile, offensive, and unrelated to the employer’s legitimate business interests. In considering whether such conduct is occurring, the trier of fact should weigh the severity, nature and frequency of the conduct. Abusive conduct shall include, but not be limited to, repeated infliction of verbal abuse… verbal or physical conduct that a reasonable person would find threatening, intimidating or humiliating; or the gratuitous sabotage or undermining of an employee’s work performance. A single act shall not constitute abusive conduct, unless the trier of fact finds such act to be especially severe or egregious.”

Assemblyman Englebright’s Bill also forbids “any retaliatory action against any employee alleging a violation of this article.” Remedies include reimbursement for lost wages, reinstatement, attorneys’ fees, and punitive damages.

If passed, the Bill would create a huge burden on employers. Employers would be expected to police the workplace against any conduct that might be considered offensive, and be subject to lawsuits if they fail to do so. Because of the broad definition of “abusive conduct,” employers would be faced with the threat of litigation any time an employee was terminated. Any lawyer would be able to draft a serviceable “abusive work environment” complaint on behalf of a terminated employee using the standard disputes and disagreements that are encountered by anyone in a standard workweek.

There are several concerning aspects of this Bill:

1)    The exceedingly broad definition of “abusive conduct”.

The Bill’s definition of “abusive conduct” is extremely broad, and extremely vague. It includes any action or omission taken with malice that a reasonable person would find to be hostile or offensive. Abusive conduct can be almost anything at all. This makes it difficult or impossible for an employer to dispose of claims on a motion to dismiss – the Bill clearly provides that it is up to the trier of fact (the jury) to determine whether conduct is “abusive conduct”. Under the Bill, an employer would have to go through costly discovery, including depositions and document discovery, before being able to dispose of a potentially frivolous claim for abusive work environment.

2)    The anti-retaliation provision is problematic.

Any bill governing workplace conduct needs a provision prohibiting retaliation. It would be unreasonable to permit employers to fire or harass employees for complaints about illegal behavior. However, this Bill’s anti-retaliation provision is a potential nightmare for employers. The Bill prohibits “abusive conduct” in the workplace, which, as we’ve seen, can be almost any conduct. Does this mean any employee who complains about any potentially offensive conduct is protected against “retaliation”? Can a fired employee bring a lawsuit for retaliation after complaining about conduct he found to be offensive? Any employer wanting to fire or discipline an employee claiming to have been subjected to “offensive” conduct in the workplace will have to think twice about their course of action when faced with possibility of a lawsuit and the uncertainties inherent in litigation. The broad scope of the Bill will allow nearly any well-advised employee to take advantage of its anti-retaliation provision. And there’s little an employer can do about it.

3)    A single act can create a hostile work environment.

Bill A04258 clearly contemplates that an employee can sue an employer for a single act abusive act.   The Bill provides that “a single act shall not constitute abusive conduct, unless the trier of fact finds such act to be especially severe or egregious,” meaning that an especially severe or egregious act is abusive conduct. Whether a single act is sufficiently severe is up to the trier of fact.

4)    The difference between abusive conduct and an actionable abusive work environment is a simple trip to the doctor by an employee

Under Assemblyman Englebright’s Bill, “abusive conduct” is not actionable. An “abusive work environment”, however, is actionable. When does “abusive conduct” become an “abusive work environment? When “abusive conduct” causes physical or psychological harm to an employee. This means that a well-advised employee can create an “abusive work environment” with a simple trip to the doctor and the claim that offensive conduct has caused him or her physical or psychological harm.

While it is clear that workplace abuse is a serious problem, Assemblyman Englebright’s Bill is not the answer. New York state employers are already forced to contend with numerous laws governing how they must pay and treat their employees. Forcing employers insert themselves into office disputes and relationships puts them in an untenable situation. In addition, well-advised employees can take advantage of the Bill’s broad definition of “abusive conduct” to prevent employers from firing or disciplining them. While legislation may ultimately be the way to combat workplace abuse, any anti-workplace abuse statute must be far more narrowly tailored in order to strike the proper balance between protecting employees and giving employers sufficient latitude to conduct their business profitably.

