Yesterday was a big day for sentencings in the real estate foreclosure investigation being handled by the San Francisco office of the Antitrust Division.  According to a DOJ press release, ten individuals were sentenced in the U.S. District Court for the Eastern District of California in Sacramento.  The sentences ranged from probation to eight months in prison and fines up to $1 million, plus restitution:

Anthony B. Ghio of Stockton, California, was sentenced to serve five months in prison and ordered to pay a $1 million criminal fine and $214,544 in restitution to the victims of the crime.

John R. Vanzetti of Stockton, California, was sentenced to serve five months in prison and ordered to pay a $1 million criminal fine and $271,454 in restitution to the victims of the crime.

Theodore B. Hutz of Stockton, California, was sentenced to serve five months in prison and ordered to pay a $250,000 criminal fine and $76,670 in restitution to the victims of the crime.

Richard Northcutt of Stockton, California, was sentenced to serve seven months in prison and ordered to pay a $1 million criminal fine and $614,982 in restitution to the victims of the crime.

Kennen A. Swanger of Alta, California, was sentenced to serve five months in prison and ordered to pay a $5,000 criminal fine.

Wiley C. Chandler of Stockton, California, was sentenced to serve seven months in prison and ordered to pay a $500,000 criminal fine and $614,982 in restitution to the victims of the crime.

Walter Daniel Olmstead of San Francisco, California, was sentenced to serve eight months in prison and ordered to pay a $29,687 in restitution to the victims of the crime.

Gregory L. Jackson of Lodi, California, was sentenced to pay a $150,000 criminal fine and $20,900 in restitution to the victims of the crime.

Robert Rose of Danville, California, was sentenced to pay a $100,000 criminal fine and $24,128 in restitution to the victims of the crime.

Anthony B. Joachim of Stockton, California, was sentenced to pay a $175,000 criminal fine and $94,154 in restitution to the victims of the crime.

The bid rigging schemes appear to fit the typical auction collusion pattern.  The defendants determined ahead of time which bidder (among themselves) would win certain property.  After the rigged public auction,  the ring members held a second private auction.  At this auction, bidding was competitive.  The difference between the public auction price and the private auction price was divided up among the ring members.  The losers, of course, were the banks and homeowners who received depressed prices for property at the public auction.

I did not look through the plea agreements for each individual, but the agreement for defendant Hutz was typical.  Each defendant had pled guilty as far back as 2010 and agreed to cooperate with the Antitrust Division in return for a § 5K1.1 downward departure.  Under his plea agreement, defendant Hutz had a guideline sentencing range  of 12-18 months. He was sentenced to five months. (Plea agreement of Theodore B. Hutz, filed June 24, 2010, available at here.)

B. Stipulations Affecting Guidelines Calculations: The government and the defendant agree that there is no material dispute as to the following Sentencing Guidelines variables and therefore stipulate and agree to the following:

§ 2R1.1(a) Base Offense Level 12
(b) (1) Bid Rigging +1
(b) (2) (A) volume of commerce > $1 million +2
Total 15
(c) (1) Fine 1 – 5% of $6 million
After a two point reduction for acceptance of responsibility, the Guidelines calculation results in an offense level of 13, for a jail term of 18 to 24 months and a fine between $60,000 and $300,000.

The government agrees to recommend at the time of sentencing that the defendant’s sentence of imprisonment be reduced to reflect his substantial assistance to the government in the investigation and prosecution of others, pursuant to U.S.S.G. § 5K1.1.

Two other real estate investors, Andrew B. Katakis and Donald M. Parker, were convicted at trial of bid rigging in March 2014.  At that trial, the jury found W. Theodore Longley, an auctioneer who worked on behalf of various trustee companies to sell foreclosed houses at public auctions in San Joaquin County, not guilty on both counts.

The San Francisco office has several more upcoming real estate auction collusion trials.

Thanks for reading.

