WASHINGTON Three former officials from CDR Financial Products Inc. are urging a federal judge to dismiss the Justice Department’s charges against them, arguing prosecutors should not proceed to trial on a fraud theory the Supreme Court rejected last year.
“Defendants should not be forced to defend themselves at trial against a theory of criminality that is facially and undoubtedly invalid as a matter of law,” attorneys Michael McGovern and Steven Goldschmidt of Ropes & Gray LLP in New York, said in a joint motion they filed last month with the U.S. District Court for the Southern District of New York on behalf of their client, Stewart Wolmark.
Co-defendants David Rubin and Evan Zarefsky, who were also CDR officers, joined the motion.
Rubin was CDR’s founder, president and chief executive officer. Zarefsky was a vice president and Wolmark served as chief financial officer and a managing director.
The joint motion seeks to dismiss portions of an indictment filed against them in December that expanded the government’s original charges to include so-called honest services fraud — a criminal statute enacted in 1989 that survived a broad Supreme Court challenge last year. Federal prosecutors often invoke the provision, which makes it a felony for public or private employees to use the mail or wires to deprive their employers of the employee’s “honest services,” to target wrongdoing by public officials.
In muni-related cases, the charge has been used to prosecute fraudulent schemes involving pay-to-play practices, bribes and kickbacks.
Last June, the Supreme Court upheld the honest services statute against an attack mounted by former Enron Corp. chief executive officer Jeffrey Skilling, who claimed it was unconstitutionally vague. The justices confined their ruling, and the reach of the provision, to bribery and kickbacks.
The CDR indictment alleges that the defendants and the firm, a broker of guaranteed investment and derivatives contracts, conspired to rig the bidding process to ensure certain firms would win the bids in exchange for undisclosed kickbacks, disguised as “hedge fees.”
According to the defendants, the court should dismiss, or at least strike defective language from, five of the indictment’s nine counts because the Justice Department’s allegations are “patently defective” under the Skilling decision.
Specifically, they say, prosecutors alleged two separate honest-services theories: the defendants conspired to deprive municipal bond issuers of their right to honest services by taking kickbacks and they did so by concealing material information.
The second theory, they said, is the same one the Supreme Court renounced last year. The defendants “vigorously deny” they engaged in a kickback scheme or a scheme to deprive municipalities of money.
In a brief opposing the motion, Justice Department attorneys said the defendants’ claims are “meritless,” because the indictment alleged the precise honest-services fraud approved in the Supreme Court’s decision: “a scheme to defraud involving concealed kickbacks.”
Specifically, they said the indictment alleges that, on at least 10 occasions between 1998 and 2006, CDR received kickbacks ranging in size from $4,500 to $475,000. They also said the firm and the providers did not disclose the kickbacks to the muni clients — a material deception that deprived issuers of their right to honest services.
“While not every concealment of material information constitutes a scheme or artifice to defraud another of the right of honest services under [the statute], the concealment of kickbacks and bribes does,” the Justice Department said.
In a separate motion, the defendants asked the court to dismiss certain counts of the indictment charging them with a fraudulent bank transaction stemming from a $25,000 payment made to Rubin, disguised as a hedge fee, from an undisclosed entity, characterized as “Financial Institution A.”
According to the defendants, the government improperly failed to allege they were employees of the bank.
But in its opposition papers, the Justice Department said the relevant statute did not require prosecutors to allege the defendants worked for the bank.
Zarefsky filed a motion seeking to dismiss one count of the indictment, charging him with perjury. He claimed the federal district court in New York was the improper venue for addressing the allegedly false statements he made to federal agents in California.
In response, the Justice Department said the federal court in Manhattan is the proper venue because the government received a written report of Zarefsky’s statements in New York, where the alleged misrepresentations impeded its investigations.
An attorney for Rubin declined to comment on the motions. Attorneys for Wolmark and Zarefsky did not respond to phone calls seeking comment. A Justice Department spokesperson also declined to comment.