The opinion of the court was delivered by: KESSLER
This matter is before the Court upon Defendants' three Motions to Dismiss and one Motion to Strike.
The motions arise out of Independent Counsel Donald Smaltz's criminal prosecution of Defendants for conspiring to make illegal campaign contributions and then concealing those contributions from various federal agencies.
Defendant Crop Growers Corporation ("Crop Growers") is a holding company for several wholly-owned subsidiary companies, including Crop Growers Insurance, Inc. ("CGI"), Crop Growers Software, Inc. ("CGS"), and Prairie Mountain Insurance, Inc. ("PMI"). Defendants John J. Hemmingson ("Hemmingson") and Gary A. Black ("Black") were officers of Crop Growers at all relevant times. Hemmingson was an officer and director of CGI and a director of CGS. Black was also a director of Crop Growers, an officer of CGI, an officer and director of CGS, and an officer of PMI. CGI obtains a significant portion of its revenue from the federal Multi-Peril Crop Insurance Program, which the Department of Agriculture regulates.
All three Defendants are charged in an eighteen-count indictment (the "Indictment"), returned on October 31, 1996.
Independent Counsel Donald Smaltz (the "IC") is prosecuting Defendants as part of his investigation of the acceptance of gifts by former Secretary of Agriculture Alphonso Michael ("Mike") Espy ("Secretary Espy" or the "Secretary") from organizations or individuals with business pending before the Department of Agriculture.
The Indictment charges an elaborate scheme, involving indicted and unindicted co-conspirators, to violate the Federal Election Campaign Act ("FECA") and to conceal that violation in contravention of the campaign finance and securities laws. Essentially, the Indictment charges that Defendants facilitated the making of illegal campaign contributions to Secretary Espy's brother, Henry William Espy, Jr. ("Henry Espy"). These contributions were allegedly hidden by Defendants' falsification of the accounting and business records of Crop Growers and its subsidiaries CGI, CGS, and PMI. Specifically, the Counts of the Indictment charge as follows:
Count One: A five-object conspiracy, existing from 1993 through 1995, to make and conceal illegal campaign contributions of approximately $ 46,000 to the Henry Espy for Congress Committee.
Counts Two and Three: Causing the Henry Espy for Congress Committee to falsely report the identities of campaign contributors to the Federal Election Commission ("FEC") on March 24, 1993, and August 31, 1993. Crop Growers is not a named defendant in these Counts of the Indictment.
Count Four: Making and keeping false records and accounts comprising the information underlying the financial statements filed by Crop Growers with the Securities and Exchange Commission ("SEC"), from June 23, 1994 through December 31, 1995.
Count Five: Making and keeping false accounting records, from June 23, 1994 through December 31, 1995. Crop Growers is not a named defendant in this Count of the Indictment.
Counts Six through Fifteen: Failing to disclose material facts in filings with the SEC on ten different dates, from April 11, 1994 through March 31, 1995.
Count Sixteen: Failing to provide information about the alleged false information comprising the first fifteen Counts of the Indictment in information relied upon by purchasers and potential purchasers of securities when Crop Growers became a publicly traded corporation registered with the SEC.
Counts Seventeen and Eighteen: Failing to disclose potentially illegal conduct to independent auditors, namely, that management of Crop Growers had been involved in making illegal campaign contributions, on March 25, 1994 and March 28, 1995. Crop Growers is not a named defendant in these Counts of the Indictment.
Defendant Hemmingson and several other persons not indicted here, including Henry Espy, have been indicted and tried in the Eastern District of Louisiana for crimes arising out of similar and/or interrelated events. United States v. Espy, et al., No. CR. 96-198 (E.D. La. Aug. 1996). Secretary Espy is not a defendant in either action.
Defendants raise several challenges to the substance of the Indictment in their many motions, each of which will now be considered in turn.
II. Independent Counsel Jurisdiction
All three Defendants challenge the IC's jurisdiction to bring the charges in the Indictment, and move that all eighteen Counts be dismissed under Fed R. Crim. P. 12(b)(1) and (2).
The Independent Counsel shall have jurisdiction and authority to investigate other allegations or evidence of violation of any federal criminal law, other than a Class B or C misdemeanor or infraction, by any organization or individual developed during the Independent Counsel's investigation referred to above and connected with or arising out of that investigation . . . [and] to seek indictments and to prosecute any organizations or individuals involved in any of the matters described above, who are reasonably believed to have committed a violation of any federal criminal law arising out of such matters, including organizations or individuals who have engaged in an unlawful conspiracy or who have aided or abetted any federal offense.