The Antitrust Division has announced that three more companies have agreed to plead guilty in the electrolytic capacitor investigation. According to a DOJ press release of August 22, (here) Rubycon Corp, Elna Co, and Holy Stone Holdings Co, have agreed to plead guilty to fixing the prices of electrolytic capacitors sold in the United States and elsewhere.  Rubycon and Elna (Japanese companies) and Holy Stone (Taipei based) will each plead guilty to a single count of price-fixing.  The press release quotes Deputy Assistant Attorney General Brent Snyder of the Justice Department’s Antitrust Division:  “The Antitrust Division has now charged five companies and one individual for their participation in this international price-fixing conspiracy.”

There have been two previous corporate guilty pleas in the investigation.  NEC TOKIN Corp. was sentenced to pay a fine of $13.8 million in January 2016, and Hitachi Chemical was sentenced to pay a fine of $3.8 million in June 2016.  There has only been one individual charged. Takuro Isawa, a former Global Sales General Manager for an unidentified capacitor manufacturer, was indicted in 2015, but is a fugitive.

This is an interesting case from the outside looking in. First, the period of the alleged cartel is exceptionally long. The charging language in each case reads:

From at least as early as September 1997 and continuing until in or about January 2014….conspirators …..knowingly entered into and engaged in a combination and conspiracy to suppress and eliminate competition by fixing prices and rigging bids of certain electrolytic capacitors in the Untied States and elsewhere.

[Read more…]

The above title is from a New York Times article published today.  This quote is from the article:

“Legal experts attribute the decline primarily to the advent of the congressional sentencing guidelines and the increased use of mandatory minimum sentences, which transferred power to prosecutors, and discouraged defendants from going to trial, where, if convicted, they might face harsher sentences.”

And this:

Former Judge John Gleeson, who in March stepped down from the federal bench in Brooklyn to enter private practice, noted in a 2013 court opinion that 81 percent of federal convictions in 1980 were the product of guilty pleas; in one recent year, the figure was 97 percent.

Judge Gleeson wrote that because most pleas are negotiated before a prosecutor prepares a case for trial, the “thin presentation” of evidence needed for indictment “is hardly ever subjected to closer scrutiny by prosecutors, defense counsel, judges or juries.”

“The entire system loses an edge,” he added, “and I have no doubt that the quality of justice in our courthouses has suffered as a result.”

There are many reasons for the unfortunate lack of trials (the extraordinary expense of going to trial, especially in white-collar cases, being one).  But, I agree that unfairly harsh sentencing guidelines often dictate that a defendant plead guilty and get the benefit of a 5K downward departure from a recommended guideline sentencing range for offering “substantial assistance.”

I have written before about why I think the antitrust sentencing guideline in particular is a poor measure of culpability and serves mainly to enhance the government’s bargaining position in inducing pleas to escape the possibility of an irrationally harsh guideline sentence. See Cartel Capers, “The Need To Reform the Antitrust Sentencing Guidelines for Individuals.”  A defendants’ culpability in an antitrust crime is measured principally by the volume of commerce.  While the volume of commerce has some relevance to the culpability of the defendant, the guidelines assign it an overwhelming weight.  A defendant can reach up to a 16 level upward adjustment based on the volume of commerce attributed to that defendant. The disconnect from culpability is more dramatic in the case of a subordinate. The volume of commerce assigned to an individual defendant is the same for the most and least senior/culpable actor in an organization if their participation in the cartel was of the same duration. In other words, the CEO who formed the cartel may have the same volume of commerce adjustment as his subordinate to whom he assigned the task of exchanging prices/volumes with competitors.

Along these lines, I have been contemplating how the guidelines might be changed and have come up with a draft “Shadow Antitrust Guideline.”  No doubt this draft can be improved upon with the input from a broad range of defense lawyers, judges, academics, economists and others.  My basic idea is to recognize, but greatly reduce, the volume of commerce upward adjustment. The draft also delinks the volume of commerce adjustment for a subordinate who plays no role in forming the cartel, but is delegated the task of exchanging prices/market shares, etc. with competitors. Another objective of my draft is to reduce the possibility of approaching the 10 year maximum sentence unless there is some serious aggravating factor relating to culpability such as recidivism, express coercion of a subordinate or competitor, a particularly vulnerable victim or some other unusual aggravating circumstance besides the cartel involving a large amount of commerce. Also, I would like to see some upward adjustment for a CEO or other senior executive who had the authority to institute an antitrust compliance program but did not.

