In September 2013, the New York State White Collar Crime Task Force issued a report that could herald significant change for the future of complex white-collar prosecutions at the state level. The Task Force proposed a sweeping revision of the New York state criminal laws that would allow state prosecutors to bring many white-collar prosecutions on equal footing with federal prosecutors. These changes include, among other things, revising grand jury procedure, amending New York’s accomplice corroboration rule, and amending and gradating various penal law statutes.
The Task Force, headed by Manhattan District Attorney Cyrus R. Vance Jr. and Nassau County District Attorney Kathleen M. Rice, proposed the first major revision to New York white-collar criminal law since 1986.1 Notably, the Task Force included both prosecutors from throughout the state and a number of distinguished criminal defense attorneys.
The Task Force’s full recommendations, collected in the Report of the New York State White Collar Crime Task Force, issued September 2013 and available online at http://www.law.nyu.edu/sites/default/files/upload_documents/WCTF Report.pdf, are a must-read for any practitioner in the field. This article, by necessity, addresses only a portion of the many proposed revisions to New York law. Specifically, it addresses the proposed revisions to New York state grand jury procedure, the accomplice corroboration rule, and the substantive laws on larceny, scheme to defraud and money laundering—key areas where New York state law has lagged behind federal law in the white-collar arena.2
The Task Force’s recommendations—if adopted—could encourage far more active and effective New York state prosecutions of complex white-collar cases. State prosecutors are currently hamstrung in bringing these cases by a set of rules that, in comparison with the federal rules and the rules of many other states, are underpowered and antiquated. After years of taking a back seat to the assertion of federal muscle in cases that deeply impact many New York victims—both individuals and businesses—the empowerment of New York state prosecutors in the white-collar arena seems long overdue.
A comprehensive revision of New York state white-collar law should work to everyone’s benefit, putative defendants included. Trying to shoehorn modern actors into white-collar criminal statutes last updated nearly 30 years or more in the past is a worrisome prospect. For example, the Martin Act, drafted in 1921, is still New York’s governing law on securities fraud. Yet some of its criminal provisions, drafted when Wall Street was a very different place, do not even require the willful and knowing commission of an illegal act. A badly outdated criminal code simply cannot fairly regulate the realities of the modern marketplace.
Having a second sovereign actively involved in the evolution of white-collar criminal law is also beneficial. The federal courts in New York are virtually the only courts in New York with regard to complex white-collar prosecution. Enabling New York state courts to participate in the process may force legislators and prosecutors on both sides of the aisle to modernize and adapt far more efficiently than if there was a monopoly in the field.
Grand Jury Procedure
One of the most significant amendments proposed by the Task Force is to the New York grand jury system. Currently, New York prosecutors face several significant obstacles in presenting complex white-collar cases to a grand jury. In its report, the Task Force proposed simple and effective remedies to remove those obstacles, streamlining grand jury procedure at a significant savings in time and expense and allowing state prosecutors to effectively bring charges where they otherwise might have been discouraged from doing so.
First, as opposed to federal prosecutors, New York state prosecutors must currently comply (with limited exceptions) with the rule against hearsay in grand jury presentations. The significance of this restriction is that many documents crucial to the prosecution of complex white-collar cases, such as emails obtained from Internet service providers, must be authenticated by a live witness in the grand jury. In many cases, this requires a significant expenditure of time, effort, and money to secure the testimony of records custodians, even though that testimony is usually only brief and ministerial.
To remedy this issue, the Task Force proposed making all business records admissible in the grand jury when accompanied by a sworn certification attesting to the authenticity of those records. This would eliminate a substantial burden in time and money on both prosecutors and businesses. This is particularly significant because the Task Force found that budgetary concerns often deter state prosecutors from bringing charges in complex white-collar cases that require voluminous records. Of all the Task Force’s proposals, this change alone could make a significant difference in the number of complex white-collar cases charged by New York state prosecutors.
Second, in identity theft cases, New York state prosecutors are currently required to present live testimony from victims in order to properly allege the crime before a grand jury. As many identity theft schemes, particularly in the Internet age, span wide geographic areas, this rule again forces a significant expenditure of time and resources to secure the appearance and testimony of victims. The Task Force proposed that a victim’s lack of consent for the use of personal identifying information could be established through a sworn certification.
Third, the Task Force proposed allowing witnesses located outside New York state or more than 100 miles from the grand jury to testify by secure videoconference.3 Again, this rule, if adopted, would conserve state funds and reduce the burden on grand jury witnesses. It could prove a particularly useful amendment as complex white-collar schemes span larger and larger geographic areas.
