Melinda Haag, U.S. attorney for the Northern District of California (Jason Doiy)
SAN FRANCISCO — The last time Silicon Valley was booming, the U.S. attorney’s office was in hot pursuit.
With Robert Mueller at the helm of the office from 1998 to 2001, a specialized team aggressively targeted corporate wrongdoing and insider trading fueled by the dot-com bubble. But with money coursing through the Valley once more, there’s been a curious quiet from U.S. Attorney Melinda Haag.
Many in the bar hoped that Haag, an Orrick, Herrington & Sutcliffe partner who served as Mueller’s white-collar chief, would bring about a renaissance in high-impact fraud cases as the Bay Area’s top federal prosecutor. But three years into her tenure, white-collar prosecutions have slumped nearly 40 percent, according to data from the Transactional Records Access Clearinghouse, a nonpartisan research institute at Syracuse University that tracks criminal enforcement. Overall case numbers have also fallen, albeit less dramatically, according to TRAC.
Two of the high-profile cases that Haag’s office has staked out—investigations into the bankruptcy of solar panel maker Solyndra and allegations of accounting fraud at British software company Autonomy before its 2011 sale to Hewlett-Packard Co.—have yet to produce charges.
The downswing is surely a consequence of stretched budgets and understaffing at federal agencies, according to interviews with more than two dozen local lawyers, including 11 who once worked in the office. However, lawyers say, it is also the mark of an office that can be reactive and somewhat cautious in its approach to white-collar investigations. Even considering the resource constraints, there is some surprise that Haag, with her white-collar chops, has not led a more aggressive campaign to police the Valley’s red-hot, and at times freewheeling, business culture.
“When there’s that much frothiness and, in particular, young companies with green management teams, this is an environment where you really want to see enforcement,” said defense attorney Nanci Clarence of Clarence, Dyer & Cohen.
In an interview, Haag said that the decline in white-collar prosecutions is by design. Since taking office in 2010, Haag said, she has given Bay Area federal prosecutors a mandate to focus on complex prosecutions that will leave a mark, rather than the small-time cases that boost statistics.
“Our focus is on bringing high-impact cases,” she said. “Those cases require substantial resources and deep and thorough investigations.”
Complex fraud cases take time to build, she added, hinting that the office has more in the pipeline than outsiders can see. Despite the defense bar’s keen interest in the Valley, Haag said she is no more focused there than on the rest of the Northern District, which stretches from Monterey to the Oregon border.
“We investigate and prosecute crimes where they occur,” she said. “I pay attention to all parts of our district in that regard.”
But others are zeroing in on the Valley.
For years, the sharp-elbowed Southern District of New York has been aggressive about pursuing cases with ties to the Bay Area. In October, New York prosecutors indicted a 29-year-old San Francisco resident who allegedly ran the website Silk Road, an online bitcoin-based marketplace where illegal drug sales flourished. When it comes to the data breach and hacking cases that many in the local defense bar feel she should own, Haag faces a broad field of potential competitors.
“There may be some jockeying among prosecutors who want to say, ‘I’m the tech prosecutor,’” said Hanni Fakhoury, a staff attorney at the Electronic Frontier Foundation.
BY THE NUMBERS
White-collar prosecutions have fallen each year of Haag’s tenure, according to TRAC. In 2010, 164 defendants were charged, but the total slipped to 160 the following year. From there, prosecutions fell more precipitously, to 113 in 2012 and 103 last year.
White-collar prosecutions nationwide fell about 14 percent during the same period, according to TRAC data. Still, some major districts registered gains. The Southern District of New York saw white-collar prosecutions tick up 5 percent in that period, while the Central District of California showed a 14 percent rise.
TRAC defines white-collar crime broadly, including charges for securities, computer and corporate fraud; antitrust violations; and a range of other crimes. It tracks cases by the fiscal year. Adjusting for population, the U.S. attorney’s office in the Bay Area is one of the least active for white-collar enforcement.