I certainly appreciate all the feedback I get on this subject, either anonymously, as a guest post, or any other way.

Thanks for reading.

In a July 28th post, I reported that United States District Judge Phyllis J. Hamilton ruled that the FBI did not conduct a warrantless search by placing electronic eavesdropping devices outside two courthouses in the San Francisco area to capture conversations of bidders at real estate foreclosure auctions.  See, Cartel Capers, FBI Bugging on Courthouse Steps (Not Very Nice) But Not a Warrantless Search). But, as noted in that post, the same issue was also before a second judge in another upcoming real estate foreclosure auction trial in the same district.  Ten days later US District Judge Charles R. Breyer (brother of Supreme Court Justice Stephen G. Breyer) found that, “The government has utterly failed to justify a warrantless electronic surveillance  program that recorded private conversations spoken in hushed tones by judges, attorneys and court staff.”  The full story by Bob Egelko of the SF Gate can be found here.

The difficulty for the government will now come in establishing that none of the evidence that they will seek to use at trial is the “fruit of the poisonous tree.”  It is simple for the government to agree not to use any of the recordings at trial (as they had already agreed to in the case before Judge Hamilton), but now the prosecution must establish that the evidence that they do seek to use at trial was derived independently from and is “untainted” by any information learned from the recordings. The judge scheduled a status conference for Aug. 10 regarding a taint hearing concerning the recordings.

Warrantless or not, and two judges disagreed on the issue, the bugging of the courthouse steps was clearly overkill and has created an enormous amount of extra work for the resource strained San Francisco office.  This reminds me of a saying of one of my former bosses at DOJ when staff (and/or myself) would plead to be authorized to bring a small case: “There are no small cases.”

More to follow.  Thanks for reading.

Plaintiff Spencer Meyer is litigating a class action lawsuit against Uber for alleged price fixing. Judge Jed Rakoff rejected Uber’s attempt to force the case into arbitration on the basis of an arbitration clause contained in the Terms and Policy section of the agreement.  On July 29th, Judge Rakoff found that the difficulty in finding the arbitration clause in the electronic contract with multiple hyperlinks meant the consumer did not give his assent to the arbitration agreement simply by using the service.

Judge Rakoff based his opinion largely on a decision written for Second Circuit Court of Appeals in 2002, by then-Circuit Judge Sonia Sotomayor who presciently held that “[r]easonably conspicuous notice of the existence of contract terms and unambigious manifestation of assent to those terms by consumers are essential if electronic bargaining is to have integrity and credibility.” Specht v. Netscape Communications Corp., 306 F.3d 17, 35 (2002).  Judge Rakoff concluded, “Applying these principles to the matter at hand, the Court finds that the plaintiff here never agreed to waive his right to a jury trial or to submit to mandatory arbitration.” [Read more…]

United States District Judge Phyllis J. Hamilton has ruled that the FBI did not conduct an illegal search by placing electronic eavesdropping devices outside two courthouses in the San Francisco area to capture conversations of bidders at real estate foreclosure auctions. In the long running northern California real estate auction investigation, the FBI bugged areas around the courthouse entrances without obtaining a search warrant. The recording devices were placed to capture conversations of real estate buyers who might huddle together and collude among themselves to suppress the foreclosed property’s sales price. The FBI placed recording devices in vehicles around the courthouses, in lights boxes near the entrances, in a backpack and other public but hidden places. The FBI was also working with cooperators (i.e. people who had agreed to plead guilty and were cooperating in the investigation) who were wearing wires and “consensually monitoring” conversations with other auction bidders. But, the addition of these audio recordings (and some video) devices was a more aggressive, additional step to gather evidence. [Read more…]

Dear Friends:

The ABA Journal publishes a list of the 100 Best Legal Blogs every year.  The list is based on reader feedback.  If you’d like to see Cartel Capers on the list and you have a moment, please consider nominating the blog for the “Top 100” list.  I would very much appreciate your help.

