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United States v. Grimm

United States Court of Appeals, Second Circuit

December 9, 2013

UNITED STATES of America, Appellee,
v.
Peter S. GRIMM, Dominick P. Carollo, Steven E. Goldberg, Defendants-Appellants, and UBS AG, UBS Securities LLC, UBS Financial Services, Inc., Intervenors.

Argued: Nov. 19, 2013.

Page 499

Howard E. Heiss, O'Melveny & Myers LLP, New York, N.Y. (Jonathan D. Hacker, Anton Metlitsky, Deanna M. Rice, Mark A. Racanelli, on the brief), for Appellant Grimm.

James R. Smart, McElroy, Deutsch, Mulvaney & Carpenter LLP, Morristown, NJ (Walter F. Timpone, on the brief), for Appellant Carollo.

David C. Frederick, Kellogg, Huber, Hansen, Todd, Evans & Figel, P.L.L.C., Washington, DC (Brendan J. Crimmins, Emily T.P. Rosen, Andrew E. Goldsmith, Kellogg, Huber, Hansen, Todd, Evans & Figel, P.L.L.C., Washington, DC; John S. Siffert, Daniel M. Gitner, Lankler Siffert & Wohl LLP, New York, NY, on the brief), for Appellant Goldberg.

James J. Fredricks, United States Department of Justice, Washington, DC, (Scott D. Hammond, Deputy Assistant Attorney General, John J. Powers, III, Finnuala K. Tessier, United States Department of Justice, Washington, DC, Antonia R. Hill, Steven Tugander, United States Department of Justice, New York, NY, on the brief), for Appellee.

Before: KEARSE, JACOBS and STRAUB, Circuit Judges.

DENNIS JACOBS, Circuit Judge.

Three employees of General Electric Company (" GE" ) conducted a multi-year scheme to fix below-market rates on interest paid by GE to municipalities. When municipalities receive proceeds of tax-exempt bond issues, they invest those proceeds (with GE and others) until such time as the funds become needed for the underlying capital projects. To prevent abuse of municipal bonds for pure arbitrage, the Internal Revenue Code and Treasury regulations require a municipality to rebate to the Treasury any excess over the municipal bond rate. To guarantee a market rate of interest on these investments, municipalities are required to use competitive bidding. The conspiracy between GE employees and brokers depressed the interest rate on the guaranteed investment contracts paid by unindicted co-conspirator GE; each instance cheated either the municipalities or the Treasury (or both).

Steven Goldberg, Peter Grimm, and Dominick Carollo (collectively, " Defendants" ) were tried and convicted in the United States District Court for the Southern District of New York (Baer, J. ) of violating the general federal conspiracy statute, 18 U.S.C. § 371. Goldberg was sentenced principally to four years in prison, Grimm and Carollo to three. They appeal the judgments of conviction on the ground ( inter alia ) that the indictment is barred by the applicable statutes of limitations. The district court held that the statute of limitations continued to run during the period when GE paid the (depressed) interest to the municipalities, and that the interest payments could constitute overt acts. We conclude that those payments do not constitute overt acts in furtherance of the conspiracy.

I

Under the Internal Revenue Code (" Tax Code" ), interest payments on qualifying municipal bonds are exempt from federal income tax. See I.R.C. § 103(a). Often, municipal issuers (" issuers" ) do not expend the proceeds immediately because the projects financed by the issue may take years to construct. To generate additional revenue before the funds are depleted, an issuer may invest in a guaranteed investment agreement or contract (" GIC" ) provided by a financial institution with a high credit rating (" provider" ). GICs typically require periodic interest payments. Although GICs have a fixed maturity date, the issuer can usually draw

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down the principal— and thus terminate the GIC— at any time.[1]

To prevent arbitrage, the Tax Code limits the return that issuers can generate through GICs. See I.R.C. § 148. In general, any return in excess of the interest on the bonds must be paid to the Treasury. I.R.C. § 148(f). An issuer thereby lacks incentive to maximize interest on a GIC above a rate that equals or exceeds the interest rate paid on the bonds, and the arbitrage opportunities for a provider are obvious.

To prevent such abuses, Treasury regulations require issuers to determine for each GIC the fair market value, calculated as a function of the market interest rate, on the date of purchase. Treas. Reg. § 1.148-5(d). Market value is not easily determinable, however, because GICs are not regularly traded. So the Treasury regulations require as a safe harbor a competitive bidding process that, if followed, establishes the fair market value of the GIC for tax purposes. Treas. Reg. § 1.148-5(d)(6)(iii). Issuers hire third party brokers to solicit closed bids from at least three providers; each provider offers an interest rate without knowing the rates offered by the other bidders; and the winning bidder certifies in writing that it had no prior opportunity to review the bids of other providers.

