For six years, Kerri Kaley worked at a subsidiary of Johnson & Johnson, selling the company's latest surgical innovations to hospitals. But she and about two dozen other salespeople of J&J's Ethicon Endosurgery got into trouble with federal authorities by selling inventory that hospitals no longer wanted on the gray market, an indictment charged.
Valid prescription medical devices, such as sutures, allegedly were bought by F&S Medical of Delray Beach, Fla., which turned around and dealt the products to other medical facilities.
Now the Cold Spring Harbor, N.Y., woman and her husband, Brian P. Kaley, are the poster children in an appeal pending before the 11th U.S. Circuit Court of Appeals on the legal standard for pre-trial seizure of a defendant's assets.
For years, the criminal defense bar has been arguing wholesale seizures of assets are unconstitutional because they strip defendants of their Sixth Amendment right to choose the counsel of their choice.
"The Kaleys simply want to use their own money to retain counsel of choice to defend them at trial," said one of their attorneys, Howard Srebnick of Black Srebnick Kornspan & Stumpf in Miami. "The government is interfering by freezing their assets, including the equity in the home they purchased more than a decade ago, without giving the Kaleys an opportunity pre-trial to confront witnesses and present evidence to establish they have committed no crime."
The Kaleys set aside about $1 million to pay attorneys by taking out a second home mortgage and cashing certificates of deposit. But prosecutors claimed the money was ill-gotten gains. They charged Kerri Kaley stored the medical equipment in the family's garage. Her husband was indicted after she refused a plea deal. Prosecutors said he knew about the conspiracy and managed the illegal profits.
Even after being stripped of the money, the Kaleys didn't qualify for a federal public defender. U.S. Magistrate Judge James M. Hopkins in West Palm Beach concluded the couple could liquidate their 401(k) retirement accounts and their children's tax-deferred college funds -- at a cost of a $200,000 tax penalty -- to pay for a cut-rate lawyer.The defense asked for an unusual probable cause hearing to test the prosecutor's case, but prosecutors opposed the move. The hearing would be like a mini-trial, giving the defense an early glimpse of evidence and strategy.
Srebnick and co-counsel Richard Strafer and Susan W. Van Dusen last June appealed U.S. District Judge Kenneth Marra's decision freezing the Kaleys' assets without a probable cause hearing. They argue -- among other things -- that the couple's Fifth Amendment right to due process and Sixth Amendment right to counsel were violated.
The attorneys are being paid by a relative of the Kaleys, who are accused of defrauding the Food and Drug Administration by selling stolen medical goods. They were charged with conspiracy, interstate transportation of stolen property, money laundering and obstruction of justice.
"Contrary to the magistrate and district court, the constitution did not place any burden of production on the Kaleys. Rather the government at all times had the burden to justify freezing the assets the Kaleys had specifically set aside to retain counsel of choice," according to the 68-page defense brief filed in the 11th Circuit.
At least five other circuits follow that standard and allow some type of probable cause hearing, the Kaleys' attorneys argued.
The 11th Circuit ruled in a 1989 drug case that any effect on a defendant's Sixth Amendment right to counsel would in most cases be rendered harmless so long as the defendant received "competent representation" even by "appointed counsel."
But Strafer, author of the new appellate brief, argued before the appellate court in January that the 1989 decision imposed a balancing test, not a flat-line rule. The drug case involved the killing of witnesses, in which the government had a stronger case for not showing its hand than in a white-collar crime case, he maintained.
Strafer also contends the U.S. Supreme Court has rejected the 11th Circuit's standard, "holding denial of right to counsel of choice is a structural error not subject to any form of harmless-error analysis. "
U.S. Attorney Alex Acosta's office in Miami would not comment on the ongoing case, but a brief filed by Assistant U.S. Attorneys Anne R. Schultz and Madeleine R. Shirley argued the Kaleys have no right to use funds slated for forfeiture to retain counsel. The defendants were fortunate to receive an evidentiary hearing in front of the magistrate, the prosecutors argue.
"Although the accused enjoys the right to be represented by counsel under Sixth Amendment, he does not enjoy the absolute right to counsel of his own choosing," the government's 60-page pleading asserts.
Such statements send shivers down the spines of defense attorneys. If a defendant's assets are frozen, "they are not in a position to adequately defend themselves," said Miami criminal defense attorney Neal Sonnett, who is not involved in the Kaleys' case.
"Legal fees are not the only cost involved," he said. "In complicated white-collar cases, there are perhaps 100,000 documents. Just the copying and scanning and software, the costs for investigators, it can run into $1 million."
Prosecutors started seizing assets of defendants in drug cases more than 20 years ago. In 1989, the U.S. Supreme Court held a defendant does not have the right to use money from a criminal enterprise for an attorney.
Soon the government started seizing assets in white-collar cases before trial.
"What the government has done for many years is boot-strap any white-collar case with a money-laundering count and some kind of forfeiture," Sonnett said.
Attorney Jane Moscowitz of Moscowitz & Moscowitz in Miami adds that bad rulings in drug cases "eventually come and pollute the prosecution of white-collar cases."
Alexandria, Va., attorney David B. Smith, who co-chairs the forfeiture abuse committee for the National Association of Criminal Defense Lawyers, said federal judges make bad law in drug cases because they have no sympathy for the defendant.
"Now they are stuck with that law when the government says you have to apply that same law in white-collar cases," Smith said. "It's too bad you've already said defendants have no rights."
Smith said the prevailing political winds may change the course of some seizures. He points to the recent defeat of a U.S. House bill that would have allowed the seizure of assets even before indictment.
As for the Kaleys, their case was buoyed when co-defendant Jennifer L. Gruenstrass was acquitted last November. The Ethicon saleswoman from New Haven, Conn., said there never was any theft, and she was simply helping out the hospitals by disposing of excess products no longer wanted or needed.
Her attorney, Robert Casale, also of New Haven, said Johnson & Johnson created the secondary market by constantly marketing new products and making it hard for hospitals to return the older versions. He said Gruenstrass gave loads of returned medical inventory to a physician who would perform surgery in Third World countries.
"I always assume Johnson & Johnson didn't like the competition," Casale said. "They probably said, 'We've created a monster, and now it's biting us on the heels and competing against us.'"
The U.S. Attorney's Office said 23 defendants have pleaded guilty in related cases. "Ethicon takes the laws governing our business practices very seriously," said Ethicon spokeswoman Wendy Dougherty in Cincinnati. "We don't tolerate any unlawful behavior. We immediately terminated the employees found to be involved."
F&S owner John Keith Danks, a former Ethicon employee, pleaded guilty to transportation of stolen property and was sentenced in 2006 to 30 months in federal prison by U.S. District Judge Alan S. Gold in Miami.
FDA spokeswoman Karen Riley said the agency doesn't know the scale of the gray market for prescription medical supplies. "We have instances of this, but we don't have good numbers on the scope of it," she said.
Strafer, in a supplemental brief to the 11th Circuit after Gruenstrass' acquittal, said the government has no reason to fear a probable cause hearing exposing its case.
The decision to go to trial "exposed far more of the government's case to the Kaleys and district court than would ever have emerged from the probable cause hearing the government opposed," he wrote.