MEDIA

May 11, 2012

Discovery and Classified Materials, Proving Loss Causation, Extradition

Published in: New York Law Journal | volume 247

This column reports on several significant, representative decisions handed down recently in the U.S. District Court for the Eastern District of New York. Judge Eric Vitaliano allowed the prosecution to modify its discovery obligations by turning over summaries of classified materials, in a way that protected the government’s interest in national security and the defendant’s interest in material information. Judge Joanna Seybert enjoined enforcement of an invalidated and repealed anti-loitering statute in Suffolk County. Judge Nicholas Garaufis, finding that the government had finally proven loss causation after two earlier tries, ordered defendant in a securities fraud case to pay more than $17 million in restitution. And Magistrate Judge Robert Levy found probable cause to support an extradition to India.

Criminal Discovery

In United States v. Shehadeh, 10 CR 1020 (EDNY, April 17, 2012), Vitaliano granted the government’s motion to withhold certain classified information from discovery and to provide summaries of certain other classified information.

Defendant Abdel Hameed Shehadeh was charged with making material false statements to government agents, in violation of 18 U.S.C. §1001(a)(2). Defendant allegedly went to Pakistan in 2008 to join a violent insurgent group and later lied to the agents about the purposes of the trip.

Pursuant to the Classified Information Procedures Act (CIPA), 18 U.S.C. App. 3 §§1-16, and Fed. R. Crim. P. 16 (d)(1), the government sought relief, ex parte and in camera, from its usual disclosure obligations due to the classified nature of the materials in question. The government’s application required the court, in applying the state secrets privilege, to balance the government’s need to protect national security with the defendant’s need to mount a full defense.

Vitaliano reviewed extensive submissions by the government in camera, including examples of documents it sought to exclude and proposed substitute disclosure. The court also held an ex parte conference with defense counsel to glean insights into the defense strategy and items that could be helpful or material.

Vitaliano agreed with the government that the first category of materials subject to the state secrets privilege would be neither helpful nor material to the defense and could therefore be exempted from disclosure.

The next category consisted of materials admittedly relevant and potentially helpful to the defense. As to those items, the government provided both classified summaries as contemplated by CIPA §4 and the complete original source materials for comparison. In response to the court’s request regarding one of the summaries, the government provided additional information and a modification to that summary. In Vitaliano’s view, the proposed summaries, as modified, provide defendant with "all that is helpful or material" while protecting the classified aspects of the source materials.

Loitering Statute

In Jefferson v. Rose, 12 CV 3334 (EDNY, April 23, 2012), Seybert granted a preliminary injunction against continued enforcement by various Suffolk County officials of New York Penal Law §240.35(1), which provided that a person is guilty if he "[l]oiters, remains or wanders about in a public place for the purpose of begging."

The enforceability of the statute was not at issue. Long before plaintiff’s arrest, it had been declared unconstitutional in both federal court, Loper v. N.Y.C. Police Dept., 802 F.Supp. 1029 (S.D.N.Y. 1992), aff’d, 999 F.2d 699 (2d Cir. 1993), and state court, People v. Hoffstead, 28 Misc.3d 16, 905 N.Y.S.2d 736 (App. Term 2010), and it was repealed by the New York State Legislature effective July 30, 2010.

The Suffolk County defendants opposed injunctive relief principally on two grounds.

First, they argued that plaintiff Kevin Jefferson could not show a threat of irreparable harm because the charges against him had been dismissed. But plaintiff had subsequently been threatened with arrest by Suffolk County Police for panhandling on three occasions. As Seybert observed, "[e]ven threats of arrest or being told to ‘move along’ by the police violate Plaintiff’s rights and constitute actual injury." Slip op. 11.

Second, defendants argued that the court should abstain from interfering with state criminal proceedings under the doctrine of Younger v. Harris, 401 U.S. 37 (1971). Younger abstention, however, is not required where "’a state court is engaging in flagrantly unconstitutional acts.’" Since the statute was both unconstitutional and repealed, Younger was no bar to enjoining its enforcement. Slip op. 13-14 (internal citation omitted).

Seybert noted that defendants were "not enjoined from arresting individuals for violating other, valid sections of the Penal Law while panhandling. See, e.g., N.Y. Penal Law §240.20 (disorderly conduct); N.Y. Penal Law §240.26 (harassment in the second degree); N.Y. Penal Law §140.05 (trespass)." Slip op. 14 (emphasis in original).

Restitution

In United States v. Gushlak, 03 CV 833 (EDNY, April 20, 2012), Garaufis ordered defendant to pay $17.5 million in restitution. In a column published Aug. 12, 2011, we discussed an earlier decision in which Garaufis gave the government a third and final chance to prove loss causation and the amounts of each victim’s loss as required under 18 U.S.C. §§3663A and 3664.

Defendant had pleaded guilty to conspiracy to commit securities fraud, admitting to (1) owning over 5 percent of the stock in Global Net; (2) paying kickbacks to brokers in exchange for the brokers’ promises to aggressively push Global Net’s stock so that the price would rise; and (3) selling his stock once the price had risen.