Although she did not dispute the accuracy of the statistics, Haag stressed that they are not a good measuring stick for her office’s accomplishments. “I am not focused on the numbers,” she said. “What I am focused on is the quality of the cases.”
A. Marisa Chun, a white-collar partner at McDermott Will & Emery, noted that Haag has pursued cross-border cases that demand even more resources than the typical white-collar investigation. In March, federal prosecutors won an economic espionage case against Oakland businessman Walter Liew, who was accused of selling E.I. du Pont de Nemours & Co.’s trade secrets to China.
The office has been aggressive in its intellectual property prosecutions under Haag’s leadership, lawyers say, also convicting corporate recruiter David Nosal on counts of conspiracy, stealing trade secrets and violating the Computer Fraud and Abuse Act.
Two long-running criminal investigations bore fruit this spring. Working with California Attorney General Kamala Harris, federal prosecutors charged Pacific Gas and Electric Co. with violations of the Natural Gas Pipeline Safety Act related to the 2010 explosion in San Bruno. Days earlier, federal prosecutors charged state Sen. Leland Yee and more than two dozen other defendants with crimes that included firearms and weapons trafficking, money laundering, murder for hire, drug distribution and honest services fraud.
“These are not small fish,” said Munger Tolles & Olson of counsel Miranda Kane, who served as Haag’s criminal chief from 2010 to 2013. “These are cases that take a lot of work to put together.”
Federal prosecutors in the office are increasingly devoting their time to cases involving the Foreign Corrupt Practices Act, an area of enforcement that lawyers say will be key as maturing Valley startups expand abroad. In April, San Francisco-based Assistant U.S. Attorney Adam Reeves and trial attorneys in the Department of Justice’s fraud section struck a $108 million settlement with HP over allegations that its subsidiaries bribed foreign officials. Haag offered up another measure by which to gauge her office’s productivity. In fiscal year 2013, the office collected more than $394 million from civil and criminal actions, an amount topped by only one district. The office’s rank by that measure has steadily increased during her tenure, Haag noted.
The volume of white-collar prosecutions in the Northern District has ebbed and flowed under different administrations. Cases boomed under Mueller, with 214 defendants indicted in 2000. They fell precipitously under his successor, Kevin Ryan, who prioritized violent crime, lawyers say.
Ryan’s tenure was plagued by other troubles, with more than 40 prosecutors leaving amid complaints of management missteps, including a long list of veteran assistant U.S. attorneys with white-collar chops, The Recorder reported at the time. Though Ryan ultimately was fired, the Northern District ceded ground under his watch that his successors have had to regain, lawyers say.
“That cast a long shadow,” said Clarence, the longtime white-collar defense lawyer. “They’re still trying to pull themselves out of that.”
A TOUGH TARGET
With new companies constantly cropping up, many of which aim to disrupt established industries and business practices, the Valley is a vexing region to police, lawyers say.
Jonathan Schmidt, a former Northern District prosecutor who left the office for Ropes & Gray last year, said prosecutors are likely still devising best practices for enforcement in the Valley.
“Policing Silicon Valley is different than policing Wall Street, and will take some time to figure out,” he said.
Accounting fraud cases were assistant U.S. attorneys’ bread and butter during the Mueller era. But laws such as the Sarbanes-Oxley Act of 2002 have rooted much of that out, instituting procedures that make it more difficult for companies to fudge their numbers, lawyers say.
“At the margin, there are more controls, and it makes it more difficult,” said former Northern District prosecutor Timothy Crudo, who is now a white-collar partner at Coblentz, Patch, Duffy and Bass. “But it’s not going to stop all fraud.”
Haag’s deputies are pursuing at least one significant case of that variety. Days after HP announced an $8.8 billion write-down of its acquisition of Autonomy, Bay Area prosecutors launched an investigation into accusations that the British software company cooked its books.
Some lawyers point to the investigation, which has now been running for a year and a half, as an example of Bay Area prosecutors’ slowness in deciding whether to bring charges or decline to prosecute. It’s a critique that has long been levied against the office. And as the clock runs, prosecutors generally see their hand weaken, lawyers say.
