Steven M. Witzel
Steven M. Witzel ()

The government has often used continuing crime theories such as conspiracy as a means to prosecute defendants when the statute of limitations on the underlying crimes may have expired. Following the December 2013 decision in United States v. Grimm, however, prosecutions in the Second Circuit based on a continuing conspiracy theory may have been dealt a major blow. In Grimm, the U.S. Court of Appeals for the Second Circuit overturned the convictions of three corporate employees who were convicted of conducting a scheme to fix below-market interest rates on guaranteed investment contracts (GICs) by bribing various brokers to rig GIC auctions. The court held that interest payments on fraudulently issued GICs did not constitute overt acts in furtherance of a conspiracy and thus the interest payments could not be used as a means to extend the statute of limitations. The government has filed a petition for a panel rehearing and rehearing en banc. This decision, if sustained, may significantly limit the government’s ability to prosecute otherwise time-barred actions and provides defendants with new grounds to assert statute of limitations defenses.

Alleged Auction Rigging Scheme

Following a bond offering, municipalities often have more cash than is needed to meet the current expenses of their underlying capital projects.1 To generate additional revenue while the funds are not yet needed, a municipal issuer may invest in a GIC provided by a financial institution with a high credit rating.2 GICs pay periodic interest and have fixed maturities, but generally permit the issuer to call the principal at any time, thus terminating the contract.3

To prevent arbitrage, the tax code limits the returns that municipal issuers can earn on GICs to the interest rate on the municipal bonds.4 In general, payments in excess of this amount must be paid to the U.S. Treasury, which reduces any incentive on the part of the issuer to maximize the interest earned on GICs.5 In addition, Treasury regulations require issuers to determine the fair market value of each GIC to prevent GIC providers from benefitting from municipalities’ interest rate insensitivity.6 Because GICs generally are hard to value, many municipalities avail themselves of a safe harbor, which permits issuers to hire third-party brokers to solicit confidential bids from at least three GIC providers, with the contract being awarded to the highest bidder.7

In 1999, the three defendants in the case worked for a division of a corporation that served as a GIC provider (one of the defendants later left that company in 2001 and moved to another GIC provider).8 Between 1999 and 2004, the defendants agreed to pay kickbacks to brokers and, in exchange, the brokers rigged the GIC auctions by, alternatively, revealing to the defendants what other providers were bidding, keeping competitive bidders off the bid list, and/or asking certain providers to submit intentionally losing bids.9 As a result, the defendants were able to win GICs for their employers with artificially low rates of interest, thus defrauding both the municipality and the federal government.10

In July 2010, a federal grand jury returned an indictment which was later narrowed to six counts of two-object conspiracy to defraud (1) the municipalities and (2) the United States.11 After the district court found that the alleged conspiracies continued as long as the unindicted co-conspirators (the corporate employers) made interest payments on the GICs, the case proceeded to trial and the defendants were ultimately convicted.12

The Majority Opinion

The key question on appeal was whether the serial interest payments made by the GIC providers pursuant to the fraudulently-issued GICs constituted overt acts in furtherance of the conspiracy.13 The Second Circuit first noted that in United States v. Salmonese, 352 F.3d 608 (2d Cir. 2003), a case heavily relied on by the government—it held that a conspirator’s receipt of anticipated proceeds from the sale of “stripped warrants” constituted an overt act in furtherance of an economically-motivated conspiracy.14 The court reasoned that where the goal of a conspiracy is economic enrichment, the conspiracy necessarily continues as the anticipated economic benefits of the conspiracy are received.15 The sales of the stripped warrants in Salmonese were treated as overt acts because they occurred within a short period of time and were neither “indefinite” in number nor “lengthy” in duration.16

