A federal appeals court has upheld the conviction of Franklin Brown, the former general counsel of Rite Aid, on fraud and obstruction charges in connection with the $1.6 billion accounting scandal that sent half a dozen executives to prison and cut the company's stock price in half.
The unanimous three-judge panel rejected Brown's claims that both the prosecutors and judge had engaged in misconduct, and that secretly recorded tapes of his conversation with another executive had been tampered with.
But the appellate judges agreed that Brown, 82, who is now about halfway through serving his 10-year prison term, is entitled to a new sentencing hearing.
Third Circuit Judge Morton I. Greenberg said the order for a new sentencing is automatic because Brown's initial sentencing occurred during the window of time when the Supreme Court had cast doubt on the constitutionality of the federal sentencing guidelines, but had not yet declared that the guidelines are merely advisory.
Because a new sentencing was ordered, the appellate panel never addressed most of Brown's arguments as to how his first sentence was calculated.
But in a lengthy footnote that could prove to be important later, the appeals judges appeared to side with Brown on a key point about how the loss to shareholders should be calculated, noting that the complex method used in Brown's case has now been rejected by many courts.
Brown was convicted in October 2003 of 10 counts stemming from accounting irregularities at the drugstore chain in the late 1990s. He was one of six former Rite Aid executives and officers convicted in the investigation and the only one to be found guilty in a jury trial. The others, including former Chairman and CEO Martin L. Grass, all pleaded guilty.
In a 96-page indictment, prosecutors alleged that Brown and Grass took a series of steps to thwart and frustrate the investigation including backdating some documents.
But prosecutors secured the assistance of former Rite Aid President Timothy Noonan, who agreed to secretly videotape Grass and Brown, and later testified at Brown's trial, where jurors saw videotapes of the two men discussing the cover-up.
The tapes of Brown's conversations with Noonan became the focus of a series of arguments by Brown's lawyers -- all of which were ultimately rejected by the trial judge, U.S. District Judge Sylvia H. Rambo, and now rejected again by the 3rd Circuit.
First, Brown argued that prosecutors knew Brown was represented by a lawyer and therefore had violated lawyer's ethics rules when they sent Noonan in as their secret agent to have conversations with a represented person.
In the appeal, Brown's lawyers -- Peter Goldberger and Pamela A. Wilk of Ardmore, along with Nathan Dershowitz and Amy Adelson of Dershowitz Eiger & Adelson in New York -- argued that under the McDade Amendment, federal prosecutors are subject to the ethical rules in the state where they practice.
In Pennsylvania, the defense team argued, Rule 4.2 of the Rules of Professional Conduct prohibits a lawyer from communicating directly with a represented person, and Assistant U.S. Attorney Kim Douglas Daniel, who led the Rite Aid investigation, was not permitted to violate Rule 4.2 through the acts of a surrogate.
But the 3rd Circuit was unimpressed.
"We reject his argument because we do not believe the McDade Amendment prohibits federal prosecutors in Pennsylvania from using a well-established investigatory technique simply because the Pennsylvania courts have not considered whether such conduct is permissible," Greenberg wrote in an opinion joined by Judges Dolores K. Sloviter and Kent A. Jordan.
"After all, the Pennsylvania courts have not held that such conduct is impermissible," Greenberg wrote.
Greenberg said that although the government's conduct "gives us pause," it was not enough to undermine the conviction because "we do not regard it as so egregious that it falls outside the realm of acceptable pre-indictment investigation."
Brown also complained in the appeal that his attempt to plead guilty on the eve of trial was thwarted when the trial judge improperly inserted herself in the process and had ex parte conversations with prosecutors.
But Greenberg found there was no proof that the judge had violated any rules because her rejection of the plea deal came after the negotiations were finished.
"Rule 11(c)(1) seeks to avoid a situation in which a court places pressure on a defendant to plead guilty involuntarily. In this case, Judge Rambo's position led to the collapse of the plea agreement and had the opposite effect," Greenberg wrote.
"Thus, though Brown may have lost the benefit of his bargain with the government because of Judge Rambo's position, he did not lose his right to be tried by an impartial jury of his peers and he surely was not coerced to plead guilty. In fact, quite to the contrary, Judge Rambo's actions caused him to adhere to his previously entered plea of not guilty even though he had been prepared to change his plea to guilty," Greenberg wrote.
Much of Greenberg's 64-page opinion was devoted to discussion of Brown's claim that the Noonan tapes were tampered with and should have been excluded at trial.
Brown's initial appeal was put on hold for several years when he filed a renewed motion before Rambo that sought a new trial on the basis of newly discovered evidence that the FBI had altered the tapes.
Now the 3rd Circuit has upheld Rambo's ruling that rejected the bid for a new trial.
Greenberg noted that Rambo considered "voluminous amounts of briefing, expert reports, and live testimony" before making a series of factual findings that the various tapes of the Noonan conversations had not been "edited, altered, digitized, or manipulated by the government at any time," and were therefore "authentic recordings."
Brown's lawyers attacked Rambo's analysis, but Greenberg found that the argument would never work for Brown because, even if the tapes were declared to be fakes, he couldn't show that the jury's verdict would have been different.
Rambo had noted that Noonan testified at trial about his conversations with Brown, and "was cross examined thoroughly, on all topics that might impugn his credibility." She also found that the evidence at trial of Brown's guilt was "concrete, credible, and more than sufficient to sustain his conviction."
In light of those findings, Greenberg said, Brown failed to "plausibly explain how the absence of the Noonan tapes would have rendered the evidence at his original trial or would render the evidence at a new trial less than sufficient to sustain his conviction."
Goldberger, in an interview, said the defense team is weighing all of its options and has not yet decided whether to pursue any further appeals. But Goldberger said that if the case proceeds directly to a new sentencing, he is encouraged that the appellate court's discussion of the loss calculation and other factors will result in a reduced term.
