November 13, 2014

New York Law Journal / Written by: Harvey M. Stone, Richard H. Dolan

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 Dora L. Irizarry granted a motion for acquittal on money laundering charges. Judge Nicholas G. Garaufis found a Title VII violation in the hiring procedures of the New York City Fire Department. Magistrate Judge Roanne L. Mann rejected defendant's constitutional challenge to a sentence imposing a fine greater than the collateral forfeiture amount in lieu of an appearance. Judge Frederic Block disagreed with plaintiffs as to the 'relation back' date of an amended complaint. And Judge Arthur D. Spatt ordered disgorgement from Relief Defendants who, though not directly ac-cused of wrongdoing, had received ill-gotten funds from defendants without consideration.

Rule 29 — Money Laundering

In United States v. Roberts, 07 CR 425(S-3) (EDNY, June 25, 2009), Judge Irizarry granted a Rule 29 motion for a judgment of acquittal on counts of money laundering and conspiracy to commit money laundering.

In addition to the two money laundering counts, the indictment charged defendant with cocaine offenses. Count Six alleged that defendant transported money from the United States to Jamaica, knowing that the funds were proceeds of unlawful activity and that such transportation was 'designed in whole or in part . . . to conceal or disguise the nature, the location, the source, the ownership, or the control of the proceeds of the specified unlawful activity, ' in violation of 18 U.S.C. §1956(a)(2)(B)(i). Count Five alleged a conspiracy to commit the same offense.

The government's case-in-chief at this jury trial included the following evidence: Late one evening, by pre-arrangement, a co-conspirator — who later testified at trial — gave defendant a black bag containing money at JFK Airport. Using a belt loader, defendant entered an aircraft set to go to Montego Bay the next morning. Defendant left the aircraft five minutes later without the bag. The co-conspirator admittedly never traveled to Jamaica carrying such money because it was 'too risky.' The coconspirator knew that the money represented 'drug profits' and would be retrieved in Montego Bay to 'pay for the drugs or buy more drugs.'

Judge Irizarry found that the government failed to prove an element of the money laundering counts, to wit, that defendant knew the transportation of funds was 'designed to conceal or disguise the nature, the location, the source, the ownership, or the control' of the funds. See Cuellar v. United States, 128 S. Ct. 1994, 2002 (2008); United States v. Ness, 565 F.2d 73, 77 (2d Cir. 2009). As Judge Irizarry noted, 'a money laundering conviction based on transportation 'requires proof that the purpose — not merely effect — of the transportation was to conceal or disguise a listed attribute' of the transported funds. Ness, 565 F.3d at 77 (quoting Cuellar, 12 S. Ct. at 2003, 2005).' Slip op. 4. Moreover, evidence of 'concealing something to transport it' is not sufficient to prove 'transporting something to conceal it.' The key focus is not 'how' one transports the money but 'why.' Slip op. 5 (citations omitted).

Here, the secretive aspects of the transportation were intended to facilitate the transaction, but secrecy was not necessarily the 'purpose' of the transportation. Slip op. 6.

In short, the government showed 'only an intent to conceal the transportation, not an intent to transport in order to conceal.' There was thus insufficient evidence to support a conviction under Section 1956(a)(2)(B)(i). Slip op. 6- 7.

Disparate Impact

In United States v. The City of New York, 07 CV 2067 (EDNY, July 22, 2009), Judge Garaufis granted summary judgment as to liability on claims by the government, and by certain plaintiff-intervenors, that the hiring procedures of the New York City Fire Department had a disparate impact on minority hiring, in violation of Title VII.

The court noted that the issues before it were different from those in the case involving New Haven firefighters, Ricci v. DeSefano, 129 S. Ct. 2658 (June 29, 2009). Where Ricci concerned a municipality's right to consider race in voiding a test that it argued might subject it to Title VII liability, 'this case presents the entirely separate question of whether Plaintiffs have shown' that the challenged exams 'actually had a disparate impact.' Slip. op. 7 (emphasis in original).

Plaintiffs' claims arose under two different examinations, numbered 7029 and 2043. Candidates who passed these written examinations were permitted to take a physical performance test. The written and physical exam results were then run through a formula, followed by adjustment for factors such as 'legacy,' 'veteran' and 'residency,' to create 'a list of candidates eligible to be appointed to Academy classes in order of rank.' While plaintiffs also successfully challenged aspects of the cut-off scores (Slip op. 78-85) and the rank ordering (Slip op. 85-91), the written examination was central to their claims.

As the court explained, there are two different guidelines under which statistical evidence of disparate treatment is typically assessed. Under the 80 percent (or four-fifths) rule, 'if a minority group performs less than 80% as well as the highest performing group, disparate impact will generally be inferred.' Slip op. 14. Under standard deviation analysis, 'a statistically significant disparity of two standard deviations' may establish a prima facie case of discrimination. Courts will consider both guidelines, and neither is necessarily controlling; whether a disparity is sufficient to establish discrimination is judged on a case-by-case basis. Slip. op. 15.