JAMS’ NEW EXPEDITED ARBITRATION RULES: AN OPPORTUNITY FOR COST-EFFECTIVE DISPUTE RESOLUTION

2011-03-10T08:03:00.001-08:00

Since passage of the Federal Arbitration Act in 1924, parties have frequently chosen arbitration over litigation to obtain more cost-effective, prompt and oftentimes confidential resolution of their disputes. In recent years, the arbitration process has increasingly taken on many of the attributes of litigation with extensive discovery, substantial pre-hearing motion practice and lengthy trials. As JAMS’ member Ken Kramer has put it, “Arbitration has lost its way.”

JAMS, one of the largest and most pedigreed private alternative dispute resolution providers, recently issued Optional Expedited Arbitration Procedures which are intended to return arbitration to its original purpose. According to Mr. Kramer, “To bring arbitration back to its roots, JAMS has promulgated new expedited procedures to insure that the parties can resolve their dispute quickly, at a reasonable cost.”

Here is a quick overview and a link to the JAMS Comprehensive Arbitration Rules and Procedures:

As to applicability, the Optional Expedited Arbitration Procedures must either be referenced in the parties’ agreement to arbitrate or later agreed to by the parties. If the latter, the claimant can opt into the Optional Expedited Procedures in the Demand for Arbitration. The respondent has seven days to agree or disagree; if the respondent disagrees, then each party must have a client representative present at the first Preliminary Conference. The two new sections, Rules 16.1 and 16.2, are entitled “Application of Expedited Procedures” and “Where Expedited Procedures are Applicable” http://www.jamsadr.com/rules-comprehensive-arbitration/

The new JAMS rules limit discovery, truncate motion practice and set relatively short deadlines for hearings and resolution.

Document requests (i) are limited to documents “directly relevant” to the matters in dispute or its outcome, (ii) must be reasonably restricted in time frame, subject matter and persons/entities, (iii) must not include broad phraseology, currently used by virtually all litigators as a matter of course, such as “all documents directly or indirectly related to” and (iv) must not include extensive definitions or instructions.

As to e-Discovery, searches are limited to sources used in the ordinary course of business. Absent a showing of compelling necessity, no documents need be produced from back-up servers, tapes or other media. Absent a showing of compelling necessity, production of e-documents need only be provided via generally available technology in a “searchable format” “usable by the requesting party” while “economic and convenient for the producing party,” with generally no metadata. Custodians are limited to those whose electronic documents are likely to contain evidence material to the dispute. The arbitrator has substantial discretion to further limit e-Discovery so that costs relate to the size and nature of the dispute and to engage in cost-shifting.

Depositions are generally limited to one per party. Additional depositions are discouraged and must be justified by the amount in dispute, issue complexity and the strength of the claims and defenses. Where there are expert reports, expert depositions are permitted only by agreement or for good cause shown.

Discovery disputes are to be expedited -- addressed with short letter briefs, “meet and confer” procedures and decision by one arbitrator, even where there is a three member panel.

Dispositive motions are permitted only under limited circumstances.

The timing of the process is limited, with:

·    75 days to complete percipient discovery after the preliminary conference
·    30 more days to complete expert discovery
·    60 days to commence hearings after completing percipient discovery
·    hearings to be held on consecutive days

The Optional Expedited Rules may well help restore arbitration to its original intended goal of a speedy, cost-effective means of resolving disputes, while continuing to provide parties the advantages of enhanced confidentiality and adjudicators with subject matter expertise.

Where appropriate, and if there is an opportunity to craft an arbitration dispute resolution clause, such as in the employment field, or even after a dispute has arisen, serious consideration should be given to utilizing this new procedure.

