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Seventh Circuit White Collar Litigation Update – December 2017

Bank Employee Whistleblower Not Entitled to Recovery for FDIC Receiver Claims

United States ex rel. Conner v. Mahajan, No. 17-1162 (Dec. 5, 2017)

Kenneth Connor brought qui tam claims under the False Claims Act, in the government’s name, against the officers and directors of Mutual Bank.  Connor was a bank employee whose job involved reviewing property appraisals.  In that role, he uncovered a scheme by the bank’s principals to obtain inflated appraisals.  One apparent effect of the scheme was to reduce the bank’s FDIC insurance premiums, because premiums are rated, in part, on the value of the appraised collateral held by the bank.  The alleged damages under the False Claims Act included the underpayment to the FDIC of premiums based on those inflated appraisals.  After the government declined to intervene in the case, Connor entered into a lump sum settlement with the defendants – a portion of which was paid to the FDIC and a portion to him as the whistleblower.

Mutual Bank failed in the meantime.  The FDIC stepped into its shoes as receiver and brought a separate case for breach of fiduciary duty against many of the same defendants from Connor’s case.  When the FDIC receiver settled those claims, Connor claimed that he was entitled to yet another bounty from that case.  His two-front approach was first to seek to consolidate the FDIC receiver’s case with his, and, when that failed, to move to intervene in the FDIC receiver’s case.  Both efforts were rebuffed at the district court level:  Connor’s qui tam claims were brought on behalf of the FDIC as a direct victim of the defendants’ misconduct.  In contrast, the FDIC receiver’s claims were brought on behalf of the now-defunct Mutual Bank based on the defendants’ wrongful breaches of duty to the bank, not on behalf of the FDIC itself.  Therefore, Connor was not entitled to a qui tam award for the recovery obtained by the FDIC receiver.  On appeal, the Court held that the doctrine of claim preclusion barred Connor from relitigating the issue in his own case.

No “Manager-Supervisor” Sentencing Enhancement for Isolated Conduct

United States v. Collins, No. 15-1998 (Dec. 12, 2017)

The Sentencing Guidelines provide for a two-level upward adjustment if the defendant was an “organizer, leader, manager, or supervisor in any criminal activity.”  See U.S.S.G. §3B1.1(c).  The defendant was convicted of a series of narcotics offenses.  In one of them, he asked another dealer to assist by delivering the drugs and taking payment.  At sentencing, the court concluded that the aggravating role enhancement applied because the defendant directed the other dealer’s actions.

The Seventh Circuit vacated the sentence, finding the enhancement to be erroneously applied.  Defendant’s “isolated, one-time request to another independent dealer to cover for him on a sale did not make him a supervisor or manager within the meaning of the guideline.”  

This decision may be useful to defense counsel in white collar conspiracy or scheme-to-defraud cases where the client may have given direction to a co-conspirator or co-schemer.  An aggravating role enhancement may be avoided by demonstrating that the client’s instruction to another was an isolated event rather than an essential part of the client’s role in the conspiracy.

No Remedy for Judge’s Violation of Rule 11 Plea Negotiation Bar

Williams v. United States, No. 16-3715 (Jan. 3, 2018) 

Rule 11(c)(1) of the Federal Rules of Criminal Procedure prohibits the trial judge from participating in plea negotiations between the government and the defendant.  The judge in this case failed to abide by that prohibition.  In response to hearing the government’s proposed plea agreement, the judge told the defendant that the deal was “exceedingly fair” and “[o]nly a fool would refuse it.”  Predictably, the defendant took the deal and pleaded guilty.

When the defendant later sought to set aside his guilty plea under Rule 11, the government confessed error and the Seventh Circuit also found that the district court violated the rule.  Yet, the Court held that a violation of the rule does not require the guilty plea to be set aside.  Such a remedy is required only if the violation also amounts to a deprivation of due process.  And that only occurs when the judge’s participation in plea discussions is so “coercive” as to make the defendant’s guilty plea “involuntary.”  Because the defendant could not establish coercion, the Court affirmed the denial of his petition.

But the due process tests of coercion and involuntariness exist independently from Rule 11 under the Fifth Amendment.  The Court’s ruling, therefore, appears to recognize a right without any practical remedy.

Unsworn Venire is Not a Structural Error

United States v. Wiman, No. 16-3929 (Nov. 13, 2017)

Voir dire of prospective jurors is a fundamental right to criminal defendants – essential to ferreting out the biased or unqualified.  Because voir dire relies on the venire-members to be truthful, it is federal practice for the court to require potential jurors to be sworn at the beginning of voir dire.

Here, the district court failed to administer the oath at the commencement of voir dire.  The judge realized his mistake near the end of jury selection and then belatedly administered the oath. On appeal, the Court affirmed the defendant’s conviction, holding that failure to have a sworn venire is not a structural error. Because the Court found the evidence of guilt to be overwhelming, it also held that the non-structural error was harmless.

This article was first published in the December 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.