These three proposed revisions are clearly in line with the Task Force’s goal of “lower[ing] the financial and logistical cost of presenting a complex white collar case to the grand jury.” If adopted, they would remove procedural hurdles that currently discourage state prosecutors from pursuing many white-collar prosecutions.
Fourth, the Task Force proposed replacing transactional immunity in the grand jury with use immunity. Currently, all witnesses testifying before a New York grand jury automatically receive full “transactional immunity” from prosecution for any crime responsibly referenced in their testimony.4 This is different from the federal rule and the rule in most other states, which confer only “use immunity,” forbidding a prosecutor from using a witness’ grand jury testimony in a subsequent investigation or prosecution.
As noted by the Task Force, the current New York transactional immunity rule has a substantial “chilling effect on prosecutors,” and it dramatically reduces a state prosecutor’s ability to use the grand jury as an investigative tool in complex white-collar cases. Prosecutors regularly refrain from calling witnesses before the grand jury out of fear that they might unwittingly immunize an individual who they subsequently learn was complicit in a serious crime. Perhaps more importantly, many complex white-collar cases require testimony from accomplices who can provide information to support even more serious charges against others. New York state prosecutors are forced to make an unenviable choice: They often need the testimony of accomplices before the grand jury to conduct a full and thorough investigation, but would have to immunize those accomplices to accomplish their goal.
As the Task Force notes, the discrepancy between this New York state grand jury rule and the federal rule is a primary reason why organized crime prosecutions, as well as major white-collar cases, are currently more effectively pursued in federal court. Amending the New York state rule, as proposed by the Task Force, to replace automatic grants of transactional immunity with grants of use immunity for witnesses who testify before a grand jury could allow state prosecutors to become far more active in the white-collar arena.5
Accomplice Corroboration Requirement
The Task Force also recommended amending New York’s corroboration requirement. Currently, under New York law, accomplice testimony standing alone is insufficient to sustain a conviction. Rather, New York law requires corroborating evidence—independent of accomplice testimony—connecting a defendant to a crime.6
In many white-collar cases, including corruption cases, this can be a major obstacle for state prosecutors. In response, the Task Force proposed revising the rule to state that corroborative evidence could include testimony from one or more accomplices, without more. If adopted, and with proper safeguards in place (such as limiting instructions from the trial court), this amendment could eliminate another roadblock currently impeding New York state white-collar prosecutions.
The Task Force made several recommendations directed at the current limitations of the New York larceny statute. One of the most significant was drawn to combat the growing problem of identity theft. Specifically, the Task Force proposed adding “personal identifying information” to the definition of “property” covered under the larceny statute.7 Along with several other proposed amendments to the larceny statute (including a targeted expansion of the terms “obtain,” “deprive” and “appropriate”) this change would provide an effective and streamlined tool for New York state identity theft prosecution.8
Scheme to Defraud
Another important proposed revision involves the crime of scheme to defraud. The scheme to defraud statute is currently an underpowered provision of the Penal Law, lacking the teeth to effectively prosecute major fraud. The problem is that no matter how great the value of the property obtained by a fraudster, and no matter how numerous the intended victims, the statute is limited to a Class E felony.9
Scheme to defraud has the potential to be a useful part of a prosecutor’s arsenal against major fraud, because it allows the aggregation of a criminal’s wrongful acts against numerous victims into a single count if those acts are part of a “systematic, ongoing course of conduct.”10 But a scheme that involved dozens or hundreds of victims, and potentially millions of dollars, cannot be effectively prosecuted as a Class E felony. The Task Force therefore proposed gradating the crime, up to a Class B felony, based upon the dollar value of the property or service obtained by the defendant, or the number of intended victims.11
The Task Force also recommended that scheme to defraud no longer require that a scheme involve two or more victims. This change would make the statute much more flexible, because many frauds involve, for example, a scheme to defraud a single bank, or a city or state government.
The Task Force proposed two additions to the existing New York money laundering laws: first, a statute criminalizing structuring transactions to evade reporting requirements; and second, a statute criminalizing monetary transactions in criminally-derived property in excess of $20,000.
With regard to structuring, New York has no criminal provision mirroring the federal statute. Federal structuring law criminalizes a transaction designed to evade financial institution reporting requirements (including the duty to report the receipt of cash in excess of $10,000).12 Because white-collar investigations—both state and federal—routinely uncover efforts by individuals to structure deposits in order to avoid reporting requirements, this is a significant gap in New York law. In many cases, structuring in fact goes hand in hand with widespread money laundering or tax evasion.
In response, the Task Force proposed a structuring law mirroring the federal statute. This would add a powerful tool to a state prosecutor’s arsenal in the white-collar arena. If adopted, it would not only allow the underlying conduct to be prosecuted, but it would also provide for seizure of the assets involved by the state.
