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Seventh Circuit White Collar Litigation Update – June 2017

The Demise of the “Good Faith” Instruction

United States v. Lunn, No. 16-1791 (June 20, 2017)

The defendant’s “good faith” often is the central, if not only, defense available to counsel in a fraud case. The objective facts may not genuinely be in dispute, so it is usually the defendant’s “empty head but honest heart” that counsel is forced to pursue as the prime defense theory. The Seventh Circuit has held time and again that a defendant’s good faith is inconsistent with an intent to defraud. See, e.g., United States v. Mutuc, 349 F.3d 930, 936 (2003). That principle is so ingrained that the Circuit’s pattern criminal jury instructions – like those of most other circuits – include one defining “good faith.” Seventh Circ. Pattern Crim. Jury Inst. No. 6.10. But a district court’s refusal to instruct the jury on the defense of good faith, even when at issue and supported by the facts, appears no longer to be erroneous.

Lunn, an investment advisor, was charged with defrauding a number of investors, most notably Scottie Pippen. His alleged scheme involved forging loan extensions and misappropriating investor funds. Lunn testified at trial about his honest belief that he was authorized to sign those documents for Pippen and that he believed the uses to which he put the proceeds were legitimate. Lunn asked the court to give the jury the pattern instruction on good faith: “If the defendant acted in good faith, then he lacked the intent to defraud.” The court refused, although its reason was not because of lack of evidence to support that defense. Instead, the court opined that it was enough to give the standard elements instruction, including the definition of acting with intent to defraud: “A person acts with intent to defraud if he acts knowingly with the intent to deceive or cheat the victim.”

The Seventh Circuit affirmed, holding that the good faith instruction would have been “redundant” to the intent-to-defraud instruction. Because “intent to defraud” will always be defined in a fraud case, that ruling implies that even if a good faith defense is supported by the facts, an instruction about good faith will never be required. The decision offers no guidance on how the district court should exercise its discretion. Nor does the decision address why there is a pattern instruction for good faith at all if that instruction would always be “redundant” to the definitional instruction for acting with intent to defraud. Indeed, the decision contradicts the pattern’s commentary that the “good faith” instruction “should be used in cases in which the government must prove some form of ‘specific intent,’ such as intent to defraud or willfulness.” The Court instead seems to be saying that a trial court may give, or not give, a good faith instruction based on the judge’s personal preference, rather than on any particularities of the case being tried. The bottom line is that defense counsel may well be stuck with the district court’s personal preference.

Court Criticizes Lapses in “Professionalism” of Trial Judge, Affirms Conviction

United States v. Betts-Gatson, No. 16-2034 (June 20, 2017)

In presiding over defendant’s fraud trial, the district court (Norgle, J.) “did not always meet the high standard of professionalism judges do and should set for ourselves,” according to the Seventh Circuit panel. The Court characterized a number of the district court’s rulings in its tit-for-tat exchanges with defense counsel as “puzzling,” such as preventing defense counsel’s paralegal from sitting at counsel table and by improperly prohibiting counsel from showing documents to refresh or impeach government witnesses. Moreover, “several times, [the judge] extended conflicts with counsel when, at least from the cool remove of an appellate court, it seems it might have been better to let the issue drop until the jury left. Once he made a facial expression, reacting to the defendant’s testimony.”

In the end, the Court found that in contrast to defense counsel’s own “frequent and serious” outbursts, the district court’s lapses were “few and minor.” Because defendant was not deprived of a fair trial, the Court affirmed.

No Sherman Act Violation for Exclusivity in Hospital-Insurer Contracts

Methodist Health Services Corp. v. OSF Healthcare System d/b/a Saint Francis Medical Center, No. 16-3791 (June 9, 2017)

St. Francis Hospital is the largest and most dominant in Peoria, providing the greatest number of services and care in that market. Methodist Hospital is its main competitor. For years, St. Francis had “exclusive” arrangements with insurance companies, such as Blue Cross Blue Shield. Those contracts designated St. Francis as the exclusive in-network provider in Peoria, which meant that more than half of the commercially-insured patients in the area were covered by St. Francis alone. Methodist brought civil claims under the Sherman Act, alleging that St. Francis’s exclusivity provision amounted to an unreasonable restraint on trade.

The Court affirmed summary judgment for St. Francis. It likened the exclusivity provision to requirements contracts in general, which are “common and legal.” Good and justifiable reasons exist for a contract to prescribe that the buyer shall purchase all or substantially all of its requirements from the seller. In this case, there were legitimate justifications for St. Francis to serve as Blue Cross’s sole in-network provider, including its status as the only Level 1 trauma center in the area.

