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Seventh Circuit White Collar Litigation Update – May 2018

Former Congressman’s Challenge Under Rulemaking Clause Rejected as Premature 
United States v. Aaron Schock, No. 17-3277 (May 30, 2018)

Forever to be known as the “Downton Abbey” Congressman, Aaron Schock was charged with mail and wire fraud for misusing funds as a U.S. House Member.  Most famously, he lavishly decorated his congressional office in the style of the hit PBS show and then allegedly concealed those expenditures.  Schock moved to dismiss the indictment.  His primary argument was that criminal charges brought by the executive branch to be tried by the judicial branch are prohibited by the Rulemaking Clause of the Constitution, which gives the House of Representatives exclusive authority to determine its own rules.  According to Schock, an Article III judge is prohibited from interpreting ambiguous House rules enacted under that constitutional provision, including those rules that govern when expenses are deemed reimbursable.  

He filed this interlocutory appeal after the district court denied his motion to dismiss.  Although the Seventh Circuit’s opinion raises serious questions about the merits of his argument, it did not reject his appeal for those reasons.  The Court instead held that it was premature.  Even if the Rulemaking Clause might later require a conviction to be vacated, that clause does not provide immunity from having to stand trial in the first place.  Unlike the Speech or Debate Clause, which protects an individual legislator from having to face an indictment at all, the Rulemaking Clause does not provide for a legislator’s personal immunity from trial, but rather establishes the allocation of authority among the branches of government.  The lack of personal immunity meant that an interlocutory appeal was improper.  The Court nevertheless concluded:  “If Schock is convicted, he may assert his Rulemaking Clause arguments on appeal from the final decision.  Similarly, he may argue that the Rule of Lenity prevents conviction if the House rules about reimbursement are genuinely ambiguous as applied to his situation.”

Is There Any Fraud Anymore That Does Not Involve “Sophisticated Means”?
United States v. Redman, No. 17-1357 (April 17, 2018)
United States v. Peterson, No. 17-2062 (May 29, 2018)

In a pair of recent cases, the Court has again rejected challenges to the application of the Guidelines enhancement for the use of “sophisticated means” – continuing the trend in setting a very low bar for when conduct is deemed “sophisticated.”  Each decision focused on the defendant’s creation of false documents as creating the necessary level of sophistication.  In Redman, the defendant’s offense was posing as a psychiatrist, which he accomplished by downloading and printing fake credentials from public websites.  In Peterson, the defendant committed mortgage fraud by providing the bank a letter falsely stating that the funds for the down payment were a gift from the borrower’s aunt.  

The Court held in each of them that the offense went beyond a “simple” fraud because of the use of the false writings.  The fact that those documents were the gravamen of the offenses – they were the fraud, in essence, and no offense could readily have been committed without them – did not convince the Court that application of the sophisticated means enhancement was improper.  Instead, the Court again appears to say that any conduct that goes beyond the simplest, narrowest definition of a hypothetical offense would justify the enhancement.

“Collective” Knowledge Cannot Establish Organizational Liability
Mimms v. CVS Pharmacy, Inc., No. 17-1918 (May 9, 2018)

It is axiomatic that corporations can act only through their agents and can “know” only what their agents know.  Similarly, corporations are liable for criminal offenses undertaken by their officers or employees within the scope of their employment.  Corporate fraud and other organizational offenses typically require that the entity has acted “knowingly.”  But what does it mean for a non-natural person, such as a corporation, to act with knowledge?  If Employee A knows something, is that knowledge imputed to Employee B (and to the corporation) for purposes of her actions, even if Employee B did not have actual knowledge of that fact?

In this civil defamation case, the Court held that the answer is, no.  The plaintiff, Dr. Mimms, is a pain management physician who prescribed narcotics to his patients.  On several occasions, CVS’s pharmacy employees told those patients that they couldn’t fill those scripts because Dr. Mimms either had been to jail or was going to be arrested soon.  Those statements were false, although the employees who made them believed them to be true.  An element of the defamation claim was actual malice, which required proof of knowledge of the falsity.  The issue on appeal was one of collective knowledge:  whether the fact that other employees in CVS knew that Dr. Mimms was not the subject of a criminal investigation was enough to establish CVS’s liability for defamation even though the speakers of the statements did not know those statements to be false.  The Court held that “it is the state of mind of the speaker that is relevant,” and that another employee’s knowledge cannot be imputed to her for purposes of establishing the employer’s liability.  

This civil holding may be relevant in criminal cases where corporate knowledge is a requirement.  For example, in a criminal False Claims Act investigation based on an employee’s misrepresentations to a government agency, the question would be whether that particular employee knew of the falsity or whether the company merely had “collective knowledge” that the representation was false.  It appears that the latter would not be sufficient to satisfy that element of the offense.

Government’s Use of Cell-Site Simulator is OK
United States v. Sanchez-Jara, No. 17-2593 (May 3, 2018) 

Also called a “stingray,” a cell-site simulator is an electronic device used by investigators to locate a subject’s cell phone.  The device acts like a cell tower, sending out signals that prompt cell phones in the vicinity to ping back information identifying themselves.  The information gathered by the stingray only contains the relative location of the cell phone; none of the phone’s contents or other data is revealed.  This technique is used to provide investigators with real-time information on a subject’s location and movements, much like a GPS device attached to the subject’s car.

Defendant challenged the government’s use of the stingray in his case, which was used to locate him and ultimately drugs and guns in his possession.  He argued that the warrant the government obtained was inadequate because it was not sought under the wiretap statutes.  It was instead obtained under 18 U.S.C. §2703(d), which allows for the interception of limited cell-phone information, such as numbers called.  

The Court affirmed.  It found that a warrant under the wiretap statutes was not necessary because the cell-site simulator did not intercept the contents of the cell phone or calls placed on it.  Issuance under §2703(d) was sufficient because the warrant allowed for interception of other cell phone information, including location data.

Defendant’s Physical Presence at Change of Plea is Non-Waivable Requirement
United States v. Bethea, No. 17-3468 (April 26, 2018)

Federal Rule of Criminal Procedure 43(a) states that “the defendant must be present at . . . the initial appearance, the initial arraignment, and the plea.”  Fed.R.Crim.P. 43(a) (emphasis added).  The rule allows for certain exceptions, mainly for sentencing hearings.  Defendant entered into a plea agreement with the government.  Due to serious health issues, he asked to appear by videoconference at his combined change of plea and sentencing hearing.  On appeal, he nevertheless asked for the judgment to be vacated because his plea was not taken in person.

The Court agreed and remanded.  While observing that it would be sensible to allow the district court discretion to handle change of plea hearings by videoconference, particularly when a defendant’s health is at issue and the defendant himself has asked for that accommodation, the Court held that Rule 43 simply doesn’t provide for that flexibility.

This article was first published in the May 2018 issue of the Seventh Circuit White Collar Litigation Update on the 7th Circuit Bar Association’s website.

Loeb & Loeb partner Corey Rubenstein authors this monthly newsletter containing helpful summaries and practice pointers for key Seventh Circuit Court opinions involving civil and criminal white collar matters.