Id. at 2. On September 14, 1994, the Department of Justice ("DOJ") referred an additional matter to the IC (the "Supplemental Referral") for investigation, namely, that "Secretary Espy hosted a fundraising dinner, attended by agricultural lobbyists, the purpose of which was to retire the campaign debt of his brother." Notice of Prosecutorial Jurisdiction, United States v. Crop Growers Corp. et al., Criminal No. 96-181 (D.D.C. May 30, 1996). Defendants assert both constitutional and statutory arguments in support of their position that the IC has exceeded his jurisdiction in bringing these charges.
First, Defendants rely on Morrison v. Olson, supra, for the proposition that an IC who attempts to perform more than a "single task" has been improperly appointed by the judiciary in violation of the Appointments Clause of the Constitution, Art. II, § 2, cl. 2. The single task to which the Supreme Court referred in Morrison was the limited grant of authority in an IC's appointment order and any supplemental referrals. Id. at 672. Because the Court concludes that the conduct at issue here is sufficiently related to the investigatory powers granted the IC in the Appointment Order and Supplemental Referral, see infra pp. 7-9, it follows that the IC has acted within Morrison's single task parameter.
Second, Defendants contend that they are not "covered persons" under the Act. By its terms, the Act is triggered by the alleged illegal conduct of high ranking executive branch officials. 28 U.S.C. § 591(a), (b). However, the IC is not limited to investigating only those persons covered by the Act. United States v. Tucker, 78 F.3d 1313, 1321-22 (8th Cir. 1996), cert. denied, 117 S. Ct. 76 (1996). When the IC investigates non-covered persons, he must show that the persons or organizations and matters being investigated are related to the original subject matter of his investigation so that "there is a reasonable causal or logical connection between the two." United States v. Secord, 725 F. Supp. 563, 566 (D.D.C. 1989). Accord, United States v. Sun-Diamond Growers of Ca., 941 F. Supp. 1262, 1273 (D.D.C. 1996) [Sun-Diamond I ]. Again, given the Court's decision relating to the scope of this Appointment Order and Supplemental Referral, the Court finds that a significant connection exists between gratuities allegedly accepted by Secretary Espy and contributions made to retire his brother's campaign debt because both could conceivably influence the Secretary's opinions and decisions on matters pending before the Department of Agriculture.
Defendants assert that neither the original Appointment Order nor the Supplemental Referral provides jurisdiction over the subject matter of the Indictment. Defendants' contention that the only powers granted to the IC are related to the acceptance of gratuities by Secretary Espy is simply without merit. The language of both the Appointment Order and the Supplemental Referral clearly gives the IC the authority to investigate persons and organizations other than Secretary Espy and violations of federal laws other than the gratuities statute.
Defendants also argue that, because the Indictment does not allege any wrongful conduct by Secretary Espy, the conduct it does charge is insufficiently related to the authority granted the IC in the Appointment Order and Supplemental Referral to satisfy the requirements of 28 U.S.C. § 593(b)(3). To prove relatedness, the IC must show that "there is a reasonable causal or logical connection" between the organizations and the matters being pursued by the IC and the subject matter of the original investigation. Secord, 725 F. Supp. at 566.
In Sun-Diamond I, the defendants argued that several counts of the indictment did not relate specifically to the subject of gratuities and, thus, at most, should have been referred to the DOJ for prosecution. 941 F. Supp. at 1273. The Sun-Diamond I court rejected the argument, pointing out that the indictment alleged that those defendants had made an illegal campaign contribution to Henry Espy, had conspired to conceal the contribution, and had business pending before the Department of Agriculture. Id. The court found that the alleged purpose of the contribution, to gain improper influence with Secretary Espy, was "intertwined with the original core subject matter of the Attorney General's investigation, as well as the subsequent related referral dealing with the allegations that Secretary Espy hosted a fundraising dinner to help retire his brother's campaign debt." Id. at 1274.
The logic of the Sun-Diamond I analysis is applicable here. The same Appointment Order and Supplemental Referral define the jurisdiction of the IC in this case as they did in Sun Diamond I, and the interpretation of those documents is the same in both cases. The underlying concern of the IC's investigation of Secretary Espy is that the "Secretary may have been influenced improperly to favor or intervene in the gift-givers' cause pending before his or her Department." In re Espy, 317 U.S. App. D.C. 25, 80 F.3d 501, 508 (D.C. Cir. 1996). The Appointment Order, by its terms, allows the IC to investigate the acceptance of gratuities by Secretary Espy and to investigate individuals and organizations who may have violated any federal law in connection with the investigation of the Secretary. Clearly, allegations that an organization with business pending before the Department of Agriculture made an illegal campaign contribution to Secretary Espy's brother to curry favor with the Secretary falls within the mandate of that Appointment Order. Further, the Supplemental Referral clearly covers allegations of Hemmingson's attendance at the fundraising dinner hosted by Secretary Espy. Allegations relating to the fundraising dinner are part and parcel of the overarching theory that all these activities were designed to curry favor with the Secretary.