PEPPER v. UNITED STATES – BACK TO THE FUTURE – THE SUPREME COURT EXPANDS A SENTENCING COURT’S DISCRETION TO THE BENEFIT OF DEFENDANTS

2011-03-10T08:02:00.000-08:00

On March 2, 2011, in Pepper v. United States, 131 S. Ct. 1229 (2011), in yet another blow to the Sentencing Guidelines sentencing regime enacted by Congress in the mid-1980’s, the United States Supreme Court further expanded the discretion accorded to sentencing judges in federal criminal cases. Resolving a split in the circuits, the Court held that on remand for resentencing, a federal sentencing judge may consider evidence of a defendant’s postsentencing rehabilitation notwithstanding a statute prohibiting such consideration. The decision, good news for federal criminal defendants, is the latest in a growing line of cases that are returning federal sentencing to a system, rejected by Congress more than a quarter century ago, which gives trial court judges very broad discretion in deciding both what is relevant and how much weight to give any particular relevant factor at sentencing.

MODERN HISTORY OF FEDERAL SENTENCING – THE SENTENCING REFORM ACT OF 1984

The modern history of federal sentencing starts with the enactment of the Sentencing Reform Act of 1984. Before 1984, federal trial court judges had very broad discretion in meting out punishment. They could consider virtually any factor they found relevant (exceptions being things such as the race, gender, ethnicity, or religion of the defendant) and give it whatever weight they deemed appropriate. Only in the most egregious cases of abuse, were the sentences reversed on appeal.

In the 1970’s and early 1980’s however, widespread concern developed over the great disparity in sentences among districts, and judges within districts. As Justice Alito points out in his partial concurrence/dissent in Pepper, under the pre-Sentencing Reform Act system, “each federal district judge was free to implement his or her individual sentencing philosophy, and therefore the sentence imposed in a particular case often depended heavily on the spin of the wheel that determined the judge to whom the case was assigned.”

The Sentencing Reform Act sought to narrow the disparities by curtailing individual judge’s discretion over sentencing using a Sentencing Guidelines system. The word “Guidelines” was really a misnomer, because the law required judges, absent extraordinary circumstances, to impose a sentence within a rather narrow range of months, based on a list of factors, which included, most prominently, the defendant’s criminal history, the seriousness of the crime committed and the defendant’s role in committing it. Those factors were largely determined by the district court using a preponderance of the evidence standard and liberal evidentiary rules.

DECLARING THE SRA UNCONSTITUTIONAL – UNITED STATES V. BOOKER

Twenty-one years after enactment of the SRA, in United States v. Booker, 543 U.S. 220 (2005), the Supreme Court fundamentally changed the Guidelines sentencing regime. It held that insofar as the Guidelines required a judge to increase a sentence based on facts found by the judge using a preponderance of the evidence standard, they violated the Sixth Amendment right of a criminal defendant to be tried by a jury and to have every element of an offense proved by the Government beyond a reasonable doubt. Id. at 243-44.

For instance, under the pre-Booker Guidelines system, in sentencing a drug defendant, a court would find, using a preponderance of the evidence standard, the quantity of drugs the defendant sold or possessed with intent to distribute. That quantity would then be used, along with other factors the judge determined by a preponderance of the evidence, to establish the Sentencing Guidelines “adjusted offense level”, which would in turn establish the sentencing range.

To remedy this constitutional defect, the Court did not, however, take a direct route, which would be to strike the entire Guidelines sentencing regime or, alternatively, to require that a jury find all sentencing factors beyond a reasonable doubt. Instead, while allowing district court judges (rather than juries) to continue to make findings of fact relevant to sentencing based on a preponderance of the evidence standard (rather than beyond a reasonable doubt), it instructed them to treat the resulting sentencing range as “effectively advisory” (rather than mandatory). Id. at 245.

The contortions the Booker Court used to “save” the Guidelines was subject to criticism for the outset. For example, Michael McConnell (formerly a Tenth Circuit Appellate Court Judge and now a Stanford Law Professor) opined that Booker does “not get high marks for consistency or coherence. . . . The most striking feature of the Booker decision is that the remedy bears no logical relation to the constitutional violation." Michael W. McConnell, The Booker Mess, 83 Denver U. L. Rev. 665, 677 (2006).

