Overt Acts, Conspiracy and the Statute of Limitations

, New York Law Journal

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Martin Flumenbaum and Brad S. Karp
Martin Flumenbaum and Brad S. Karp

This month, we discuss United States v. Grimm,1 in which the U.S. Court of Appeals for the Second Circuit considered whether routine payments by unindicted co-conspirators pursuant to guaranteed investment contracts (GICs) constituted overt acts in furtherance of a conspiracy for purposes of the statutes of limitations. In an opinion by Judge Dennis Jacobs, joined by Judge Chester J. Straub, the court held that such payments did not constitute overt acts and that the indictment was time-barred.

Relying on reasoning discussed but not adopted in a prior Second Circuit opinion, United States v. Salmonese,2 and expressly adopting the reasoning contained in a First Circuit opinion, United States v. Doherty,3 the court determined that the payments in question did not constitute overt acts because they were non-criminal, ordinary commercial obligations made pursuant to a common form of commercial agreement, and were paid over an indefinite period of time. In addition, there was no evidence that the payments were themselves the type of activity posing the special societal dangers attendant to a conspiracy. The court reached this conclusion even though it acknowledged that the GICs were tainted by the conspiracy designed to fix below-market rates on interest paid to municipalities.

Judge Amalya L. Kearse dissented from the majority opinion and concluded that the payments under the GICs constituted overt acts in furtherance of the conspiracy at issue. Kearse disagreed with the majority, finding that because the conspiracy was designed to obtain contracts that provided economic benefits over the life of the GICs, the conspiracy did not end before the unindicted co-conspirators' last payment under each contract.

Background

After municipalities receive the proceeds of tax-exempt bond issues, but before the funds are required for capital projects, they typically invest the proceeds with highly rated financial institutions pursuant to a GIC. GICs usually require periodic interest payments to the municipalities, and, although GICs have a fixed maturity date, municipalities generally can terminate the GICs at any time by withdrawing the principal.

To prevent abuse, the Internal Revenue Code limits the interest that municipalities may generate through the use of GICs.4 Under the Code, any return in excess of the interest on the underlying municipal bonds must be remitted to the Treasury. Municipalities, therefore, lack an incentive to seek GICs at rates above the interest rates paid on the underlying bonds. To prevent arbitrage by financial institutions offering GICs, Treasury regulations require financial institutions to determine for each GIC a fair market value.5 Because market value is difficult to determine, the regulations provide a safe-harbor competitive bidding process that, if followed, establishes the fair market value of a GIC for tax purposes.6

To comply with the safe-harbor provisions, municipalities hire third-party brokers to solicit sealed bids from at least three financial institutions offering GICs. As a result, each financial institution offers an interest rate without knowing what rates will be offered by other providers. Indeed, each financial institution must certify in writing that it did not review the bids of other providers before submitting its bid.

At issue in the case was a conspiracy by three General Electric Company (GE) employees to conduct a multi-year scheme to fix below-market interest rates on GICs between GE, an unindicted co-conspirator, and municipalities. In 1999, the three defendants—Peter S. Grimm, Dominick P. Carollo, and Steven E. Goldberg—worked for a unit of GE that provided GICs. In 2001, defendant Goldberg took a position at another GIC provider, Financial Security Assurance, Inc. (FSA), another unindicted co-conspirator.

Between August 1999 and May 2004, the defendants agreed to pay kickbacks to three third-party brokers in connection with bids for GICs for municipalities. In return, the brokers rigged the bidding process by either: (1) disclosing to a defendant the contents of competing bids, allowing a defendant to lower an overly high bid and still win the GIC or to bid just enough to prevail over the second-place bidder; (2) removing competitive bidders from the bid list submitted to municipalities, permitting a defendant to provide a GIC at an artificially low rate; or (3) arranging for GIC providers to submit intentionally losing bids so that a defendant could prevail in the auction at an artificially low rate. Depending on the mechanism employed and the resultant interest rate paid on the GICs, each GIC at issue defrauded the municipality, the Treasury, or both.

Prior Proceedings

On July 27, 2010, a federal grand jury returned an indictment charging the defendants with 10 counts of conspiracy and two counts of wire fraud. Later, a superseding indictment narrowed the charges. Six counts alleged a two-object conspiracy in violation of 18 U.S.C. §371 (i) to defraud the municipalities of money and property through the use of an interstate wire, in violation of 18 U.S.C. §1343, and (ii) to defraud the United States. A final count alleged wire fraud.

Defendants moved to dismiss the superseding indictment, arguing that the conspiracy and fraud charges were barred by the applicable statutes of limitations. In August 2011, the U.S. District Court for the Southern District of New York (Judge Harold Baer Jr.) issued an order declining to dismiss the conspiracy charges, holding that the alleged conspiracy continued as long as the unindicted co-conspirators continued to make payments on the GICs.7

After a three-week trial, a jury convicted Goldberg on four counts, Grimm on three counts, and Carollo on two counts. The district court denied defendants' post-verdict motions seeking acquittal, stating that a "conspiracy lasts…so long as the conspirators obtain an economic benefit through artificially suppressed payments."8

Second Circuit's Decision

The Second Circuit began its opinion by noting that the applicable statutes of limitations are five years for general conspiracy, and six years for conspiracy to defraud the United States by violating the internal revenue laws.9 Because the original indictment was returned on July 27, 2010, to satisfy the statutes of limitations, the government was required to establish that a conspirator committed at least one overt act after July 27, 2005, (for general conspiracy), or July 27, 2004 (for conspiracy to defraud the United States). Of all the overt acts alleged in the indictment, the only ones involving conduct after July 24, 2004, were the periodic interest payments made by the GIC providers to the municipalities. As a result, the Second Circuit was required to decide whether the periodic interest payments by unindicted co-conspirators constituted overt acts in furtherance of the conspiracy. If so, the convictions were proper; if not, the conspiracy charges would be time-barred.

The court began its analysis by noting that the critical question in determining whether the statutes of limitations had run is the scope of the contemplated conspiracy, as that determines whether a particular act constitutes an overt act in furtherance of the conspiracy. The government alleged that the purpose of the conspiracy was to deprive municipalities of funds by obtaining GIC contracts at artificially depressed rates and to defraud the United States by impeding the collection of revenue due from municipalities.

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