A statute criminalizing large monetary transactions using money known to be the proceeds of crime would fill another gap in current New York state law.13 The Task Force proposed that New York adopt a rule identical to the federal statute,14 criminalizing commercial transactions that involve the knowing use of criminally-derived property. Specifically, the Task Force proposed the new offense of criminal monetary transaction, which is “designed to criminalize the spending or receiving of criminal proceeds by a person who is aware that the funds were derived from an illegal source.”
These two additions, if adopted, would significantly strengthen New York’s money laundering law, bringing it closer in line with federal law and providing state prosecutors with additional formidable weapons against complex white-collar crime.
Future Revision Required
Despite the Task Force’s sweeping proposed revisions, it declined to address two significant issues: securities fraud and white-collar sentencing. The Task Force’s report thereby stops short of a full remedy for modernizing New York’s white-collar criminal laws.
First, the Task Force declined to address New York state’s securities fraud law, known as the Martin Act.15 Like scheme to defraud, the criminal provisions in the Martin Act are capped at a Class E felony, regardless of the money obtained or the number of victims impacted. This is a virtual bar, in itself, to the prosecution of major securities fraud cases. Many of the most highly publicized white-collar prosecutions in recent years—think Bernard Madoff, Raj Rajaratnam, Marc Dreier—involved securities fraud charges with strong ties to New York victims, both individuals and businesses. Uniformly, however, those cases were brought by federal prosecutors, who could effectively bring charges carrying substantial penalties. The language of the Martin Act also needs substantial revision to bring it in line with the current federal laws governing securities fraud. Modernizing and revitalizing New York securities fraud law must be a priority for future state prosecution of high-profile white-collar criminal defendants.
The Task Force also declined to address the issue of sentencing in white-collar cases.16 As demonstrated by the ongoing dissent of many federal practitioners, commentators and judges, the federal white-collar sentencing regime may prove a less than ideal model. Nevertheless, a rational, empirically-based sentencing system for white-collar crime needs to be developed and put in place in New York state courts. Shoehorning complex white-collar offenses into the current New York state sentencing scheme may prove unworkable and undesirable.
It has long been clear that New York white-collar criminal law needs thoughtful, comprehensive overhaul. New challenges presented by complex and wide-ranging major frauds demand that state law evolve in order give state prosecutors a fighting chance in prosecuting complex white-collar cases. Updating an outdated legal system to reflect the realities of the modern marketplace is to everyone’s benefit, putative defendants included. The Task Force’s report is an important and commendable first step in the right direction.
Gerald L. Shargel is a partner and Ross M. Kramer is an associate at Winston & Strawn in New York.
1. The current New York Penal Law was drafted in 1965 (updating the Penal Law dating back to 1909). The New York Legislature periodically thereafter amended various white-collar provisions, most notably through revisions in 1986.
2. Not addressed herein are proposed revisions to the New York criminal laws governing cybercrime and identity theft, elder fraud, anti-corruption and tax. Those issues are addressed in depth in the Task Force’s report.
3. The Task Force proposed measures to ensure the security of transmissions and grand jury secrecy, including the use of secure encryption, and a rule that testimony via videoconference could only take place from an approved government office.
4. See N.Y. C.P.L. §190.40(2).
5. The Task Force goes even further, recommending that this amendment also apply to trial testimony.
6. See N.Y. C.P.L. §60.22.
7. See N.Y. P.L. §155.00.
8. Levels of larceny would be gradated based on the number of identities reflected in the stolen personal identifying information. The theft of personal identifying information concerning 1,000 or more people would constitute grand larceny in the first degree, a Class B felony.
9. As the Task Force noted, in an era of massive and wide-spread financial fraud, “a reasonable New Yorker [would not] believe that she was being adequately protected by a criminal justice system that assigns the lowest-level felony blame to highly blameworthy fraudsters.”
10. See N.Y. P.L. §§190.60, 190.65.
11. Gradations would range from a Class E felony for schemes that obtain more than $1,000 or intend to defraud 10 or more victims, up to a Class B felony for schemes to obtain more than $1 million or intend to defraud 1,000 or more victims.
12. See 31 U.S.C. §5324.
13. This conduct is not currently covered by New York’s money laundering laws, N.Y. P.L. Article 470.
14. See 18 U.S.C. §1957 (engaging in monetary transactions in property derived from specified unlawful activity).
15. See N.Y. Gen. Bus. Law §352-c.
16. The Task Force explicitly deferred consideration of sentencing issues to the New York State Permanent Commission on Sentencing, formed in 2010 by Chief Judge Jonathan Lippman.