EXTENDING BOOKER -- UNITED STATES V. PEPPER

Nonetheless, the Court has reaffirmed and extended Booker on several occasions. In Kimbrough v. United States, 552 U.S. 85, 101 (2007), the Court directed district courts, that after “giv[ing] respectful consideration to the Guidelines,” they should “tailor the sentence in light of other statutory concerns as well.” And in Gall v. United States, 552 U.S. 38 (2007), it instructed that although the “Guidelines should be the starting point and the initial benchmark,” district court may impose sentences with in statutory limits based on appropriate consideration of all of the factors listed in §3553(a), subject to appellate review for “reasonableness.”

In Pepper, the Court considered a district court’s discretion to consider postsentencing rehabilitation of the defendant at resentencing. 18 U.S.C. §3742(g)(2) prohibits a district court on resentencing from imposing a sentence outside the applicable Guidelines except on a ground specifically relied upon in the prior sentencing and affirmed on appeal. Because any postsentencing rehabilitation would necessarily occur after the initial sentencing, the statute precluded consideration of postsentencing rehabilitation.
The defendant Jason Pepper pleaded guilty to conspiring to distribute methamphetamine. After taking into account his substantial assistance to the government, the judge sentenced him to 24 months in prison, which was well below the 97 to 121 month Sentencing Guidelines range. The government appealed, believing the district court erred in giving so much credit for the substantial assistance.

The Court of Appeals, Eight Circuit, agreeing with the government, vacated and remanded for resentencing. On remand, the sentencing judge reduced the amount of credit given for substantial assistance, but made up for the difference by granting Mr. Pepper a downward variance because of his postsentencing rehabilitation, which included successful drug treatment, obtaining good grades at a community college, holding down a job, and reestablishing a relationship with his father after many years of estrangement. The resentencing court then sentenced Mr. Pepper to the same 24 months to which it had originally sentenced him.

The Eighth Circuit again vacated the sentence, finding that postsentencing rehabilitation was an impermissible fact to consider in granting a downward variance. At the second resentencing, a different district court judge further reduced the credit given to Mr. Pepper for his substantial assistance and, per the Circuit’s order, refused to consider postsentencing rehabilitation evidence. It sentenced Mr. Pepper to 65 months. Because in the meantime Mr. Pepper had served his 24 months sentence, he was reincarcerated until the Supreme Court granted certiorari to review the latest, lengthier sentence.

The Pepper Court held section 3742(g)(2) unconstitutional insofar as it precludes a district court on resentencing from considering postsentencing rehabilitation as a ground for reducing the sentence from the applicable Guidelines range. The Booker Court had given district courts broad discretion to sentence outside the applicable Guidelines range to save the Guidelines regime from being unconstitutional. And, the Pepper Court held, by removing a court’s ability to consider postsentencing rehabilitation, section 3742(g)(2) so limits a district court’s discretion to sentence outside the Guidelines range as to suffer the same constitutional infirmity as the entire Guidelines sentencing regime did before Booker. Thus, the Court returned the case for yet another resentencing, with instructions that the district court consider Mr. Pepper’s postsentencing rehabilitation.

Pepper potentially gives a significant advantage to a federal criminal defendant who successfully appeals his sentence over a defendant whose original sentence was correctly determined by the district court. By allowing successful appellants to present evidence of postsentencing rehabilitation that was not available at the time of sentencing, it makes it possible for the district court to impose a sentence below what the court would have imposed in the first sentencing had it sentenced the defendant without reversible error.

DOES PEPPER EVISCERATE THE GUIDELINES?

The question is how much father the Court will go in removing Guidelines constraints on sentencing courts. Pepper struck down Guidelines law prohibiting the consideration of postsentencing rehabilitation evidence as unconstitutional. But what about other provisions of the Guidelines which, by their terms, require or prohibit consideration of certain factors, such as the amount of narcotics sold or the loss caused by fraud. May a court simply ignore such strictures under the rationale of Pepper? And if so, how is that squared with Supreme Court precedent, see , e.g. Gall, requiring the sentencing court to consider and correctly calculate the Guidelines offense level as a first step in meting out punishment?