This is from the announcement:

We’re working on our 10th annual list of the 100 best legal blogs, and we’d like your advice on which blogs you think we should include.

Use the form below to tell us about a blog—not your own—that you read regularly and think other lawyers should know about. (Please note that law blogs in the Blawg 100 Hall of Fame are not eligible for this year’s list.) If there is more than one blog you want to support, feel free to send us additional amici through the form. We may include some of the best comments in our Blawg 100 coverage. But keep your remarks pithy—you have a 500-character limit.

The announcement and link to submit nominations is at: http://www.abajournal.com/blawgs/blawg100_submit/

The deadline for nominations is August 7.  If you nominate the blog, you will be asked for the URL which is www.CartelCapers.com.

As always, thank you for reading.  I appreciate the support and feedback I receive.

Bob Connolly

One of the aspirations of many antitrust/competition lawyers worldwide is to achieve as much convergence as possible among competition authorities in enforcing competition law. Counseling companies and individuals who do business on a worldwide basis on the many differences in competition law can be inefficient, costly and result in less than optimal competition and deterrence of anticompetitive acts.  A series of recent global cartel enforcement actions highlights how individuals responsible for cartel behavior around the world are treated in vastly different way.

The European Commission just announced record cartel fines of $3.2 billion against truck manufacturers. A New York Times article is here and the EC official statement is here.  Despite the clear-cut hard-core cartel activity (and many would say fraud) it appears that no individuals will be held accountable. While there is some collateral penalty in terms of their careers, and the possibility of criminal prosecution by a member state, the brunt of any penalty is clearly borne by the stockholders of the company.  Recently Australia announced its first criminal prosecution for a cartel offense (here).  No individuals were charged in this cartel, but it is a beginning. Only time will tell individuals will eventually be held responsible in Australia, and if so, whether the penalty will include any jail sentence. [Read more…]

On, July 14, 2016 the Second Circuit ruled in a much-anticipated case pitting Microsoft against the Department of Justice. The government sought to compel Microsoft to retrieve a client’s emails located on a server in Dublin, Ireland and produce them in the United States. The emails were sought in connection with a drug trafficking investigation.  The nationality of the individual owner of the email account was not part of the record.  The production was pursuant to the Stored Communication Act (“SCA”), which was passed in 1986 as part of the Electronic Communications Privacy Act to give additional protection to new fangled thing called an email.   The Second Circuit held that, “§ 2703 of the Stored Communications Act does not authorize courts to issue and enforce against U.S.‐based service providers warrants for the seizure of customer e‐mail content that is stored exclusively on foreign servers.” The matter began in late 2013, when the DOJ served Microsoft with a demand under the SCA, seeking all content associated with a specific email account held by Microsoft. Microsoft produced some limited information about the email account that was on a server in the United States but refused to produce records located on a server in Dublin. Microsoft allowed itself to be held in contempt so the Second Circuit would have jurisdiction to consider the matter. The Second Circuit agreed with Microsoft, reversed the lower court and ruled that the company did not have to produce customer emails located on a server outside of the United States. The full opinion can be found here.

The SCA covers electronic documents and gives them a higher degree of protection than ordinary records such as bank records, for example.   If the government’s request under the SCA was considered a subpoena, the documents would have to be produced, because the court can compel the production of documents under the custodians’ control, regardless of where they are held. But, if the SCA was considered a warrant, then the court had to decide whether the SCA had extraterritorial application.

As to the first question, the court found that production under the SCA is akin to a search warrant, not a subpoena. First, a little background from the Court’s opinion:

            “Adopting the government’s view, the magistrate judge denied Microsoft’s motion to quash, resting on the legal conclusion that an SCA warrant is more akin to a subpoena than a warrant, and that a properly served subpoena would compel production of any material, including customer content, so long as it is stored at premises “owned, maintained, controlled, or operated by Microsoft Corporation.” In re Warrant, 15 F. Supp. 3d at 468 (quoting Warrant). The fact that those premises were located abroad was, in the magistrate judge’s view, of no moment. Id. at 472.

