White-Collar Crime

Is Being a Bad Employee a Crime?

DOJ has a clever new theory about how it can put everyone in jail.

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Perhaps the most frustrating response to a lawyer’s argument — for the lawyer making the argument — is to call the argument clever. When I’m in court, and I hear the judge tell me my argument is clever, I know I’ve lost.

“Clever” means that you’re requesting an extension of the law, or a reading of the law, that pushes the bounds just past where they’ve been drawn before or really ought to be.

That being said, a recent piece by Peter Henning, a Wayne State professor (twitter handle @peterjhenning) in the New York Times explains that the Department of Justice has expanded the scope of how it does insider trading prosecutions in a way that I think is very clever.

Your federal government is prosecuting a man who ran a company that operated around 400 Verizon Wireless outlets. His company sold a lot of different phones. As a result, he had a lot of information about wireless phones.

As a guy with a lot of information about wireless phones, he was able to land a consulting contract with a financial services firm — Detwiler Fenton & Co. What did he consult about? The wireless phone industry.

With the information Detwiler Fenton learned, they issued a report about negative sales of Blackberry phones. When the report came out, Blackberry’s sales dropped.

Let us pause for a moment and think about whether you really need information from someone in the industry to know that Blackberry isn’t selling many phones.

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Blackberry was shocked that someone leaked the secret that no one is buying its phones. It did what any business would do when no one wants to buy its products; it made better products went to the Securities and Exchange Commission.

And here is where things get interesting.

The SEC didn’t bring a case — the Department of Justice did. And what were the charges?

The guy didn’t profit off the information and he wasn’t helping his clients trade. So the SEC can’t take the case — there’s no insider trading. So, since the SEC can’t act, DOJ went after him for mail and wire fraud.

The basis for the mail and wire fraud, according to Professor Henning, is that the guy used confidential information from his wireless outlet company when he was giving information to Detwiler Fenton.

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Apparently, the wireless outlet company makes its employees sign an agreement that says that they can’t disclose confidential information or do anything that would hurt the company’s business or reputation.

Breaching that agreement is the basis of the fraud prosecution under an honest services fraud theory. One of the “honest services” he owed his employer, on the government’s theory, was to not breach its employment agreement — and, in turn, to not disclose information or hurt the company’s business or reputation. In the wake of Skilling, the Supreme Court still allows commercial bribery prosecutions on an honest services fraud theory.

So, if you violate your company’s employment agreement and you get paid for it through a bribe or a kickback, on the government’s view in this case, you’ve committed honest services fraud.

Remember that great hypothetical about honest services fraud and baseball? Could it be that a person who skips out on work to go to an afternoon baseball game, yet signs himself in as present, has committed honest services fraud?

The answer is supposed to be no — otherwise you’ve pretty much just federalized and criminalized an employment analog of Ferris Beuller.

But, under the government’s new theory in the Blackberry case, if the employee skips work to go to a baseball game, and his companion at the game has gotten him to go through the promise of free tickets, beer, and a hot dog — why couldn’t the government say that counts?

The Department of Justice, if it succeeds on its new theory, may have criminalized many instances of dull employee misconduct.

There’s something else wrong about this case too — in this case the more debatable your legal theory is the more likely you are to be subject to criminal prosecution instead of regulatory action. The SEC has narrow and specifically defined rules about what it can enforce. DOJ paints with a broader palate — the sprawling mess that is Title 18 of the United States Code.

Which means that the more questionable the claim that conduct is illegal, the more likely it is that DOJ will take the case instead of the SEC. This is exactly the opposite of how things ought to be.

Though if you’d like to expand government power without getting Congress to create a new law to explicitly let you do that, it is clever.

Matt Kaiser is a white-collar defense attorney at Kaiser, LeGrand & Dillon PLLC. He’s represented stockbrokers, tax preparers, doctors, drug dealers, and political appointees in federal investigations and indicted cases. Most of his clients come to the government’s attention because of some kind of misunderstanding. Matt writes the Federal Criminal Appeals Blog and has put together a webpage that’s meant to be the WebMD of federal criminal defense. His twitter handle is @mattkaiser. His email is mkaiser@kaiserlegrand.com He’d love to hear from you if you’re inclined to say something nice.

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