By Robert Y. Lewis, Partner, Freeman Lewis LLP

GOOD NEWS FOR INVESTORS – FINRA ADOPTS RULE ALLOWING INVESTORS TO CHOOSE AN ALL-PUBLIC ARBITRATION PANEL

2011-02-02T07:44:00.000-08:00

The cause of investor rights was significantly advanced yesterday, February 1, 2011, when the Financial Industry Regulatory Authority, Inc. (“FINRA”) adopted a rule permitting public investors to choose an arbitration panel comprised of all public arbitrators.

Heretofore, in cases involving claims by investors of more than $100,000 against firms or individuals in the securities industry, the panel was comprised of two public arbitrators and one non-public arbitrator. A public arbitrator is one who has no significant ties to the securities industry, broadly defined. Such arbitrators presumably are more sympathetic to the investor. A non-public arbitrator is someone who has significant ties to the industry. For example, someone who is now or has in the past five years worked for a broker or dealer, or a lawyer or accountant who in the last two years has devoted 20 percent or more of his time or received $50,000 or more in revenues from representation of securities industry clients is a non-public arbitrator.

The new rule is based on FINRA’s experience with its Public Arbitrator Pilot Program, under which 14 major securities industry firms agreed to allow a portion of cases to be arbitrated before an All Public Panel. Data released by FINRA in December 2010 on its pilot program suggest that an All Public Panel generally benefits the public investor. For example, the All Public Panels awarded moneys to the investor in 68 percent of the cases, compared to an award rate of 57% and 49% in 2009 and 2010 (through October) respectively for mixed Public/Non-Public Panels.

The Dodd-Frank Wall Street Reform and Consumer Protection Act passed last year by Congress gives the SEC authority to restrict the ability of the security industry to include arbitration clauses in its customer agreements. Were the SEC to exercise this authority, investors would then be given the right in at least some cases to choose litigation over arbitration. That would be a major sea change in the manner in which investor disputes with the securities industry are resolved, dwarfing the change occasioned by this new rule. Stay tuned.

WHY OBAMA HAS HIMSELF TO BLAME FOR LOSING KENNEDY'S VOTE ON OBAMACARE

2011-02-01T08:04:00.000-08:00

Yesterday's Florida federal district court decision striking down Obamacare moves the issue of Obamacare's constitutionality ever closer to a Supreme Court showdown. Increasingly, it looks like the current Court with four liberals, four conservatives and one swinger (Kennedy) will decide the issue within the next year or two. In all likelihood, that means that Justice Kennedy will decide. So the game of predicting Kennedy's vote is now on.

The supporters and critics say the individual mandate is the law's linchpin. The idea is that it will bring more relatively healthy people (primarily young, uninsured people) into insurance pools, thus spreading risk and allowing insurance carriers to take on the added burden of insuring sick people (for example, those with preexisting conditions) without unduly raising premiums. Whatever the merits of this policy decision, the Court will eventually have to focus on a different question -- whether the Constitution grants the federal government the power to force people to buy a product, which is hardly inexpensive, for life.

I believe that Kennedy will vote to strike down the individual mandate, not because I have done an exhaustive survey of his jurisprudence, but because of something really boneheaded President Obama did in his State of Union address last year.

People might recall that the address was given less than a week after the Supremes, in a five to four decision, struck down a portion of the McCain-Feingold campaign finance law passed in 2002, which, among other things, forbade corporations and unions from advertising in favor of a political candidate within 30 days of an election. Justice Kennedy wrote for the majority, holding that that portion of the law violated the First Amendment because it attempted to regulate speech based on the identity of the speaker (corporation vs. individuals).

Obama disagreed with the decision and, hoping to score political points, took the unprecedented step of directly confronting the six Supreme Court Justices who showed him the courtesy of attending the State of the Union address. He asserted that the decision "reversed a century of law" and would “open the floodgates for special interests — including foreign companies — to spend without limit in our elections.” He continued, “I don’t think American elections should be bankrolled by America’s most powerful interests.” He implored Congress to “pass a bill that helps correct some of these problems.”

Now Obama might have thought that such remarks in that forum where he stands literally above both the other two branches of government, would score political points. But he was wrong, not only on substance but even more in his political calculation. Justice Alito could not contain his anger, mouthing the words "not true" for all the world to see as the other Justices sat there stone faced, no doubt stunned.

