If the DOJ charges you with the wrong crime, did you actually do anything wrong?
KPMG's David Middendorf and PCAOB's Jeffrey Wada were convicted of wire fraud. Four more pled guilty to similar crimes. Now DOJ says its reading of the law was bad, asks for verdict to be set aside.
The filing, made July 31, 2023, by U.S. Attorney Margaret Graham is here.
The Government concedes that in light of the Department of Justice’s post-Kelly interpretation of “property” in 18 U.S.C. § 1343, as well as this Court’s decision in Blaszczak II, Middendorf’s and Wada’s convictions should be set aside.
16. The Government has determined, in consultation with the Solicitor General’s Office, that the evidence at trial was insufficient to establish that the confidential information at issue in this case constituted “property” under Kelly and Blaszczak II because it had value only in the “‘exercise of regulatory power,’” Blaszczak II, 56 F.4th at 243 (quoting Kelly, 140 S. Ct. at 1568), and not in the government’s “role ‘as property holder,’” Kelly, 140 S. Ct. at 1568 (quoting Cleveland, 531 U.S. at 24).
To be sure, the PCAOB “invested time and resources into [the inspection lists’] creation.” (SPA 18); see also Blaszczak I, 947 F.3d at 33 (recognizing, pre-Kelly, that “CMS does have an economic interest in its confidential predecisional information” because the agency “invests time and resources into generating and maintaining the confidentiality of ” that information, and leaks affect the “efficient use of its limited time and resources”). But in the Department’s view, shaped by Kelly, the time and resources at issue in this case did not constitute “an object of the fraud,” and thus the associated “labor costs could not sustain the conviction[s]” here. Kelly, 140 S. Ct. at 1573.
Thus, the Government concedes that the evidence adduced at trial did not sufficiently distinguish the information at issue here from the predecisional CMS information at issue in Blaszczak to satisfy the “property” requirement of Section 1343. Accordingly, and because each count of conviction required the Government to prove that “property” was an object of the scheme, the Government moves to remand the case to the District Court to permit the Government to dismiss each count of conviction as to Middendorf and Wada.
My source for the filing said that it was likely that the other parties who had pled guilty — David Britt who was deported to his native Australia, Cynthia Holder who actually served jail time, Thomas Whittle who got two years of supervised release, and Brian Sweet who got time served and probation — would now request that their pleas be vacated.
I was kind of surprised that no one picked up my tweet right away or that no other media outlet had apparently written a story on this filing yet.
Finally, at 5 am UK/12 am ET August 3, Stephen Foley’s story came out at the Financial Times:
The DoJ secured criminal convictions from six people in all, three of whom admitted additional charges of conspiracy to defraud the SEC by interfering with the inspection process, as well as the wire fraud charges that have now been called into question.
The applicability of the wire fraud statutes turned on whether defendants were trying to steal “property” from the PCAOB or just affect the outcome of its inspections.
Recent judgments in unrelated cases, including a 2020 Supreme Court ruling, Kelly vs US, had clarified that wire fraud could not be brought against Middendorf and Wada, the DoJ said in a submission earlier this week to an appeals court considering appeals from Middendorf and Wada. The department asked for their case to be sent back to a lower court, where it said it would dismiss the charges.
Then later that morning on August 3, at 9am ET, Dave Micheals at WSJ had a good story that filled out the information on the other cases that led to this conclusion:
Fraud doesn’t mean what it used to. A string of high-profile federal prosecutions are falling apart as courts apply a newly narrowed legal definition of the crime.
The latest case came this week in the prominent “steal the exam” auditing case. Other prosecutions, in the Varsity Blues college-admissions scandal and a hedge-fund trading case involving confidential government data, also were dismissed.
The failed prosecutions are casualties of a Supreme Court decision that threw out the fraud convictions of two political aides to former New Jersey Gov. Chris Christie. That scandal involved a political retribution scheme to cripple a town near the George Washington Bridge with traffic jams. The “Bridgegate” case wasn’t fraud because it didn’t take money or property, the justices found…
Middendorf and other partners at KPMG improperly obtained advance information about which of the firm’s audits would be inspected by the Public Company Accounting Oversight Board. Wada, who prosecutors said was unhappy with how the PCAOB treated him, funneled the tips to KPMG, according to the charges. Four other former KPMG auditors pleaded guilty for their participation in the scheme.
Finally, Amanda Iacone makes an appearance later August 3 at 4:18 ET:
Confidential US audit board inspections plans at the heart of a cheating scandal involving KPMG LLP don’t qualify as property, prosecutors have determined, leading them to drop wire fraud charges against a former partner and a former board staffer.
Federal prosecutors said in a court filing this week that they would seek to dismiss the charges against David Middendorf, who was national managing partner for audit quality at KPMG, and Jeffrey Wada, who was an inspections leader with the Public Company Accounting Oversight Board. The move effectively ends the pair’s appeal of their 2019 convictions…
I have always said that the wire fraud charges were fraught.
In fact, way back when in April of 2017 when KPMG first admitted the scandal, I wrote about the prospects for punishment of the individuals and KPMG.
I said prosecutors should look at another case, USA v. Rohit Bansal for ideas.
If you are surprised by my mention of potential criminal penalties you should not be. This case mirrors the 2014 case where in 2014 a junior Federal Reserve Bank of New York employee leaked “a regulatory gold mine,” according to a New York Times article, to a junior Goldman employee who was a former New York Fed employee himself.
What are they teaching—or not teaching— in the universities these days?
According to a NY Times report, the Fed said the confidential information stolen included reports of bank examinations and other “confidential reports prepared by banking regulators.” Goldman Sachs, the Fed said, illegally used the information in presentations to current and prospective clients “in an effort to solicit business.”
Goldman Sachs, like KPMG, not the New York Fed, or the PCAOB in this case, uncovered the leak. Goldman fired the recipient of the leaked info and an executive who supervised him who they said had “failed to properly escalate” the problem. The New York Fed fired the leaker employee and notified law enforcement agencies.
Rohit Bansal, the Goldman Sachs employee who prosecutors say instigated the theft by his friend Jason Gross, the NY Fed employee, pleaded guilty to a misdemeanor for obtaining about 35 documents on about 20 occasions from his partner in crime. Bansal escaped a jail sentence but was sentenced to two years probation, 300 hours of community service and a $5,000 fine. Gross pleaded guilty to a misdemeanor and was sentenced to a year’s probation.
Goldman paid a $50 million penalty to New York State regulators because its “management failed to effectively supervise” and paid another $36.3 million to the Federal Reserve Board, the central bank authority, because it is “illegal to use or disclose confidential supervisory information without prior approval.”
Joseph Jiampietro, the former managing director at Goldman Sachs’ investment banking division and Bansal’s supervisor, sued Goldman Sachs for failing to pay at least $350,000 in legal fees he incurred defending himself.
In a case of not really a coincidence, Rohit Bansal’s attorney was E. Scott Morvillo.
PCAOB-turned-KPMG partner Brian Sweet’s attorney was Richard Morvillo, E. Scott’s uncle. Richard Morvillo also had some strong opinions about the eventual PCAOB fine for Scott Marcello, the head of KPMG’s audit practice who was mysteriously not charged by the SEC or DOJ. (I can not find anywhere the name of Marcello’s attorney, but would not be surprised to find it was a Morvillo.)
Looks like Rohit Bansal’s conviction is different and can stick.
I did ask E. Scott and Richard, who are now both at Stroock LLP, if they plan to try to get their respective clients’ guilty pleas vacated. I will let you all know if I get an answer.
© Francine McKenna, The Digging Company LLC, 2023