Power Tips to Prosecutors

Daily Business Review
Dan Christensen

Squeezed between regulators and prosecutors, South Florida lawyers who represent white-collar defendants are struggling to cope with an increasingly hostile environment for their clients.

In the wake of Enron and other giant corporate financial scandals, white-collar defendants and suspects are facing stepped-up regulation and prosecution, tougher sentences, more aggressive prosecutorial tactics and more hostile juries.

Defense attorneys are developing fresh tactics to counter the government’s powerful new arsenal, including using former government agents, linguistic experts and even other lawyers as witnesses to debunk prosecutors’ electronic evidence. And since the recent Martha Stewart obstruction of justice trial, they are rethinking the old rule about not putting their clients on the stand.

No one questions that the government now has greater firepower. On the criminal side, accused corporate offenders face longer federal sentences under the 2002 Sarbanes-Oxley Act. At the same time, under more recent changes to federal law, prosecutors and judges have less discretion to tailor charges and sentences to individual cases. Even those convicted of white-collar crimes before those legal changes took effect are being socked with stiffer sentences.

On the civil side, federal and state regulators with bulked-up budgets increasingly are using the courts to club errant corporations and fraudulent operators with orders that freeze their assets, seek disgorgement of illegal profits, and seize or shutter their businesses. They are coordinating those efforts with prosecutors to make it harder for defendants to fight criminal charges.

Attorneys representing white-collar defendants bristle over the changes. Steven E. Chaykin, a partner at Zuckerman Spaeder in Miami, said in the past someone charged with securities fraud involving $1 million could plead to a five-year maximum count that, with various adjustments, would have carried less than a five-year sentence. “That same person today, instead of looking at perhaps two or three years, is looking at six to eight years,” he said.

Veteran white-collar defense attorney and former federal prosecutor Roma W. Theus II, a partner at Edwards & Angell in Fort Lauderdale, called the severity of sentencing in several recent South Florida federal cases “extraordinary.” He said he could not “recall any higher sentences having been imposed in this district for white-collar crime offenses.”

Stephen J. Bronis, a Zuckerman Spaeder partner in Miami who is the incoming chair of the American Bar Association’s white-collar crime committee, said crimes involving less money are receiving stiffer sentences.

But regulators and prosecutors are pleased with the new legal and political environment. “Some change is certainly because of new powers and provisions in the law,” said David Nelson, director of the southeast regional office of the U.S. Securities and Exchange Commission in Miami. “But at the end of the day, the biggest change for us has come because of the increase in our resources. We can do more cases.”

A spokesman for U.S. Attorney Marcos D. Jimenez attributed the more favorable prosecutorial climate to the Sarbanes-Oxley law and some less sweeping anti-crime legislation enacted shortly before that.

“Sarbanes-Oxley increased the maximum sentences for mail fraud and wire fraud from five to 20 years,” said Jimenez spokesman Carlos B. Castillo. “It also caused tougher changes to the sentencing guidelines.”

At the state level, Florida Statewide Prosecutor Peter Williams said everything has come together to keep white-collar criminals on the run. His office has about 40 attorneys working in eight offices from Tallahassee to Miami.

“The statutes are firm enough, the penalties are firm enough and they’re being applied by judges across the state,” Williams said. “And the Legislature was good to us this year. I think we’re appropriately staffed.”

The government’s muscle-flexing comes amid a general boom in white-collar prosecutions and probes in both federal and state courtrooms in Florida and across the nation.

Nelson said congressional funding increases in the past two years have allowed him to boost his enforcement staff, including lawyers and investigators, from 70 to 93. As a result, the SEC in each of those two years filed nearly twice as many securities cases — administratively or in federal court — as in 2001, he said.

Jimenez’s office charged 208 white-collar offenders in Miami in fiscal year 2003. That was up 20 percent from flat numbers in 2001 and 2002, said Jimenez spokesman Castillo. An additional 140 persons were charged during the current fiscal year through June 30, he said. The fiscal year ends Sept. 30.

Health care fraud cases have led the growth in white-collar crime prosecutions. In the last fiscal year, 40 new defendants were charged district wide. With three months to go in fiscal year 2004, 87 defendants have already been charged, Castillo said.

Castillo declined to produce statistics for securities fraud prosecutions — the other key economic crime enforcement area.