First, Mr. Obama was wrong in asserting that the decision permitted foreign corporations to intercede in our political campaigns. McCain-Feingold prohibits foreign nationals from directly or indirectly contributing to a federal candidate or a political party or from making any independent political expenditures – and this ban was not overturned by the Supreme Court. In short, it is "not true," as Alito silently said, that Citizens United freed foreign corporations to make independent expenditures in American elections.

Second, Mr. Obama was wrong about overturning 100 years of precedent. As Linda Greenhouse, former NYT Supreme Court reporter, wrote at the time:

"Indeed, Mr. Obama’s description of the holding of the case was imprecise. He said the court had 'reversed a century of law.' The law that Congress enacted in the populist days of the early 20th century prohibited direct corporate contributions to political campaigns. That law was not at issue in the Citizens United case, and is still on the books. Rather, the court struck down a more complicated statute that barred corporations and unions from spending money directly from their treasuries — as opposed to their political action committees — on television advertising to urge a vote for or against a federal candidate in the period immediately before the election. It is true, though, that the majority wrote so broadly about corporate free speech rights as to call into question other limitations as well — although not necessarily the existing ban on direct contributions."

While Mr. Obama's constitutional scholarship was shoddy, his political calculation was even worse. Remember, the author of the Citizens United decision was Kennedy, and he was also in the audience that night. What do you think he thought as the President looked down on him from his perch, and in front of a national television audience impugned his castigated the decision while misrepresenting it?

Now Obamacare, Mr. Obama's signature legislative achievement, faces the supreme test in the Supreme Court. Does anyone believe that Justice Kennedy will be looking to do Obama any favors?

New York Mob Bust -- How Many Innocents Caught in Web?

2011-01-20T07:59:00.000-08:00

This morning, as I write, the the U.S. Attorneys from the two districts in New York City and the FBI are preparing for a news conference at which they will announce the arrest of about 100 alleged mobsters in what is purported to be the largest mafia bust in history. Although this makes for good headlines, such massive law enforcement busts should be looked at askance by anyone concerned about individual rights. Typically such large scale busts end up catching a number of individuals for whom the evidence of guilt is extremely slight, if non-existent. Freeman Lewis LLP has experience, for instance, representing several persons of arab decent or Islamic sounding names who were arrested as "material witnesses" following 9-11. We found that in the hysteria of the moment there was little regard for the rights of these individuals. Any allegation of involvement or knowlege, no material how inherently increible was viewed as a basis for arrest. The government, knowing that it didn't have enough to charge these individuals criminally, used the material witness law to arrest without charging. Although these material witnesses ultimately were set free without charge, it was not before being detained for several weeks.

Lawyers representing individuals arrested in this mafia bust should not hesitate to speak forcefully about the need for a determination of individual guilt or innocence, and warn the courts of a tendency to forget this key prinicple of our criminal justice system where law enforcement seeks to make headlines with group arrests.

Listen to Partner Robert Lewis's Interview on "America's Best Lawyers"

2011-01-14T13:30:00.000-08:00

Listen Here.

THE WAGE THEFT PREVENTION ACT GOES INTO EFFECT APRIL 12, 2011

2011-01-14T11:21:00.000-08:00

On December 13, 2010, Governor Paterson signed the Wage Theft Prevention Act, significantly increasing New York restaurants’ duties to provide information to employees about wages and hours, imposing significant civil penalties for failure to do so, and increasing sanctions for failure to comply with all wage and hour laws. The new law becomes effective April 12, 2011.

Below we summarize the law’s major provisions. Because the new law is complex and needs to be interpreted in light of pre-existing state and federal law, as well as judicial opinions and state and federal Labor Department regulations, a restaurant is well-advised to consult counsel experienced in wage and hour law to avoid significant civil and criminal exposure under the new law.

