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The 2nd 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. Addressing a case of first impression in an opinion by Judge Robert Katzmann, the circuit in U.S. v. Schneider, 03-1764, upheld the denial of attorney fees to defendant Jeffrey Schneider. Schneider had claimed his 2002 acquittal on fraud charges entitled him to recovery under the 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 multi-million 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 — or “haircut” — on residential loans it was obligated to cover after “warehouse” lenders had covered between 95 percent and 98 percent. Schneider worked at Werblin, Casuccio & Moses, a public accounting firm in Syosset, beginning in 1998. 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, the 2nd Circuit decision said. Schneider suggested Aaron Chaitovsky, a partner at his old firm, Citrin Cooperman. During the transition, Schneider allegedly discussed with Citrin accountants the debt owed to the escrow account. Chaitovsky later was a key witness against Schneider. Schneider was indicted two years after a contentious exchange between Eastern District assistant U.S. attorney Jodi Avergun and Schneider’s lawyer, James Druker, over whether and under what terms Schneider would be party to a proffer agreement. Druker later claimed Avergun said she would subpoena Schneider for the grand jury. “If he takes the Fifth Amendment, we will indict him,” he quoted her as saying, according to the decision. When Druker said his client could not proffer information to the government under the terms proposed by the government, Avergun allegedly grabbed the proposed proffer agreement from Druker’s 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.” Druker later sent a letter to Avergun memorializing the exchange and copied the letter to her superior in Central Islip, N.Y. Avergun responded with her own letter, saying Druker’s account was “incorrect in several respects,” and asserting that she had never threatened to prosecute Schneider if he invoked his Fifth Amendment right against self-incrimination. Schneider never appeared before the grand jury. He was indicted in January 2002. The following July, he participated in a proffer session with two new assistant U.S. attorneys and the new chief assistant in Central Islip. 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. DEFENDANT ACQUITTED 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. Judge Denis R. Hurley Sr. denied the motion, and Schneider appealed to the 2nd Circuit. There, Katzmann and Pierre Leval said Schneider was the first opportunity to interpret the Hyde Amendment since its passage in 1998. “Schneider’s case clearly falls short of the type of prosecutorial conduct that would trigger Hyde Amendment liability,” Katzmann wrote. During oral argument, he said, counsel for Schneider “again admitted that the thrust of Schneider’s Hyde Amendment argument rested on the credibility of the witnesses arrayed against him.” One witness, principal Paul Skulsky of Island Mortgage Network, had a criminal record and “Skulsky, Casuccio, and Chaitovsky each played a central role in the dishonest scheme” they discussed with Mr. Schneider at various points, the court said. Although those witnesses had “shortcomings,” Katzmann 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.” “Ultimately, Schneider’s argument concerning the sufficiency of the evidence appears to be based on the result — his acquittal — from which he extrapolates backwards and concludes that the case had no merit,” he said. And as for the exchanges between Avergun and Druker, Katzmann wrote, “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.” Paula Schwartz Frome of Kase & Druker in Garden City, N.Y., represented Schneider. Assistant U.S. attorneys Demetri M. Jones and Jo Ann Navickas represented the government on the appeal.

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