But several white-collar defense attorneys said securities fraud prosecutions are noticeably down. Bronis attributed that decline to the U.S. Department of Justice’s focus on national security enforcement since the Sept. 11 terrorist attacks. On the other hand, he said he’s seen increased activity in civil enforcement of securities fraud.

Defense attorney Benedict P. Kuehne, a partner at Sale & Kuehne in Miami, said he also sees a decrease in securities fraud prosecutions. But he noted that the U.S. Attorney’s Office in Miami prosecuted 58 defendants charged in the sweeping FBI undercover probe of more than $150 million in fraudulent securities sales, code-named Bermuda Short.

“They are bringing some aggressive, significant cases,” Kuehne said. “Bermuda Short is the model that is going to be used in the future for those kinds of undercover investigations where they try to take on a considerable part of an industry.”


As prosecutors and regulators get more aggressive, federal district judges in South Florida are meting out white-collar sentences of unprecedented severity — even for crimes committed before Sarbanes-Oxley took effect.

The contrast between the past and the present in federal sentencing is stark. Before the Sentencing Reform Act of 1984, which created the guidelines that became effective three years later, federal district judges had “virtually unfettered” sentencing discretion, with the power to give first-time offenders probation, Theus said.

Since then, the sentencing discretion of judges has dwindled while the penalties imposed on white-collar offenders have grown steadily tougher. “There has been a stark progression from where there was almost a presumption of probation to the likelihood of imprisonment to the substantial likelihood of substantial imprisonment,” said Chaykin, a former federal prosecutor.

“It’s almost a foregone conclusion now that if there is a conviction, jail time will follow,” Theus said.

In May, Marc M. Harris was convicted of running an enormous offshore tax shelter fraud and money laundering scheme and Fort Lauderdale U.S. District Judges James I. Cohn sentenced him to 17 years.

In January, former Link Express Delivery Solutions chief executive Paul R. Johnson was found guilty for his role in a $19 million corporate securities fraud scheme. U.S. District Judge Donald M. Middlebrooks in West Palm Beach sentenced him to 20 years.

And in April, Serder Kalaycioglu, a former official in the Canadian Space Agency, was sentenced by U.S. District Judge Daniel T.K. Hurley to 27 years after a seven-week trial in West Palm Beach. He was convicted of multiple counts of wire fraud and conspiracy related to a $20 million investment fraud scheme.

Defense attorneys and prosecutors alike say even harsher sentences are on the way. Defendants who will be affected are those convicted of white-collar crimes that occurred after the Sarbanes-Oxley Act took effect on July 30, 2002, as well as those convicted of crimes that occurred after federal sentencing guidelines were stiffened in January of last year for economic crimes.

For example, Sarbanes-Oxley increased the penalty for securities fraud from 10 years to 20 years.

Such cases only recently have begun landing in the courts, said Eric I. Bustillo, chief of economic crimes under U.S. Attorney Jimenez in Miami.

Bustillo, who leads a staff of 17 Miami-based attorneys dedicated to prosecuting fraud in the areas of securities, health care, bank and taxes, identified several big white-collar cases where defendants are subject to those higher maximum sentences and enhanced penalties. The most sweeping case is the prosecution of an alleged $170 million scheme to defraud Espirito Santo Bank of Florida.

In May, four defendants in the case pleaded guilty to bank fraud, conspiracy or other charges in the case. They await sentencing. Nine more defendants are to go on trial next April in Miami, including lead defendants Eduardo and Hector Orlansky.

The charges stem from a failed business partnership between entities related to Espirito Santo Bank and Bankest Capital, the Miami factoring company owned by the Orlansky brothers. Factoring companies lend money using the borrower’s accounts receivable as collateral, and they charge above-market interest rates.

For years, Bankest allegedly misrepresented the loan value of its accounts receivables to dupe Espirito Santo Bank into providing financing. Assistant U.S. Attorneys Stephen Stallings and Caroline Heck Miller are prosecuting the case.

Other recently charged defendants who may face stiffer sentences if convicted are former Hamilton Bank chief executive Eduardo A. Masferrer, former president Carlos Bernace and former chief financial officer John M. R. Jacobs.

They were indicted last month on charges of conspiracy, wire fraud, securities fraud and obstruction of justice charges for allegedly covering up multimillion-dollar losses in international loans that led to Hamilton Bank’s shuttering by federal banking regulators in 2002.