NOTICE TO EMPLOYEES

SUBSTANCE OF NOTICE:

The Wage Theft Prevention Act requires businesses to notify employees of, among other things:

- the rate of pay and whether payment is by the hour, day, week, salary, piece, commission or other;

- allowances, if any claimed as part of the minimum wage, including tip credit, meal credit, or lodging allowances;

- the regular pay day designated by the employer; and

- the employer's name, address of principal place of business, telephone number; and other information that may be required by the labor commissioner.

TIMING AND LANGUAGE OF NOTICE:

The Wage Theft Prevention Act requires that the above notice be given:

- to all employees upon commencement of employment and to existing employees annually; and

- in both English and the employee's designated language.

PROOF THAT NOTICE WAS GIVEN

The Wage Theft Prevention Act requires employers to obtain a signed and dated written acknowledgment from each employee confirming that the notice was provided.

CIVIL PENALTY FOR VIOLATON OF NOTICE RULES

The Wage Theft Prevention Act provides civil damages of $50 per workweek for failure to give the above notices until proper notice is given, with damages capped at $2,500 per employee, plus costs and attorneys' fees.

WAGE AND HOUR STATEMENT TO EMPLOYEES

CONTENTS OF STATEMENT

- The Wage Theft Prevention Act requires employers to provide employees with a statement whenever an employee is paid, stating, among other information,

- the dates for which the employee is being paid;

- the employee’s rate or rates of pay and the basis thereof;

- whether the employee is being paid by the hour, shift, day, week, salary, piece, commission or otherwise;

- allowances, if any, that the employer claimed as part of the minimum wage;

- the employee’s gross wages; deductions from the employee's wages; overtime hours worked and pay; and

- the employee’s net wages.

CIVIL PENALTY FOR FAILURE TO PROVIDE WAGE AND HOUR STATEMENT

The Wage Theft Prevention Act provides civil damages of $100 per violation for failure to provide the wage and hour statement as required, with damages capped at $2,500 per employee, plus costs and attorneys' fees.

RECORD KEEPING FOR 6 YEARS

- A restaurant must maintain copies of all the above records for six years.

INCREASED LIQUIDATED DAMAGES AND CRIMINAL SANCTIONS

CIVIL

Under pre-existing New York state law, a successful employee-plaintiff is entitled to actual damages proved, plus liquidated damages (that is, an additional recovery) equal to 25% of actual damages. The new law increases liquidated damages to 100% of actual damages unless the employer can show a good faith and reasonable basis for believing that its conduct was legal. The new law also carries increased penalties for employers who retaliate against employees for complaining about conduct that they reasonably believe violates New York’s wage and hour laws, including front pay, back pay, and liquidated damages of up to $10,000.

CRIMINAL

The Wage Theft Protection Act extends the criminal penalties currently applicable to violations of wage and hour laws to violations of the new law. First-time offenders are guilty of a Class-B misdemeanor, with a fine between $500 and $20,000 and/or imprisonment up to one year. Subsequent offenses within six years of the first constitute felonies with significantly higher fines and incarceration terms.

* * * * * *

Freeman Lewis LLP, an associate member of the New York State Restaurant Association, is a law firm that provides wage and hour counseling and represents employers in litigation. Please do not hesitate to call us if you have any questions about the new law or any other wage and hour issue.

Freeman Lewis LLP

228 East 45th Street - 17th Floor

New York, NY 10017

(646) 230-8543

Jennifer Freeman

jfreeman@freemanlewis.com

Robert Y. Lewis

rlewis@freemanlewis.com

Alexander T. Linzer

alinzer@freemanlewis.com

THE CASE AGAINST HEDGE FUNDS IN THE EXPERT-NETWORKING INSIDER TRADING PROBE: WHERE ARE THE TAPES AND WHAT DO THEY CONTAIN?

2011-01-12T14:40:00.000-08:00

Over the past several months the media has been full of stories about the government’s expert-networking probe. The government alleges that hedge funds and money managers paid expert-networking firms large sums to obtain access to “consultants” employed in companies in whose shares the hedge funds were trading. These consultants, who in turn received consulting fees ranging from $350 to $500 per hour from the expert-networking firms, allegedly provided the hedge funds with insider information on which they traded.