To distinguish the interest payments in Grimm from the receipt of sale proceeds in Salmonese, the court applied the reasoning in United States v. Doherty, 867 F.2d 47 (1st Cir. 1989), a First Circuit case cited in Salmonese. Doherty involved a conspiracy by police officers to receive advance copies of promotional exams, which allowed them to fraudulently obtain salary raises.17 Although the police officers continued to receive the augmented salaries, and thereby benefitted from the original conspiracy over the course of years, the court in Doherty held that such continued receipt of increased salaries did not constitute overt acts, and therefore did not restart the limitations period.18 The reasoning in Doherty was that continued receipt of anticipated profits does not further a conspiracy where “the payoff merely consists of a lengthy, indefinite series of ordinary, typically noncriminal, unilateral actions … and there is no evidence that any concerted activity posing the special societal dangers of conspiracy is still taking place.”19

The Second Circuit in Grimm stated that generally “overt acts have ended when the conspiracy has completed its influence on an otherwise legitimate course of common dealing that remains ongoing for a prolonged time, without measures of concealment, adjustment or any other corrupt intervention by any conspirator.”20 Following the reasoning in Salmonese and Doherty, the court set forth the following non-exhaustive list of the features that would describe payments that would not constitute overt acts in furtherance of a conspiracy: lengthy, indefinite, ordinary, typically noncriminal, and unilateral.21 The court rejected the government’s contention that because the GICs had fixed maturity dates, the interest payments were not “indefinite.”22 Rather than taking the meaning of “indefinite” as “without end,” the court stated that payments could be “indefinite” either because they were of “undetermined number” or because they were “prolonged beyond the near future.”23 The court concluded that GIC payments were indefinite in both senses: The interest payments continued indefinitely in the sense that they were prolonged and the right of the issuer to demand the return of the principal and thereby end the number of payments at any time meant that the number of payments was undetermined.24

The court concluded by suggesting that there is a temporal component in the characterization of the receipt of anticipated economic benefits as overt acts, noting that when economic benefits continue to be received “in a regular and ordinary course” and after such a time that “the unique threats to society posed by a conspiracy” are no longer present, receipt of the anticipated economic benefit is the “result of a completed conspiracy, and is not in furtherance of one that is ongoing.”25

The Dissent

Judge Amalya Lyle Kearse dissented from the majority’s opinion in Grimm, stating that its “major flaw” was that it failed to acknowledge that, based on the jury’s findings, the GIC providers that won the fraudulent GIC contracts were themselves unindicted co-conspirators.26 The fact that the providers for which the employees worked were co-conspirators, in her opinion, implicated a number of applicable conspiracy principles, including that “[c]onspiracy is ‘a continuing crime[] that is not complete until the purposes of the conspiracy have been accomplished or abandoned.’”27 Because each payment of below market interest pursuant to the GICs resulted in the realization of an anticipated economic benefit to the providers, the dissent reasoned that the payments constituted overt acts in furtherance of the conspiracies and thus it was permissible for the jury to find “that all of the providers’ interest payments were acts in furtherance of the conspiracies.”28

The dissent also disagreed with the majority’s view that there was no evidence of any continued concerted activity posing “special societal dangers” through the making of interest payments.29 To the contrary, the dissent viewed the bid rigging as expressly implicating those policies because it was the bid rigging conspiracy—something that no single bidder could do by himself—that made it possible for the co-conspirators to prolong the life of the conspiracy and “to enjoy their illegal gains at different times.”30

Outlook for Continuing Conspiracy

Grimm is just one of a series of cases brought by the government in its widespread municipal bonds investigation.31 The Second Circuit’s decision in Grimm will likely pose challenges to government prosecutions of these types of actions and others where the alleged bad acts are time barred and the government must rely on continuing payments as overt acts in a continuing conspiracy. Additionally, the court’s decision may provide useful precedent to defendants challenging the legal sufficiency of continuing payments as overt acts. Although the case is narrowly addressed to the interest payments in question, its inclusion of a list of features of payments that would not constitute overt acts in furtherance of a conspiracy provides a useful framework for defendants in fraud, bribery and other cases to challenge the characterization of payments as overt acts.

