In its first Munibonds trial in 2012, the Antitrust Division convicted three former General Electric executives for rigging bids to suppress interest rates paid to municipalities on funds they raised through bonds and then invested in guaranteed investment contracts until such time as the funds were needed. The indictment charged that the interest rates were rigged on investment agreements ranging “from as short as one month to as long as thirty years.” The three defendants were in jail when the Second Circuit reversed their conviction in a split vote (2-1) on November 26 on statute of limitations grounds. An opinion followed: United States v. Grimm, 738 F.3d 498 (2d Cir 2013). The Antitrust Division sought an en banc hearing, which was denied last Friday in an 8-4 vote.
The case raised the statute of limitations issue because the Antitrust Division was relying on what is often called the “payments theory.” In a road construction case, for example, the bid may be rigged on Day 1 but the indictment returned outside the Sherman Act statute of limitations of five years. The payments on the rigged contract, however, are considered overt acts in furtherance of the conspiracy because the object of the conspiracy is to be paid at the rigged, inflated price. Therefore the statute does not begin to run until the winning conspirator has received its last payment on the rigged contract. Six circuits have endorsed the payments theory and held that conspiracies did not end when the rigged contract was obtained but continued as long as a conspirator made or received a contractual payment. United States v. Anderson, 326 F.3d 1319, 1328 (11th Cir. 2003); United States v. Evans & Assocs. Constr. Co., 839 F.2d 656, 661 (10th Cir. 1988); United States v. N. Improvement Co., 814 F.2d 540, 542 (8th Cir. 1987); United States v. A-A-A Elec. Co., Inc., 788 F.2d 242, 245 (4th Cir. 1986); United States v. Girard, 744 F.2d 1170, 1172-74 (5th Cir. 1984); United States v. Walker, 653 F.2d 1343, 1346-49 (9th Cir. 1981).
The government relied on the payments theory in Grimm. The applicable statutes of limitations were: five years for general fraud, and six years for conspiracy to defraud the United States by violating the internal revenue laws. The overt acts in question were the payments made by GE to the municipalities at suppressed interest rates. Each time such a payment was made the statute of limitations restarted. The government argued that this case fell within the payment theory as set forth in the Second Circuit in United States v. Salmonese, 352 F. 3d 608 (2d Cir. 2003). In Salmonese the Court held that a conspirator’s receipt of anticipated profits from the sale of stripped warrants constituted an “overt act in furtherance of an economically-motivated conspiracy.” 352 F.3d at 616. The Court, in accord with other circuits stated, “where a conspiracy’s purpose is economic enrichment, the jointly undertaken scheme continues through the conspirators’ receipt of ‘their anticipated economic benefits.’” Id. at 615.
It would seem that the government’s payment theory was sound under the holding in Salmonese but the majority in Grimm was clearly troubled by the fact that in the Munibonds context the “payments theory” could extend the statute of limitations for up to thirty years. The majority in Grimm stated:
The government’s position must be that a conspiracy continues so long as a stream of anticipated payments contains an element of profit. But that proves too much. “A conspiracy to corrupt the rent payable on a 99-year ground lease would, under the government’s theory, prolong the overt acts until long after any conspirator or co-conspirator was left to profit, or to plot.
The majority in Grimm found held that Salmonese followed the analysis set out in United States v. Doherty, 867 F.2d 47 (1st Cir. 1989), and that analysis limited the payment theory. In Doherty, police officers conspired to obtain copies of promotional exams, and thereby increased their salary payments, which continued for years after they were increased by means of the fraud. Doherty nevertheless held that the continuing receipt of the ill-gotten salaries did not constitute overt acts, and therefore did not re-start the limitations period. In Salmonese, the Second Circuit referred to Doherty and stated that a conspiracy ends notwithstanding the receipt of anticipated profits “‘where the payoff merely consists of a lengthy, indefinite series of ordinary, typically noncriminal, unilateral actions . . . and there is no evidence that any concerted activity posing the special societal dangers of conspiracy is still taking place.’” Salmonese, 352 F.3d at 616. The Salmonese court went on to list features to describe serial payments that do not constitute overt acts: lengthy, indefinite, ordinary, typically noncriminal and unilateral. Salmonese stated that the list is descriptive rather than exclusive; but generally, overt acts have ended when the conspiracy has completed its influence on an otherwise legitimate course of common dealing that remains ongoing for a prolonged time, without measures of concealment, adjustment or any other corrupt intervention by any conspirator. The majority in Grimm noted that in Salmonese, the sales of the stripped warrants were counted as overt acts because they were completed within ten weeks of the public offering and were “hardly ‘indefinite’ in number or ‘lengthy’ in duration.” Conversely, the majority found that payments that could extend the statute up to thirty years “commands the opposite result” and concluded that “those payments do not constitute overt acts in furtherance of the conspiracy.”