Microsoft offers a different conception of the reach of an SCA warrant. It understands such a warrant as more closely resembling a traditional warrant than a subpoena. In its view, a warrant issued under the Act cannot be given effect as to materials stored beyond United States borders, regardless of what may be retrieved electronically from the United States and where the data would be reviewed. To enforce the Warrant as the government proposes would effect an unlawful extraterritorial application of the SCA, it asserts, and would work an unlawful intrusion on the privacy of Microsoft’s customer.”

The Court found that Microsoft had the better of the argument: “The SCA’s legislative history related to its post enactment amendments supports our conclusion that Congress intended to invoke the term “warrant” with all of its traditional, domestic connotations.”

The Second Circuit then decided that the SCA did not have extraterritorial application. “The application of the Act that the government proposes ― interpreting “warrant” to require a service provider to retrieve material from beyond the borders of the United States ―would require us to disregard the presumption against extraterritoriality that the Supreme Court re‐stated and emphasized in Morrison v. National Australian Bank Ltd., 561 U.S. 247 (2010) and, just recently, in RJR Nabisco, Inc. v. European Cmty., 579 U.S. __, 2016 WL 3369423 (June 20, 2016). We are not at liberty to do so.”

Microsoft had also argued that the government had access to the information under the Mutual Legal Assistance Treaty (MLAT), adopted by the United States and Ireland in 2001. While obtaining evidence pursuant to an MLAT can be a slow process, it likely would not have taken as long as it did to litigate this case. According the Guardian, “Indeed, the Irish government had said it would have gladly helped the US Department of Justice obtain the records in question, related to a drug trafficking investigation, but they were not consulted.”

The government may appeal the decision to the Supreme Court. Or perhaps the government will seek a legislative fix. The SCA was passed in the very infancy of email and before even the birth of the World Wide Web. Congress clearly did not have the current IT environment in mind when it passed the SCA.  There are competing interests of: 1) the government not being thwarted in investigations by individuals storing relevant electronic records on foreign servers;  versus 2) the privacy interests of users and the sovereignty of foreign governments who want the right to control access to information within their own jurisdiction. Judge Gerard Lynch wrote in a concurring opinion that he agreed with the interpretation of the statute, but was concerned that by storing data overseas, criminals could keep electronic records outside the reach authorities. He said that a new law must be created that provides balance between law enforcement and the privacy of users.

Thanks for reading.

On June 10, 2016 Judge William Orrick III refused to accept a guilty plea from Trod Ltd, a British company d/b/a Buy 4 Less.  The company did not have a representative at the change of plea hearing but had authorized the company attorney to enter the plea of guilty.  Judge Orrick rescheduled  the hearing for July 7th.  Trod had previously pleaded not guilty but the company had agreed to plead at this hearing to fixing prices for online sales of posters in Amazon’s Marketplace.

This reminded me of a change of plea I was involved in many years ago.  Some judges will accept the plea if the corporate attorney has the proper authorization from the company’s Board of Directors.  But, the  judge in our case, a plea from a Japanese company, required that the company send a representative.  The judge was notorious for having hearings faster than the speed of light, especially something as routine as a corporate change of plea.  But, when the hearing started, the judge had this “Oh No” look on his face when he realized that a translator was going to translate everything the judge said for the corporate representative from Japan.  As  it became clear that the proceeding was going to move along at a snail’s pace, the judge began to say to the translator “You don’t have to translate that.”  “He doesn’t need to know that….”  I imagined myself  being that corporate representative from Japan and not knowing what was going on and perhaps wondering if something had gone awry and I was going to jail.  Fortunately, everything went according to plan.  The plea was accepted, the fine was imposed, and the corporate representative had an uneventful, though bewildering,  glimpse of the US legal system.

Thanks for reading.