The import of Grimm, however, remains to be seen in light of the pending petition for a panel rehearing and rehearing en banc filed by the government in January 2014.32 The government’s petition challenges the majority’s view that a conspiracy ends when all that remains is a “lengthy, indefinite series of ordinary, typically noncriminal, unilateral actions,” and “there is no evidence that any concerted activity posing the special societal dangers of conspiracy is still taking place,”33 and argues that it is irrelevant whether the overt act itself is lawful or unlawful; rather, what matters is that the act is in furtherance of an unlawful objective.34 Therefore, the petition asserts that an act cannot be disqualified merely because “it is an ordinary, typically noncriminal action,” such as an interest payment.35 In addition, the petition criticizes the majority’s approach of focusing on the duration and temporal proximity of the payments, rather than the purpose thereof, which, in the government’s view, would result in absurd outcomes where a conspiracy’s duration could depend on whether “the contract provided for monthly payments or a single payout or whether the contract prescribed three months or three years of payments.”36 The petition also argues that the majority’s decision is inconsistent with Second Circuit precedent, including Salmonese, as well as other precedent in six other circuits.37

Thus, whether U.S. v. Grimm has permanently altered the landscape in the Second Circuit for what constitutes overt acts in furtherance of conspiracy, and whether other circuits will adopt the Second Circuit’s reasoning, remains to be determined. What is more certain is that the government’s ability to bring particular fraud cases originating during the financial crisis may be impacted by the resolution of these issues.

Steven Witzel is a partner at Fried, Frank, Harris, Shriver & Jacobson. Jessica Neiterman and Vaishali Dangat, associates of the firm, assisted in the preparation of this article.

Endnotes:

1. Grimm, 738 F.3d 498, 499 (2d Cir. 2013).

2. Id.

3. Id. at 499-500.

4. Id. at 500.

5. Id. In effect, municipal issuers are not permitted to make a profit off their municipal investors by borrowing money and then investing it for a higher rate of return than the initial loan. Thus, municipal issuers are incentivized only to seek an interest rate high enough to cover the interest rate owed on the municipal bonds. If the actual market interest rate is higher than the municipal bond rate, then a market imbalance occurs. The financial institution providing the GIC at the lower municipal bond rate could then invest that money at the higher market interest rate thereby making a profit.

6. Id.

7. Id.

8. Id.

9. Id.

10. Id.

11. Id.

12. Id. at 500-01. Two of the defendants were also charged with a substantive wire fraud scheme, but that charge was dismissed because the government did not allege any activity after the five-year statute of limitations period.

13. Id. at 501-03.

14. Id. at 502 (citing Salmonese, 352 F.3d at 616). A warrant entitles its holder to purchase securities at a specific price within a certain time frame. In Salmonese, an initial public offering plan called for individual shares of common stock to be sold along with an offer for two warrants per share. Each warrant entitled its holder to buy an additional share of the common stock at the offering price for a period of about four years. Thus, an investor taking advantage of the warrant offer would additionally profit if the shares later rose in value. The defendants were alleged to have secretly “stripped” one warrant from each stock unit, keeping most of them for themselves and using the remainder to bribe others.

15. Id. at 502 (citing Salmonese, 352 F.3d at 615).

16. Id. at 502-03; Salmonese, 352 F.3d at 616.

17. Grimm, 738 F.3d at 502; Doherty, 867 F.2d at 56.

18. Grimm, 738 F.3d at 502; Doherty, 867 F.2d at 61-62.

19. Grimm, 738 F.3d at 502; Salmonese, 352 F.3d at 616 (citing Doherty, 867 F.2d at 61 (emphasis in original)).

20. Grimm, 738 F.3d at 503.

21. Id.

22. Id.

23. Id.

24. Id.

25. Id.

26. Id. at 504.

27. Id. at 504-05 (citations omitted).

28. Id. at 507.

29. Id. at 509.

30. Id.

31. See Archive of the U.S. Department of Justice’s Municipal Bonds Investigation, http://www.justice.gov/atr/public/division-update/2014/muni-bonds.html (last visited April 18, 2014). This Department of Justice website details the press releases and case filings as part of its municipal bonds investigation.

32. Petition of the United States of America for Panel Rehearing and Rehearing En Banc, United States v. Grimm, No. 12-4310(L) (2d Cir. Jan. 22, 2014).

33. Id. at 9.

34. Id.

35. Id.

36. Id. at 10.

37. Id. at 12.