The decision in Grimm was a 2-1 decision with Judge Kearse finding the convictions should have been upheld because the Second Circuit has consistently taken the position that where a conspiracy’s purpose is economic enrichment, the jointly undertaken scheme continues through the conspirators’ receipt of ‘their anticipated economic benefits.'” Salmonese, 352 F.3d at 615 . The decision to not review that case en banc was also a split decision. One of the dissenters stated: “For the reasons stated by Judge Kearse in her dissent from the panel’s decision … I believe that the majority opinion in this case is inconsistent with United States v. Salmonese and that en banc review is appropriate to settle the law of the circuit.”
My Two Cents
I think it is doubtful that the Antitrust Division will seek to appeal the case to the Supreme Court. It is unusual for the Division to deal with conspiracies where the payment theory could lead to a 30-year statute of limitations. The Division will simply indict more quickly or, if necessary, charge a statute with a longer statute of limitations. Federal fraud cases involving banks and financial institutions generally carry 10-year statutes of limitation. Major fraud against the U.S. is subject to a seven-year limit.
I believe the dissent was correct on the law, and as long as GE was receiving interest payments at rates that were rigged to be artificially low, the conspiracy continued. At the same time, it is troubling to think that the Government could bring a case 20 or 30 years after the agreement because affected payment are still being made. But, such a scenario is extremely unlikely. And, if it were to arise, there are other doctrines that could protect the defendant from such an extreme result. For one thing, the government would have a hard time explaining why such a case should not be thrown out on due process grounds for prejudicial prosecutorial delay. The Munibonds investigation was an extremely complicated investigation. I’m not aware of credible allegations that the government delayed the prosecution to gain any advantage or that the defendants’ suffered any prejudice at trial from the delay. The government’s case was based almost entirely on taped conversations and related documents. Of course, waiting so long to have their day in court is a difficult situation for defendants to endure, but in this case there was no evidence of prejudice at trial from lack of memory for the passage of time, loss of witnesses due to death or other possible handicaps. The Division’s use of the payments theory in this case extended the statute by a fairly short period of time, not the extreme case the Second Circuit was concerned about. Concern about an unreasonably long statute of limitations is understandable, but a more balanced approach would be to focus on whether the use of the payments theory to extend the statute of limitations resulted in any prejudice to the defendant in receiving a fair trial.
Another way to deal with unlikely situation where the government is relying on a 20 or 30-year statute of limitations is through application of the withdrawal theory. Withdrawal is a difficult defense to prove and last year, the Supreme Court unanimously held in Smith v. United States, 133 S. Ct. 714 (2103) that the defendant bears the burden to prove the affirmative defense of withdrawal. Merely ceasing activity in furtherance of the conspiracy is not enough, but perhaps in a situation where the court felt the government was abusing the “payments theory” to extend the statute, certain factors related to the passage may be evidence of withdrawal. Retirement, a job in an unrelated industry, a lengthy period of competition at odds with any agreement, no association with other conspirators may, after some point of time, indicate withdrawal. Of course, this would be a fairly indefinite standard, but the one set forth by the Second Circuit in Grimm on the payments theory is also very confusing and in conflict with other circuits and arguably Salmonese. The payments theory is sound law, and unless it is used to actually extend the statute of limitations to an unconscionable/prejudicial degree, or modified by the Supreme Court, it was unwise to use this case to express displeasure of the possibility of a thirty-year statute of limitations.
The government’s payment theory is sound law and its application in Grimm does not seem to raise any apparent unfairness or abuse issues. While I don’t know if this case will be appealed, my suggestion would be that the payment theory should be upheld, and where the Court believes its application has resulted in an unfairness or abuse to the defendant to deal with the prejudice on other grounds.