Exclusivity in those circumstances does not suggest anti-competitive conduct. According to the Court, it only suggests that the defendant “offered a better deal” by providing a broader and deeper range of services, and that the plaintiff simply choose not to duplicate those services.

District Court Cannot Reject Credibility Findings by Magistrate Judge without De Novo Hearing

Jackson v. United States, No. 16-2470 (June 16, 2017)

The Court addressed the novel question in this Circuit: In deciding to reject a magistrate judge’s report and recommendation, can the district court rely on its own credibility findings of witnesses who testified only before the magistrate judge?

Jackson filed a Sec. 2255 petition claiming ineffective assistance of counsel. He alleged that his lawyer mistakenly told him that he would be ineligible to receive a reduction under the Fair Sentencing Act if he pleaded guilty. He claimed he went to trial because of that mistaken belief, where he was convicted of drug-related offenses. His post-conviction claim was referred to the magistrate judge for an evidentiary hearing and issuance of a report and recommendation. The magistrate judge heard from three witnesses, including Jackson and his former lawyer. Jackson asserted his lawyer told him that the FSA reduction would not apply if he pleaded guilty; his lawyer testified that he had no such conversation with Jackson and that Jackson always insisted on going to trial. The magistrate concluded that Jackson’s testimony was the more credible and thus found that his lawyer’s assistance was constitutionally deficient. He issued a report recommending that Jackson’s petition be granted.

In reviewing the transcript from the evidentiary hearing before the magistrate, the district court came to a different conclusion. It believed that Jackson’s testimony was “self-serving” and that Jackson was a “hard head who would heed no advice [from his lawyer].” The district court did not conduct any evidentiary proceedings itself and did not, of course, observe the witnesses live.

Under the Federal Magistrates Act (28 U.S.C. § 636), magistrates may conduct hearings and issue proposed findings of fact and recommendations. The district court judge must then make a “de novo determination” as to any part of the report to which objections were made. The Supreme Court has held that the Act does not require the district court to hold a de novo hearing when accepting a magistrate judge’s credibility findings. United States v. Radditz, 447 U.S. 667, 675-76 (1980). But the Supreme Court left open the question of whether a de novo hearing is required for a district court to reject those findings.

Joining the other circuits to have addressed this issue, the Seventh Circuit held that the district court was wrong to reject the magistrate judge’s credibility findings without conducting a de novo hearing. By doing so, the district court “effectively denied the evidentiary hearing” that was ordered. This holding goes beyond the context of post-conviction proceedings. It would apply to any case referred to a magistrate judge to conduct an evidentiary hearing – civil or criminal. A district court in this circuit now cannot reject the credibility findings of the magistrate judge without conducting what in effect would be a retrial on those facts.

Contempt Conviction for “Missing Witness” Argument is Cautionary Tale for Defense Lawyers

United States v. Ogoke (Appeal of: Leonard), No. 16-1297 (June 22, 2017)

Michael Leonard vigorously defended Ogoke in his fraud case – perhaps too vigorously. Ogoke’s co-defendant and alleged co-conspirator Okusanya pleaded guilty before trial and became a government cooperator. The government did not call Okusanya at trial. In closing argument, Leonard focused on the government’s burden of proof and its failure to call Okusanya: “If the government had something from Okusanya to support the idea that [Ogoke] did it, you would have heard from the grand schemer, Mr. Okusanya.” Unfortunately for Leonard, the Court had entered a pre-trial order prohibiting the defense from “commenting on the government’s failure to call any witness” unless it made a prior showing that the witness was particularly within the government’s control. Because Leonard made no showing to that effect, the district court sua sponte charged him with criminal contempt, of which he was convicted following his own trial.

The Court affirmed Leonard’s contempt conviction. Although Leonard claimed that he had forgotten about the order, the Court found sufficient evidence to the contrary. Of particular importance was that Leonard was an experienced defense lawyer who should have known the general rule that defense counsel “may not argue an adverse inference from an opposing party’s failure to call a witness, absent a showing that the witness was available only to that party.” That warning should be heeded by all defense counsel. Particularly in the heat of trial, counsel’s arguments about the government’s failure to meet its burden of proof may come dangerously close to commenting on the government’s failure to adduce particular testimony. Of course, counsel must do their zealous duty – but they should always be aware of where the court may perceive the line to be drawn.

This article was first published in the June 2017 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.