Defendants attempt to distinguish Sun Diamond I on the basis that the Sun Diamond I indictment specifically alleged, in other counts, that the defendants had paid gratuities to Secretary Espy himself. However, Defendants' argument is unpersuasive because the analysis of the contribution to Henry Espy was not based on the existence of gratuities charges in other counts of the indictment.
Thus, Defendant's Motion to Dismiss the Second Superseding Indictment as Beyond the Independent Counsel's Jurisdiction is denied.
III. Inconsistent Theories of Prosecution
Defendants Hemmingson and Crop Growers assert that the IC's theory of prosecution in the Eastern District of Louisiana is inconsistent with its theory of prosecution in this District and thus move that Counts One, Four, Five, Eleven through Fifteen, Sixteen, and Eighteen of the Indictment be dismissed under Fed R. Crim. P. 12(b)(2) and the Due Process Clause of the Constitution. Although few cases address this issue, those that do overwhelmingly favor the position of the IC.
The Louisiana indictment charges that Defendant Hemmingson and other co-conspirators perpetrated a fraud upon Crop Growers by taking $ 20,000 from Crop Growers and directing it to Henry Espy's campaign, disguising it as a legal fee. Thus, in Louisiana, the IC charges that Crop Growers was a victim of the alleged criminal activity. The District of Columbia Indictment charges that Crop Growers itself made illegal campaign contributions to the Henry Espy campaign. Defendants assert that it is completely inconsistent for the IC to assert that the same behavior makes Crop Growers a victim in Louisiana and a perpetrator in the District of Columbia Thus, Defendants argue that the Counts of the Indictment resting on the alleged $ 20,000 contribution should be dismissed.
Defendants rely heavily on a concurring opinion in Drake v. Kemp, 762 F.2d 1449 (11th Cir. 1985) (en banc), cert. denied, 478 U.S. 1020, 92 L. Ed. 2d 738, 106 S. Ct. 3333 (1986), where two defendants were tried separately for the same murder. The prosecution presented inconsistent theories about whom the actual murderer was and obtained two death penalty convictions. Drake, 762 F.2d at 1478 (Clark, J., concurring). The majority of the en banc panel declined to reach Drake's argument that the theories of prosecution were inconsistent and relied instead on other grounds to overturn his conviction. Id. at 1451. Judge Clark, concurring, found that the prosecutor's actions violated notions of fundamental fairness inherent in the Fourteenth Amendment's due process clause. Id. at 1478-79.
For the following reasons, the Court finds Judge Clark's concurrence of no help to Defendants. First, no other judge joined Judge Clark's opinion and, as noted above, the en banc court did not reach the issue.
Second, Judge Clark's opinion, which turned largely on factual inconsistencies between the two trials, condemned what he perceived to be false evidence. Id. at 1477, 1479. Third, subsequent case law has narrowly construed Judge Clark's view, applying it only where the prosecutor has used "evidence that he could not have believed." Parker v. Singletary, 974 F.2d 1562, 1578 (11th Cir. 1992). Finally, a concurring opinion from the Eleventh Circuit does not bind this Court.
In addition, as a corporation, rather than a natural person, Crop Growers can be both a victim and a participant in crimes arising out of the same facts. It is a basic principle of corporate law that, in a shareholder derivative suit, a corporation plays the role of both plaintiff and defendant. See Cohen v. Beneficial Indus. Loan Corp., 337 U.S. 541, 547-48, 93 L. Ed. 1528, 69 S. Ct. 1221 (1949). See also Weaver v. United Mine Workers of Am., 160 U.S. App. D.C. 314, 492 F.2d 580, 586 (D.C. Cir. 1973) (recognizing that a union, like a corporation, can reverse its position with respect to derivative litigation) (citing with approval In re Penn Cent. Sec. Litig., 335 F. Supp. 1026 (E.D. Pa. 1971)).
Judge Clement ruled similarly when Hemmingson raised the same issue in a Motion to Transfer Venue in Henry Espy, Crim. Act. 96-198 (E.D. La. Nov. 6, 1996). In that motion, Hemmingson argued that transferring the indictment from Louisiana to the District of Columbia would prevent the government from arguing inconsistent legal theories at the two trials. Id. slip. op. at 12. That court rejected Hemmingson's request, relying in part on theories of corporate law. Id. at 12-13.
Finally, Defendants cite no authority, and the Court has found none, where a court has dismissed a criminal prosecution based on inconsistent theories of prosecution. For all these reasons, Defendants' Hemmingson and Crop Growers Motion to Dismiss the Second Superseding Indictment Based on Inconsistent Theories of Prosecution is denied.