“Memories can fade. Evidence may get lost or go stale,” said Walt Brown, a white-collar partner at Orrick. “That’s why it’s important from the prosecution’s perspective to do something to move cases along.”
When he returned for his second tour as U.S. attorney after Ryan’s exit, Joseph Russoniello pushed prosecutors to act more decisively. “The office had been criticized for its timidity,” said Russoniello, who now practices at Browne George Ross in San Francisco. “A case doesn’t need to be prepared to perfection. You’re never going to have that.”
Launching a program called “Golden Gate,” Russoniello required attorneys in the white-collar unit to meet with a supervisor within one month of launching an investigation to plan for a quick resolution. Prosecutors could not keep investigations running past a certain calendar date without a supervisor’s approval. Russoniello credits the program with boosting white-collar cases, which almost doubled during his tenure, according to TRAC data.
Russoniello devised Golden Gate to build on “Alcatraz,” an initiative pioneered by Mueller in San Francisco to track cases from intake to indictment. U.S. attorneys across the country still use Alcatraz to monitor their dockets.
One lawyer with knowledge of the matter said Haag has moved away from such rigid timetables. Haag declined to disclose the tools she uses to track cases, saying supervisors “work hard to make sure that we are bringing cases as quickly as we can, given their complexity.”
ANGLING FOR MORE
Although the Valley has been bustling for several years, some say it is still too early for the prime white-collar cases to emerge.
“In a boom time like the one we’ve had recently, everything looks good,” said Keker & Van Nest partner Stuart Gasner. “It’s not until the bottom drops out that the quest for scapegoats begins.”
Lawyers familiar with the office point to several steps Haag has taken to ramp up. After a long hiring freeze, she is preparing to bring on about a dozen new assistant U.S. attorneys, which may free up more senior lawyers for white-collar investigations.
Lawyers familiar with the office say Haag has fortified ties between the office and the agencies that feed it, such as the Federal Bureau of Investigation and the U.S. Securities and Exchange Commission. The partnership is especially crucial for white-collar cases, said Kane, Haag’s former criminal chief.
“Those are long cases, and you need people who are committed to something for the long haul,” Kane said.
Haag is also taking public stands, signaling to the DOJ and the local bar that high-profile cases in Silicon Valley should be hers to prosecute.
“I don’t think the leadership of the U.S. attorney’s office is shy or reluctant to fight for cases that they believe should be there,” said Cohen Milstein Sellers & Toll partner Matthew Axelrod, who worked at the DOJ in the deputy attorney general’s office from 2011 to 2013. The fighting spirit is important because Haag cannot always trust that she will get to bring cases that originate in her backyard. With a far reach for cases with a financial tie, the Southern District of New York has sucked up several cases that appeared to have strong links to the Bay Area, including branches of the Galleon insider-trading ring.
“Right now, it’s not a competition,” Clarence said. “They lose.”
Home to the nation’s most prominent technology companies, the Bay Area is a natural epicenter for data breach cases. But those cases too may be up for grabs. In April, the U.S. Court of Appeals for the Third Circuit overturned the conviction of computer hacker Andrew Auernheimer, who in 2010 allegedly snatched about 120,000 email addresses from AT&T’s website and handed them to Gawker. Auernheimer hacked into the site in Arkansas, the servers were housed in Texas and Georgia, and a coconspirator assisted him from the Bay Area. Yet Auernheimer was tried in New Jersey.
“We have always kind of been at a loss as to why they brought the case in New Jersey,” said Fakhoury of EFF. “They said that basically they could have prosecuted in any jurisdiction where there was some individual whose email address had been taken.”
The appeals court rejected that logic, stressing that hacking cases must be tried where the crime was committed, even when victims abound. While the case may give the Northern District more clout in skirmishes over venue, Kane said Haag has already done much to ward off those battles.
“She remains determined not to have crimes that are happening in our district prosecuted by anyone other than our district,” Kane said. “You won’t see that happening anymore.”
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