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The 2d U.S. Circuit Court of Appeals has taken its first crack at a federal statute that allows for the award of attorney fees against the government where prosecutors bring criminal charges in bad faith. U.S. v. Schneider, No. 03-1764. Addressing a case of first impression, the circuit court, in an opinion by Judge Robert Katzmann, upheld the denial of attorney fees to defendant Jeffrey Schneider. Schneider had claimed that his 2002 acquittal on fraud charges entitled him to recovery under the 1998 Hyde Amendment, which allows for fees where “the position of the United States was vexatious, frivolous, or in bad faith.” Schneider was charged in 2002 with conspiracy to defraud the government and wire fraud for his alleged role in a multimillion-dollar scheme carried out by executives at Island Mortgage Network Inc., in Melville, N.Y. The charges were based on his role in a three-member accounting team that acted as independent auditor to Island Mortgage Network. Island Mortgage was involved in illegally diverting escrow funds to pay its own operating expenses and to cover its small share of costs on residential loans it was obligated to cover after “warehouse” lenders had covered between 95% and 98%. Schneider worked at Werblin, Casuccio & Moses, a public accounting firm in Syosset, N.Y. He was working with partner Joseph Casuccio on the Island Mortgage books when Casuccio discovered a discrepancy in the company’s accounts and developed a plan to hide a growing deficit in the escrow accounts. Casuccio decided in late 1999 to withdraw as the company’s independent auditor and asked Schneider to find a replacement accounting firm. Schneider suggested Aaron Chaitovsky, a partner at his old firm, Citrin Cooperman, with whom he allegedly discussed the debt owed to the escrow account. Chaitovsky later was a key witness against Schneider. Schneider was indicted after a contentious exchange between Assistant U.S. Attorney Jodi Avergun of New York’s eastern district, and Schneider’s lawyer, James O. Druker, over the terms of a proffer agreement. When Druker rejected the terms, Avergun allegedly grabbed the proposed proffer agreement from his hand, pointed to the door and said, “I want to say one thing to you Mr. Schneider. I think that your attorney is making a very big mistake here.” Schneider was indicted in January 2002. The following July he participated in a proffer session with different assistant U.S. attorneys. According to Druker, Schneider told the prosecutors “exactly what he later testified to at trial,” and the government agreed that the prosecution should not go forward. At the close of evidence in October 2002, a jury took less than four hours to acquit Schneider. He moved for attorney fees under the Hyde Amendment, saying the prosecution was vindictive and in bad faith in that the government relied on witnesses who were not credible and gave a deferred prosecution to a more culpable person, Chaitovsky. U.S. District Judge Denis R. Hurley Sr. denied the motion, and Schneider appealed to the 2nd Circuit “Schneider’s case clearly falls short of the type of prosecutorial conduct that would trigger Hyde Amendment liability,” Katzmann wrote. Although the government’s witnesses had “shortcomings,” he said, that was not uncommon in prosecutions. And “the shortcomings of witnesses who directly implicated Schneider in the crime are inadequate to show that the government lacked a reasonable legal basis for prosecution.” As for the exchanges between Avergun and Druker, “Schneider mistakenly attempts to cast a contentious and hard-fought bargaining session as evidence of bad faith. “The government’s response to Schneider’s refusal to proffer was consistent with the type of ‘hard bargaining’ in which both prosecutors and defense counsel routinely engage.”

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