This week, a front-page WSJ story entitled “Big Consultant Payouts Hint Insider Probe Will Broaden”, stated that “people familiar with the expert-network industry” say that the large sums of money paid to some consultants charged in the government’s insider-trading case indicate they may have talked with dozens of hedge funds, suggesting the scope of the investigation could widen significantly. To date, federal prosecutors in Manhattan have charged five consultants and two employees of Primary Global Research, an expert-network firm, with insider trading.

Strikingly, even though the hedge funds (and their clients) are presumably the chief beneficiaries of the alleged insider trading, no hedge fund has to date been charged. I believe one possible reason is that proving charges against the hedge funds is more difficult than proving them against the consultants because the hedge funds must be charged as tippees, whose liability is derivative to the consultants and requires substantially more proof. The government has said that it has some taped conversations; its success with the obtaining pleas from or convictions of hedge fund employees will likely depend on the quality of the evidence on those tapes.

THE DIFFICULTY PROVING TIPPEE LIABILITY

Under the “classical” theory of insider trading, a corporate insider is prohibited from trading in the company’s stock based on non-public information, because to do so violates his fiduciary duty to the company’s shareholders who sell or buy without such information. In Dirks v. SEC the Supreme Court expanded the classical theory to reach tippees – those who obtain information from an insider knowing it to be nonpublic. “[A] tippee assumes a fiduciary duty to the shareholders of a corporation not to trade on material nonpublic information only when the insider had breached his fiduciary duty to the shareholders by disclosing the information to the tippee and the tippee knows or should know that there has been a breach.”

Thus, to establish insider trading against the hedge funds as tippees, the government must prove not only that the tippor/consultant violated his fiduciary duty to the company in providing the information, but that the tippee/hedge fund knew that the consultant was breaching his fiduciary duty; that is, it must prove that the hedge fund knew that the information was material and nonpublic. This may not be as easy to prove as it at first blush seems.

If the consultant told the hedge funds he expects earnings to be above analyst projections, that alone does not prove a breach of duty by the consultants, much less knowledge of the breach by the tippee. The consultant may be expressing a hunch based on his experience in the industry, rather than any particular inside knowledge of company financial data. But even if the consultant’s opinion about earnings were based on inside information and the tippor therefore breached his duty to the company in providing it, tippee liability is still not established. The government must also prove that the hedge fund was aware of the breach.

THE IMPORTANCE OF TAPED CONVERSATIONS

To prove tippee liability the government will, in all likelihood, need more than the fact that the tippor disclosed material nonpublic information and the hedge fund traded on it. It will likely need testimony by the consultant/tippor, or even better, a tape recording of the consultant’s conversation with the hedge fund, showing that the consultant made it clear to the hedge fund that the opinion provided was not merely his hunch based on experience, but an opinion grounded in specific inside information. Taped conversations are much more compelling than a cooperator’s testimony because tapes don’t lie or have lapses of memory.

THE GOVERNMENT’S SUCCESS AGAINST HEDGE FUNDS LIKELY DEPENDS ON THE QUALITY OF TAPED EVIDENCE

Based on publicly available information about the probe, it appears that the government, having charged seven people, none of whom worked for hedge funds, is now in the process of trying to squeeze hedge funds and their employees into plead guilty pursuant to a cooperation agreement. I believe that the government’s success in obtaining such forced “cooperation” (and the concomitant guilty pleas or consent decrees) will depend on the quality of the incriminating evidence contained on any taped conversations it has. How clearly does the tape show that the hedge fund knew that the information provided was nonpublic information, that is, only available to company insiders.

In one criminal complaint issued in connection with the expert-networking probe, the government asserted that it possessed a taped conversation between the charged defendant and a cooperating witness. It is not, however, clear how extensive the taping of consensual conversations was, or if the government also has wire tapped conversations.

If the taped evidence is strong, expect many criminal guilty pleas to come from the investigation, including pleas by hedge funds. If, on the other hand, the taped evidence is weak, expect the investigation to fizzle, with a couple of agreements to civil sanctions pursuant to SEC enforcement actions.

Welcome!

2011-01-12T13:18:00.001-08:00

Welcome to the Freeman Lewis LLP blog!