Indiana University School of Law professor Frank O. Bowman III, a federal prosecutor in Miami from 1989 to 1996, has called the enactment of the stiff criminal provisions of Sabanes-Oxley the “regrettable” result of Democrats and Republicans in Congress competing over who’s tougher on corporate malefactors in the aftermath of the Enron, WorldCom and Global Crossing scandals.

“Characterizing corporate scandal as crime shifts the focus away from degenerate norms of legal business behavior and deflects criticism of those, both in and out of government, complicit in allowing those norms to emerge,” Bowman wrote in the current issue of theOhio State Journal of Criminal Law.

The tough federal sentencing guidelines may be in constitutional jeopardy, however. Last month, the U.S. Supreme Court, in a 5-4 decision, struck down as unconstitutional sentencing guidelines in Washington state that allowed increases in sentences based on aggravating facts determined by a judge, not a jury.

The justices did not specifically apply their decision in Blakely v. Washington to federal cases. The Justice Department has taken the position that Blakely does not apply to such cases.

But some experts argue that Blakely sets the stage for future rulings striking down the federal guidelines as unconstitutional in whole or in part. There’s widespread agreement that the federal sentencing system will be at risk unless the Supreme Court or Congress provides guidance soon.


Another new wrinkle in the get-tough environment is that the SEC, which lacks the authority to bring criminal cases, is working more closely with Florida state prosecutors to bring criminal charges against white-collar lawbreakers.

Just last month, the Florida Office of Statewide Prosecution used evidence developed by the SEC to bring criminal racketeering and securities charges in Broward Circuit Court against the Fort Lauderdale viatical company Mutual Benefits Corp. In May, the SEC shuttered the company and placed it in receivership.

“We worked with the SEC to bring state charges,” said Statewide Prosecutor Peter Williams in Tallahassee.

Nelson hopes to expand that federal-state cooperation. In the coming months, he said, he plans to contact state attorneys around Florida to explore bringing state fraud charges in cases that don’t meet the federal threshold for prosecution. One former federal prosecutor said that federal threshold is “several hundred thousand dollars.”

“We want to see if there’s an interest there,” Nelson said. “It may be that what rises to our attention could also be charged as an embezzlement or whatever under local statutes. We want to be creative.”

Fred Kerstein, the veteran chief of economic crimes under Miami-Dade State Attorney Katherine Fernandez Rundle, said he’d welcome Nelson’s call.

“I’ve only worked with the SEC on very rare occasions … but they have expertise that can be unusual on the state side and they get matters reported to them that we’d be happy to see,” he said. “They’d provide most of the investigative assistance; we’d provide the prosecutorial assistance.”

Kerstein said there are already several laws on the books in Florida, including a broad statute regarding investment fraud, that could help do the job.

The Sarbanes-Oxley Act makes it illegal for corporate executives to engage in a range of financial reporting practices, such as for chief executives to sign public disclosures they know are false. Neither the SEC nor the U.S. Attorney’s Office has disclosed whether the SEC has asked the U.S. Attorney’s Office to bring criminal charges based on such violations of the act.

In the SEC southeastern regional office’s first use of Sarbanes-Oxley last year, the agency reached a civil settlement with Miami-based poultry company Rica Foods that included a $25,000 fine against chief executive Calixto Chaves. The SEC had alleged that Chaves and another executive certified that they’d received a signed independent auditor’s report when no such report was ever provided. The settlement was reached without any admissions of wrongdoing.

Nelson declined to discuss whether he’d referred the two executives for criminal prosecution.


Further complicating the work of South Florida’s white-collar defense bar is the government’s stepped-up effort to simultaneously bring civil and criminal proceedings against their clients. It’s not a new law enforcement tactic to coordinate civil actions and criminal probes. But it’s become more popular in white-collar matters because it’s proven effective.

“You can get dollars, tie up assets and force the investigation of your criminal case,” said Michael S. Pasano, a former federal prosecutor and partner at Zuckerman Spaeder who is chair-elect of the ABA’s criminal justice section.

For example, civil court orders that freeze assets have made it “extremely difficult” for clients to defend themselves against criminal charges because then they don’t have the money to pay attorney fees, Chaykin said.

That’s a tactic long familiar to Miami attorneys representing accused narcotics dealers.

“They take the position that every penny is tainted and that lawyers should not be paid with tainted money,” Bronis said. “It has a chilling effect on representation.” He said many defense lawyers are reluctant to take a case where there is either a forfeiture count in the criminal indictment or a restraining order in an SEC civil enforcement action.

