Dec 10

Update: Second Circuit Limits Government’s “Stream of Payments” Statute of Limitations Theory

Last week, White Collar Alert editor Erin Dougherty reported on the Second Circuit’s unusual summary order reversing the convictions of three former General Electric Co. executives for bid rigging.  Yesterday, in a 2-1 decision, the Second Circuit confirmed the expected basis for the reversal, holding that ongoing (and artificially suppressed) interest payments under municipal derivatives contracts do not constitute overt acts in furtherance of a conspiracy sufficient to extend the statute of limitations.  The opinion provides an important check on the government’s efforts to extend the statute of limitations in financial crimes when a conspirator receives a continuous flow of economic benefits.

As explained in our post last week, the government charged Peter Grimm, Dominick Carollo, and Steven Goldberg with wire fraud conspiracies to deflate the interest rates of investment contracts with municipalities as part of the Antitrust Division’s municipal bond investigation.  The government did not allege any overt acts within the statute of limitations other than the continued interest payments that were made by the defendants’ employers (providers) to the municipalities.  The defendants contended that the last overt acts occurred upon the closing of the transactions; the government countered that the purpose of the conspiracy was economic enrichment and the continued interest payments by the providers at depressed levels were made “in furtherance of the conspiracy.”

The Second Circuit resolved this dispute by stating that although “economic enrichment” conspiracies continue “through the conspirators’ receipt of their economic benefits,” such a conspiracy does not continue indefinitely.  United States v. Grimm, No. 12-4310-cr, slip op. at 11-12 (2d Cir. Dec. 9, 2013) (citing United States v. Salmonese, 352 F.3d 608, 616 (2d Cir. 2003)).  Relying on both Salmonese and United States v. Doherty, 867 F.2d 47 (1st Cir. 1989) (Breyer, J.), the court explained:

[A] conspiracy ends notwithstanding the receipt of anticipated profits “where [ ] the payoff merely consists of a lengthy, indefinite series of ordinary, typically noncriminal, unilateral actions . . . and there is no evidence that any concerted activity posing the special societal dangers of conspiracy is taking place.”

Grimm, slip op. at 12 (quoting Salmonese, 352 F.3d at 616).

The court contrasted a conspirator’s receipt of stripped warrants over a ten-week period that was neither indefinite nor lengthy in Salmonese with the ordinary commercial obligations over a potentially 20-year period in Grimm.  The court rejected the government’s bright-line rule that so long as the stream of payments contains an element of profit the conspiracy continues.  Judge Jacobs, for the majority, echoing his comments at oral argument, noted that “a conspiracy to corrupt the rent payable on a 99-year ground lease would, under the government’s theory, prolong the overt acts until long after any conspirator or co-conspirator was left to profit, or to plot.”  Id. at 14.

Ultimately, the court held that where the continued economic benefit continues “in a regular and ordinary course” beyond “when the unique threats to society posed by a conspiracy are present,” the “advantageous interest payment is the result of a completed conspiracy and is not in furtherance of one that is ongoing.”  Id. at 15.  Judge Kearse, in dissent, argued that the majority ignored the fact that the providers were coconspirators and that the providers’ continuing payments, under existing circuit precedent, constituted continuing overt acts.

The majority’s holding reaches beyond merely the municipal derivatives contracts at issue in Grimm and provides a restraint on the government’s ability to rely on continuing payments under an “economic enrichment theory” to extend the statute of limitations.

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