In 1999, Carollo, Goldberg, and Grimm worked for the unit of GE that served as a GIC provider. In 2001, Goldberg left GE and took a position at another provider, Financial Security Assurance, Inc. (" FSA" ). Between August 1999 and May 2004, the Defendants (on behalf of their employers GE and FSA) agreed to pay kickbacks to three brokers-Chambers, Dunhill, Rubin & Co. (" CDR" ); Investment Management Advisory Group, Inc. (" IMAGE" ); and UBS PaineWebber, Inc. (" UBS" )— and the brokers obliged by rigging the bidding process in several ways. In some instances, the broker told a Defendant what others were bidding, which allowed the Defendant to lower an initial bid if it significantly exceeded the second-place bid, or to raise the bid to a level just high enough to win the contract.[2] In another case, a broker agreed to keep competitive bidders off the bid list, which allowed the Defendant to prevail with a low bid. And sometimes a broker would rig an auction by asking certain providers to submit intentionally losing bids. Depending on the fraudulent bid rate, the municipal bond rate, and the market interest rate, each deal defrauded the municipality, the Treasury, or both.

On July 27, 2010, a federal grand jury returned an indictment (" Initial Indictment" ) charging Carollo, Goldberg, and Grimm with ten conspiracies. A May 31, 2011 superseding indictment (" Superseding Indictment" ) narrowed the charges. Six counts charged a two-object conspiracy in violation of 18 U.S.C. § 371 to defraud (i) the issuers of money and property through the use of an interstate wire, in violation of 18 U.S.C. § 1343, and (ii) the United States. Count Seven charged Carollo and Goldberg with a substantive wire fraud scheme in violation of 18 U.S.C. § 1343.

Defendants moved to dismiss the Superseding Indictment, arguing that the conspiracy and fraud charges were barred by the statute of limitations. In an August

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2011 order, the district court dismissed the wire fraud charge because the government had not alleged any activity within the five-year limitations period, but declined to dismiss the conspiracy charges, holding that the alleged conspiracies continued as long as unindicted co-conspirators GE and FSA made interest payments on the GICs. United States v. Carollo, et al., No. 10-cr-654 (HB), 2011 WL 3875322 at *2-3 (S.D.N.Y. Aug. 25, 2011).

After a three-week trial and three days of deliberations, a jury convicted Goldberg on four counts, Grimm on three counts, and Carollo on two counts. The district court denied Defendants' post-verdict motions, reiterating that the " conspiracy lasts ... so long as the conspirators obtain an economic benefit through artificially suppressed payments." United States v. Carollo, et al., No. 10-cr-654 (HB), ECF No. 285 at 11 (S.D.N.Y. Nov. 20, 2012).

II

The applicable statutes of limitations are: five years for general conspiracy, see 18 U.S.C. § 3282(a), and six years for conspiracy to defraud the United States by violating the internal revenue laws, see 26 U.S.C. § 6531(1).[3] The Initial Indictment was returned on July 27, 2010. To satisfy the statute of limitations for general conspiracy, the government must establish that a conspirator knowingly committed at least one overt act in furtherance after July 27, 2005; to satisfy the statute of limitations for a fraud on the United States, the government must establish at least one overt act in furtherance after July 27, 2004. See United States v. Salmonese, 352 F.3d 608, 614 (2d Cir.2003) (citing Grunewald v. United States, 353 U.S. 391, 396-97, 77 S.Ct. 963, 1 L.Ed.2d 931 (1957)).

Of the fifty-five overt acts alleged in the Superseding Indictment, the only ones that involved conduct after July 27, 2004 were the periodic interest payments made by providers to issuers pursuant to the GICs: " On numerous occasions, [provider] ... made payments to municipal issuers via interstate wire transfer at artificially determined or suppressed rates." Superseding Indictment ¶¶ 22(f) (Count One); 30(f) (Count Two); 38(f) (Count Three); 47(f) (Count Four); 57(f) (Count Five); 64(f) (Count Six).[4] The Defendants argue

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that such interest payments cannot serve as overt acts because the routine payments were scheduled to continue for years (if not decades) after the GICs were awarded and after all concerted conduct had ended. We review this legal claim de novo. Salmonese, 352 F.3d at 614.

" ‘ [T]he crucial question in determining whether the statute of limitations has run is the scope of the conspiratorial agreement, for it is that which determines both the duration of the conspiracy, and whether the act relied on as an overt act may properly be regarded as in furtherance of the conspiracy.’ " Id. (quoting Grunewald, 353 U.S. at 397, 77 S.Ct. 963). Here, the alleged purposes of the conspiracies were (1) to " deprive municipal issuers of money by causing them to award investment agreements and other municipal finance contracts at artificially determined or suppressed rates, and to deprive the municipal issuers of the property right to control their assets by causing them to make economic decisions based on false ...


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