Such government tactics can hurt a defendant’s legal effort. “Asset freezes have an effect on the ability of these white-collar defendants to obtain release on bond,” Chaykin said.

Parallel civil and criminal proceedings also are more costly to defend. “You have to fight on more fronts, against more weapons,” Chaykin said.

Theus agrees. “Your assets may be frozen, and you may be subject to [civil] discovery before you deal with criminal matters,” he said.

There’s also the thorny problem of whether a defendant who faces both civil and criminal jeopardy should testify. “If you have a parallel case under way, your deposition can be taken in the civil case and you then face a dilemma,” Theus said. “Do you testify, in hopes of getting to those assets to defend yourself, or do you invoke your Fifth Amendment privilege?”

Defendants face similar jeopardy with the increased use of court-appointed receivers, typically lawyers assigned to run troubled companies and gather their assets. Receivers for companies targeted as possible defendants often cooperate with prosecutors at the expense of company executives and directors, often by waiving the privilege against self-incrimination.

“That trumps what would normally be a stoppage in the flow of information to the government because of the privilege,” Pasano said. And it puts pressure on defendants to both settle and cooperate against others.

Pasano contends that the government’s use of parallel proceedings “stinks.” In his view, it unfairly stretches the resources of lawyers and clients.

“Sometimes clients want to spend their limited dollar to protect their assets,” he said. “We laugh and tell them it’s better to protect your ass.”


To succeed on this challenging new battlefield, defense attorneys are exploring fresh approaches. One is the “creative use” of expert witnesses, including other attorneys, Pasano said.

This is a response to prosecutors’ increased use of forensic testimony. It became possible only recently in the wake of the U.S. Supreme Court’s 1997 decision in Daubert that liberalized the use of expert witness testimony.

“Now you can use an ex-IRS or FBI agent who has some authoritative experience to explain how money moves,” Pasano said. “[The former agent] will say, ‘I know the badges of fraud and they are A, B and C. And I looked and didn’t see them here.’ It’s helpful.”

Another popular wrinkle for defense counsel is using testimony from linguistic experts to counter the government’s mushrooming use of wiretaps and tape-recorded evidence. “They can discuss the interrogation techniques that snitches use to get people to say things that sound like admissions but aren’t,” Pasano said.

Last month, Dennis G. Kainen, of WEISBERG KAINEN MARK, PL PL in Miami, and his co-counsel, David M. Garvin, took a novel tack in the use of expert witness testimony. It came during their defense of painting company owners Florynda and Demetrios Armadoros of Miami in a $10.1 million tax evasion case in Miami U.S. District Court.

The defense lawyers called Nova Southeastern University law professor Steven Wisotsky as an expert witness on criminal law. Kainen said the purpose was to counter a prosecution effort to “make a big deal out of the fact that many witnesses refused to be interviewed by government agents prior to testifying.” The government’s effort seemed designed to show that there was some type of conspiracy on the defense side, Kainen said.

Wisotsky testified how the government could have compelled witness statements by issuing subpoenas to the witnesses to appear before a grand jury. “I figured if a witness is not doing something that is not improper, the jury needs to know that,” Kainen said, explaining why he chose to put the attorney on the stand.

Several defense attorneys interviewed for this article said they were unaware of any previous case in which defense attorneys called other attorneys as expert witnesses at trial.

Defense lawyers see such tactics as increasingly necessary because jurors have become more receptive to prosecutors’ claims about corporate wrongdoing and less insistent that the government present an airtight case.

“Post Sarbanes-Oxley, there’s been something of a sea change in the way juries are reacting to fraud cases,” Pasano said. “Some old rules don’t work anymore.”

Defense lawyers particularly are rethinking the old rule that they should keep their clients off the witness stand. “That was the good conventional wisdom,” Pasano said. “But look at Martha Stewart. That’s turned things around 180 degrees. Juries expect white-collar defendants to explain their conduct, and they’re holding them to a higher standard.”

To sway today’s more pro-government juries, some defense lawyers say they have to prepare an aggressive affirmative defense rather than sit back and trust jurors to spot the holes in the government’s case.

“In the past, you almost didn’t have to prepare a defense,” Pasano said. “You were happy when you could look at a client at the end of the government’s case and say, ‘Is that all they’ve got?’ Now juries expect two sides.”