Exam 7029 ran afoul of both guidelines for black applicants. For Hispanic applicants, it passed the 80 percent rule and failed the standard deviation analysis. Exam 2043 passed the 80 percent rule, and failed the standard deviation analysis, for both categories of applicants. Slip op. 16-19.

The city argued that a fact issue was presented at least as to the three categories in which the challenged exams had met the 80 percent guideline (black applicants under Exam 7029 and Hispanic applicants on both exams). The city relied on Waisome v. Port Auth. Of New York & New Jersey, 948 F.2d 1370 (2d Cir. 1991), which had endorsed a finding that discriminatory impact was unproven by a minority pass rate of 87.2 percent (in excess of the 80 percent threshold). Judge Garaufis distinguished Waisome because it involved a standard deviation of 2.68. Here, the standard deviation analysis showed disparities 'uniformly beyond 3 units of standard deviation and, for many of the analyses performed, drastically beyond that,' Slip op. 34, and plaintiffs' expert testified that these disparities resulted in more than 200 black and Hispanic applicants being denied employment. Slip. op. 17-18. Also, Waisome had merely dismissed summary judgment for defendant, and remanded 'because it found that there had been a showing of disparate impact' by means other than the 80 percent rule. Id.

The court rejected numerous other defenses by the city, including a 'business necessity' defense that it found inapplicable because the tests were insufficiently tailored to identify relevant skills. Slip op. 53-77.

The court did not reach the remedy for the disparate impact violation, or the merits of intervenor-plaintiffs' disparate treatment Title VII claims based on continuing reliance on the examinations despite knowledge of their disparate impact. Slip. op. 93.


In United States v. Pereyra, 09 MJ 198 (EDNY, June 18, 2009), Magistrate Judge Mann held that a sentence greater than the $400 collateral forfeiture amount offered in lieu of appearance on two violations does not impermissibly burden defendant's right to trial.

Following a bench trial before Magistrate Judge Mann, defendant was found guilty of resisting arrest and disorderly conduct, 36 C.F.R. §§ 2.32(a)(1) and 2.34(a)(1), based on an altercation with a National Park Police Officer at Jacob Riis Park in Queens. Defendant had been informed that the collateral forfeiture amount in lieu of an appearance would be $400 for the two violations.

On the eve of sentencing the government submitted a letter recommending one year's probation, with community service and other conditions, and a $1,000 fine. Defendant argued that the applicable regulations permitted fines to be no more than $500. The government argued that the relevant framework for punishment is found in Title 18 and allows for fines of up to $5,000 on each count. Expressing an intent not to exceed the limits on fines as set forth in the regulations cited by defendant, the court declined to resolve this dispute.

Defendant contended that a sentence in excess of the collateral forfeiture amount would 'needlessly' coerce guilty pleas by unduly burdening the assertion of the right to trial. United States v. Jackson, 390 U.S. 570, 583 (1968).

As Magistrate Judge Mann observed, in this jurisdiction 'well-established precedent permits sentences greater than those offered during plea negotiations.' Slip op. 5. Moreover, the record here 'does not support any finding or inference that [defendant] was coerced into entering an inaccurate plea . . .; to the contrary, defendant withdrew his payment of collateral in order to stand trial, and was subsequently found guilty on two counts.' Slip op. 6. And, '[m]ore importantly, the collateral forfeiture amount in the instant case — $400 — is a substantial sum . . .' Id.

Finally, the gravity of defendant's actions and his failure to assume responsibility for them support a sentence greater than the collateral forfeiture amount. Concluding that a fine of $500 coupled with probationary measures would be constitutionally appropriate, the court set a sentencing date.

Amendment — Relation Back

In Amaya v. Garden City Irrigation, Inc., 03 CV 2814 (EDNY, July 10, 2009), Judge Block held that claims in an amended complaint seeking damages for state labor law violations related back not to 2003 as plaintiffs had argued, but merely to Dec. 31, 2007. The court viewed plaintiffs' delay in seeking 'relation back' as the result of a deliberate litigation strategy, not mistake.

Plaintiffs, former employees of defendants Garden City Irrigation, Inc. and Garden City Maintenance, claimed that they had not been paid wages required by federal and state labor laws and were terminated in retaliation for their complaints about their wages. The complaint was originally filed in June 2003. In May 2005, a bonding company defendant filed a third-party complaint against Joseph Tedesco, a former shareholder of Garden City Irrigation and Garden City Maintenance. In April 2008, plaintiffs sought leave to amend the complaint to add state labor law claims against Mr. Tedesco, arguing that these claims should relate back to the filing of the complaint in June 2003. The magistrate judge agreed with plaintiffs. Under the six-year statute of limitations, the claims would cover conduct as early as June 1997 based on a 2003 'relation back' date. But the claims would cover conduct starting only on Dec. 31, 2001, based on a December 2007 'relation back' date — when plaintiffs' counsel informed the court of his intention to amend the complaint.

