White Collar Criminal Defense Group

Ninth Circuit Affirms Sophisticated Means Enhancement In Scheme To Steal Federal Grant Money

The Ninth Circuit, in United States v. Augare, No. 14-30131, 2015 WL 5234789 (9th Cir. Sept. 9, 2015), recently affirmed the application of a “sophisticated means” sentencing enhancement under U.S.S.G. § 2B1.1(b)(10)(C) in a case where the defendant, Delyle Augare was convicted of conspiracy to defraud the United States, False Claims Act conspiracy, theft from an Indian tribe receiving federal funding and federal income tax evasion. In doing so, the court found that use of multiple bank accounts and making fraudulent transfers in those accounts was sufficient to invoke the sophisticated means enhancement. 

Under the Sentencing Guidelines, a “sophisticated means” sentencing enhancement results in a two-level increase. Offense conduct is deemed sophisticated if it involves a greater level of planning or concealment than a typical fraud of that kind. The Guideline Application Notes provide examples of sophisticated means, such as telemarketing schemes in which the main office is located in one jurisdiction, while the solicitation operations are conducted in another, as well as offenses involving the hiding of assets and/or transactions through the use of shell corporations, fictitious persons or offshore accounts.

While serving as assistant director of the Po’Ka Project, an organization created to help Native American youth, Augare, the father of Montana state senator Shannon Augare, stole federal grant money intended for the project. According to prosecutors, Augare and one of his co-defendants devised a scheme to donate Po’Ka Project money to a charity controlled by the Po’Ka Project, which Augare then deposited into his personal account.  He entered a plea of guilty in the district court to conspiracy to defraud the United States, False Claims Act Conspiracy, theft from an Indian tribe receiving federal funding and federal income tax evasion.  In June 2014, the district court sentenced Augare to 33 months in prison and ordered him to pay over $1 million. 

Augare appealed his sentence, specifically challenging the district court’s application of the “sophisticated means” sentencing enhancement. Augare argued that his crimes amounted only to simple fraud involving the use of government-funded fuel cards for personal travel and money transfers between different bank accounts.

The Ninth Circuit concluded that the district court did not abuse its discretion when it applied the “sophisticated means” enhancement to Augare’s offense conduct. The three-judge panel explained that the “sophisticated means” sentencing enhancement is applicable when a defendant employs coordinated and repetitive conduct to execute a criminal scheme. Relying on precedent from other federal circuit courts, the panel noted that even if the individual activities employed to carry out the scheme are not elaborate, a “sophisticated means” enhancement is warranted if the totality of the scheme is sufficiently coordinated and complex.  In affirming the sentence, the Ninth Circuit determined that Augare’s use of various bank accounts and fraudulent transfers of money that was intended for the Po’Ka Project was sophisticated enough to trigger the two-level sentence guideline increase. 

Attorneys And Law Firms Remain On SEC’s Radar For Insider Trading Cases

A series of recent high profile prosecutions of attorneys or persons affiliated with law firms for insider trading has highlighted the government’s concern about attorneys and law firm personnel misusing information shared by clients.  Law firms, particularly those representing public companies, are entrusted on a regular basis with sensitive information regarding proposed mergers, acquisitions and tender offers.  Protecting this information from threats inside the organization is a challenge just as critical as protecting it from outside threats.    

Attorneys advising or representing highly placed executives or board members in public companies are also frequent recipients of potentially market-moving information. It is correspondingly critical that these individuals restrict their use of this information to those purposes necessary to serve their client and nothing more.  When sensitive information regarding public companies is misused for personal gain, those using it can expect the government to come calling.  On Monday, the most recent example of this peril came to light when the SEC charged five Florida residents, including two lawyers and an accountant, with insider trading in advance of the acquisition of Pharmasset, Inc. by Gilead Sciences, Inc. 

The charges are set forth in a civil complaint filed in the U.S. District in Newark, New Jersey, alleging that attorneys Robert L. Spallina and Donald R. Tescher, as well as accountant Stephen G. Rosen, used information obtained from a mutual client to trade in advance of the sale of Pharmasset to Gilead.  According to the complaint, during a meeting on November 8, 2011 regarding year-end personal tax and estate planning, the mutual client, who was a Pharmasset board member, discussed with his advisors the fact that the Pharmasset board was negotiating to sell the company at a significant premium.  Three of those advisors, Spallina, Tescher and Rosen purportedly used that information and purchased Pharmasset securities.  According to the complaint, Spallina also told a financial advisor, Thomas J. Palermo, and his neighbor Brian H. Markowitz about the negotiations involving Pharmasset.  Both of those individuals also purchased Pharmasset securities.

After public announcement of Gilead’s acquisition of Pharmasset on November 21, 2011, the Pharmasset stock price rose by 84%.  Each of the five defendants named in the case liquidated their holdings and collectively gained more than $234,000 in illegal profits. 

In the complaint, the SEC highlighted the breach of the respective fiduciary duties owed to the mutual client by the two attorneys and the accountant through the misuse of the information obtained in their meeting.   The SEC alleged that the misappropriation of this material non-public information demonstrated that each of them acted knowingly and/or recklessly in trading Pharmasset securities for their own profit.  

The SEC also announced that each of the defendants has agreed to terms to settle the charges. As part of the settlement, which is subject to court approval, the five individuals have collectively agreed to pay approximately $489,000, which includes disgorgement of their gains, pre-judgment interest and civil penalties.