Garaufis had rejected the government’s prior efforts to prove loss causation and the amounts of each victim’s loss because the government had failed to prove that at least some of the investor victims’ economic losses were caused by the fraud and to provide a reasonable estimate of the amount of the loss attributable to the fraud. This time around, the government submitted supporting affidavits that presented details of the fraud and a new expert report.

The affidavits from defendant’s co-conspirators and a federal agent told the story of how Gushlak had pumped up the price of Global Net and then let the price collapse after selling most of his holdings, demonstrating that the cessation of the fraud caused the price to decline. The expert report, using econometric techniques, showed that "during the period of the fraud, the rate of return on Global Net stock was not correlated with the rates of return of competing companies or that of a specialized telecommunications market index, but that after the fraud, Global Net’s rate of return was statistically significantly related to the market index and several of its competitors." Slip op. 9 (emphasis in original). This gave rise to an inference that the fraud had a major effect on Global Net’s stock price.

The expert calculated the loss by taking the "victims’ aggregate trading loss, as accurately calculated in the Government’s second restitution submission, less the aggregate fair market loss." Slip op. 14. Finding that defendant failed to present strong evidence to counter the government’s submission, Garaufis accepted the government’s reasonable estimate of the amount of loss caused by the fraud and ordered Gushlak to pay restitution in the m amount of $17,492,817.45. Slip op. 20.

Extradition

In In the Matter of the Extradition of Monika Kapoor, 11 M 456 (EDNY, April 17, 2012), Levy granted the government’s request for a certificate of extraditability to India.

In April 2010, the Court of the Metropolitan Magistrate in New Delhi, India, issued a warrant for the arrest of Kapoor, an Indian citizen. The U.S. government, acting on behalf of the Indian government, filed a complaint in the Eastern District in May 2011, seeking an arrest warrant and Kapoor’s extradition. In India, Kapoor and her brothers were alleged to have defrauded the Indian government of approximately $679,000 by (1) using forged export documents to obtain Replenishment Licenses from the Indian foreign trade authorities, (2) 14 of which they subsequently sold to another company, (3) which used them to import duty-free gold, causing a loss of duties to the Indian government.

Kapoor allegedly participated in the fraudulent scheme by being the proprietor of the company that submitted the application for six of the licenses, signing the applications and forged documents accompanying them, receiving the licenses at her residence, and facilitating the transmission of the licenses to the purchaser. The formal charges against her included "(1) cheating and dishonestly inducing delivery of property, (2) forgery of valuable security, will, etc., (3) forgery for the purpose of cheating, (4) using as genuine a forged document, and (5) criminal conspiracy in violation of the Indian Penal Code."

Kapoor conceded that the first two prongs of the test for extraditability were met—a valid treaty existed and the crimes charged were covered by that treaty. She argued, however, that the Indian government had not established probable cause. The court denied admission of evidence proposed by Kapoor to challenge probable cause. First, the affidavit in which she contended that her statements to the Indian government were coerced was inappropriate because (1) it would not completely obliterate probable cause; (2) the affidavit had no indicia of reliability; and (3) the facts contained in her proposed recantation set forth the kinds of issues that are best addressed at a trial in India. Second, an expert report on handwriting concluding that it was not Kapoor’s signature on several documents contradicted the government’s evidence, rather than explaining it in an exculpatory way. For this reason, the report was inappropriate for consideration. Slip op. 5-6.

Levy found that the Indian government had met the standard for probable cause by presenting sufficient evidence to justify holding Kapoor to answer each of the charges pending against her. The same standard is used to determine probable cause in extradition proceedings as in federal preliminary hearings, and a request will be granted if the evidence supports a reasonable belief that the extraditee was guilty of the crimes charged. The evidence must be competent and adequate, the rules of evidence do not apply, and hearsay is admissible.

In support of the charge of "Cheating and Dishonestly Inducing Delivery of Property," the government presented documentary evidence that Kapoor "’cheated’ the Indian government by using forged export documents to induce the Indian foreign trade authorities to deliver the Replenishment Licenses to her" and taking part in setting up the business in her name, as well as signing the forged bank certificates of export and realization and other documents, and allowing the licenses to be mailed to her home address. Slip op. 12.

The three forgery offenses were supported by evidence linking Kapoor to the forged documents submitted to the Indian trade authorities. Finally, her statement to the Indian authorities describing "several actions that she took at the request of one or both of her brothers, including setting up Monika Overseas and giving her brother signed sheets of Monika Overseas letterhead," supported probable cause as to the conspiracy charge.

Levy noted that Kapoor raised questions about the reliability of the government’s evidence, such as the lack of direct evidence that she signed any of the forged documents and the absence of any evidence regarding the qualifications of the person who identified her signature on the documents. In addition, the supplemental handwriting opinion, which the court was not permitted to consider, cast further doubt on the reliability of the government’s evidence. These questions could not overcome the government’s showing of probable cause or defeat the extradition request. Slip op. 15.

Harvey M. Stone and Richard H. Dolan are partners at Schlam Stone & Dolan. Bennette D. Kramer, a partner of the firm, assisted in the preparation of the article.

[This article is reprinted with permission from the May 11, 2012, issue of the New York Law Journal. Copyright © 2012 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.]