Under Federal Rule of Civil procedure 15(c)(1)(C), a claim against an added defendant relates back only if the defendant 'received such notice of the action that it will not be prejudiced in defending the action' or 'knew or should have known that the action would have been brought against it, but for a mistake concerning the proper party's identity.' The claims against Mr. Tedesco would not relate back to the commencement of the action because, among other things, the record did not suggest that he knew about the lawsuit until the bonding company defendant named him as a third-party defendant in May 2005.

Rule 15(c) was amended in 1991 to provide that claims raised in an amended complaint will relate back if the law that provides the applicable statute of limitations (here, New York) allows relation back. Fed. R. Civ. P. 15(c)(1)(A). Judge Block rejected Mr. Tedesco's argument that this provision did not apply to the addition of new parties.

Applying New York law on relation-back of claims against a newly added defendant, Judge Block first noted that plaintiffs' claims against Mr. Tedesco 'arose out of the same facts giving rise to their claims against the originally named defendants.' Slip op. 9. Second, plaintiffs' veil-piercing allegation created a unity of interest between Mr. Tedesco and Garden City Irrigation and Garden City Maintenance because, if plaintiffs proved that the veil had been pierced, Mr. Tedesco would be personally liable for the corporate defendants' obligations.

Nonetheless, plaintiffs did not meet the third prong — 'whether the new party knew or should have known that, but for [a] mistake by plaintiff as to the identity of the proper parties, the action would have been brought against him as well.' Slip op. 12 (citation omitted). Judge Block rejected the concept that the relation back analysis required bad faith by the plaintiff. Rather, 'the pertinent question is whether the plaintiff acted intentionally; acting in bad faith to obtain a tactical advantage is simply one form of intentional conduct. ' Slip op. 13.

Given Mr. Tedesco's prior sale of his ownership interest, plaintiffs' failure to name him in June 2003 was not the result of bad faith or an intentional strategy. On the other hand, plaintiffs' subsequent conduct ruled out mistake. Plaintiffs waited three years after Mr. Tedesco was added as a third-party defendant to seek to add him as a direct defendant. Also, plaintiffs initially took the position that the claims should relate back to Dec. 31, 2007, changing their strategy later based on a review of the law. Thus, it was reasonable for Mr. Tedesco to conclude at first that plaintiffs did not intend to sue him, and relation back to June 2003 was not appropriate. Slip op. 17.


In Securities and Exchange Commission v. China Energy Savings Technology, 06 CV 6402 (EDNY, July 6, 2009), Judge Spatt, granting summary judgment to the SEC, ordered disgorgement of proceeds of a securities fraud scheme transferred or diverted by defendants to 'Relief Defendants' to avoid an SEC judgment.

The court had entered a judgment on default against defendants arising from a 'pump and dump' scheme related to China Energy stock. ('Pump and dump' refers to a scheme by which someone causes the price of a stock to be artificially inflated, and then sells it at a high value, leaving the purchasers with worthless or lower-valued stock.) The court then entered a TRO freezing the proceeds of the sale of China Energy stock in the hands of defendants and Relief Defendants and limiting the disposition, transfer or dissipation of those proceeds.

Finding a factual dispute as to whether the Relief Defendants had a legitimate claim to the funds in the accounts, Judge Spatt referred the matter to Magistrate Judge A. Kathleen Tomlinson for a hearing. After an evidentiary hearing, the magistrate judge concluded that Relief Defendants had 'failed to provide a shred of documentary evidence to support their assertion that the shares held in the accounts were in fact issued as compensation.' Slip op. 8.

District courts may 'order disgorgement from parties who, though not directly involved, profit from a fraud and have no just claim to their profits.' Slip op. 11. Knowledge of the alleged fraud was therefore not necessary for recovery from the Relief Defendants. In ordering disgorgement, the court pointed to conduct by the Relief Defendants, including use of identical addresses for defendants and Relief Defendants and deposits of stock and funds by defendants into Relief Defendants' accounts.

The court found that defendant Chiu Wing Chiu, previously found liable for fraud, controlled and directed sales of the stock in the Relief Defendants' accounts and that the declarations submitted by Relief Defendants were inconsistent and incredible. Relief Defendants also did not establish a legitimate interest in the funds or receipt of the China Energy Shares in exchange for adequate consideration.

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 August, 2009, issue of the New York Law Journal. Copyright © 2009 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.]