IV. Liability Under 18 U.S.C. § 1001
Counts Six through Fifteen of the Indictment charge Defendants with violations of 18 U.S.C. Section 1001
and 18 U.S.C. Section 2.
Section 1001 proscribes two different types of conduct: concealment of material facts and false representations. See United States v. Curran, 20 F.3d 560, 566 (3d Cir. 1994); United States v. Mayberry, 913 F.2d 719, 722 n.7 (9th Cir. 1990); United States v. Tobon-Builes, 706 F.2d 1092, 1096 (11th Cir. 1983); United States v. Diogo, 320 F.2d 898, 902 (2d Cir. 1963). The Indictment alleges violations of both prohibitions, which will be discussed in turn.
The Indictment specifically identifies ten different SEC filings from which material facts were allegedly omitted. These material facts are: (a) that Crop Growers violated FECA by making illegal campaign contributions; (b) that a material contingent liability existed for potential criminal and civil fines because of said violations; (c) that Crop Growers' financial statements were misleading; (d) that Crop Growers maintained false books and records; and, (e) that Crop Growers, its subsidiaries, and their key officers faced criminal and civil sanctions under provisions other than FECA and that their ability to operate could be severely affected as a result.
A. Section 1001 Concealment
Although our Court of Appeals has not squarely addressed the issue,
the majority of Circuits have ruled that a violation of Section 1001 predicated on concealment requires that the defendant must have had a legal duty to disclose the facts at the time of the alleged concealment. Curran, 20 F.3d at 566; United States v. Zalman, 870 F.2d 1047, 1055 (6th Cir. 1989), cert. denied sub nom., Sharifinassab v. United States, 492 U.S. 921, 106 L. Ed. 2d 594, 109 S. Ct. 3248 (1989); United States v. Nersesian, 824 F.2d 1294, 1312 (2d Cir. 1987), cert. denied, 484 U.S. 958, 98 L. Ed. 2d 382, 108 S. Ct. 357 (1987); United States v. Murphy, 809 F.2d 1427 (9th Cir. 1987); United States v. Hernando Ospina, 798 F.2d 1570, 1578 (11th Cir. 1986); United States v. Larson, 796 F.2d 244, 246 (8th Cir. 1986); United States v. Anzalone, 766 F.2d 676, 683 (1st Cir. 1985); United States v. Irwin, 654 F.2d 671, 678-79 (10th Cir. 1981), cert. denied, 455 U.S. 1016, 72 L. Ed. 2d 133, 102 S. Ct. 1709 (1982). At least one district court in this circuit has stated that "the case law is clear that the deliberate failure to disclose material facts in the face of a specific duty to disclose such information constitutes a violation of the concealment provision of § 1001." United States v. Dale, 782 F. Supp. 615, 626 (D.D.C. 1991).
The rationale of these cases has rested, in large part, on due process considerations. See Murphy, 809 F.2d at 1431 (citations omitted); United States v. Bucey, 876 F.2d 1297, 1307-08 (7th Cir. 1989), cert. denied, 493 U.S. 1004, 107 L. Ed. 2d 560, 110 S. Ct. 565 (1989) (citation omitted). For example, in Murphy, the defendant was charged with conspiring to conceal information from and falsify information to the Internal Revenue Service by submitting Currency Transaction Reports ("CTRs") that misidentified the source of funds deposited. 809 F.2d at 1429. The court found that because the CTR form was ambiguous, criminal liability could not be predicated on the failure to fill out the form completely, stating:
Due process requires that penal statutes define criminal offenses with sufficient clarity that an ordinary person can understand what conduct is prohibited. Kolender v. Lawson, 461 U.S. 352, 357, 75 L. Ed. 2d 903, 103 S. Ct. 1855 (1983). [The statute and regulations at issue] do not clearly require depositors to identify the source of their funds. Therefore, the imposition of criminal sanctions on these facts would violate due process. [citation omitted].
Murphy, 809 F.2d at 1431.
In Murphy, where the statute and its implementing regulations were ambiguous as to whether they required disclosure, the Ninth Circuit concluded that imposition of criminal liability would offend due process considerations. A fortiori, where a statute or regulation imposes no duty whatever to disclose information, due process concerns require that criminal liability not be based on omission of such information.
Turning to the issue of whether Defendants herein had a duty to disclose the five pieces of information that the IC alleges as the basis for liability, the Court must first decide, as a matter of law, whether such duty existed. Zalman, 870 F.2d at 1055 (citations omitted); United States v. Poarch, 878 F.2d 1355, 1360 (11th Cir. 1989).
Defendants contend that they had no duty to disclose that Crop Growers violated FECA by making illegal campaign contributions or that they illegally maintained false books and records. In support of their argument, Defendants cite United States v. Matthews, 787 F.2d 38 (2d Cir. 1986), for the ...