by Bruce Carton
When Neil MacBride, U.S. attorney for the Eastern District of Virginia, told The Wall Street Journal in May that he was putting together a new “investigative taskforce” to crack down on financial crime and securities fraud, the news didn’t strike many as a significant development.
After all, most federal prosecutors’ offices have various taskforces or units set up to focus on specialized areas. Moreover, MacBride’s jurisdiction in Virginia is hardly a hotbed for financial fraud. MacBride indicated, however, that his ambitions extended well beyond the borders of Virginia. His bold claim: “I think Virginia and New York are the only two districts that have jurisdiction over all securities-fraud cases involving all publicly traded companies.”
It makes sense that New York, the financial capital of the world, would have jurisdiction over a huge number of securities fraud cases. But Virginia?
It turns out that MacBride’s claim of jurisdiction has nothing to do with companies headquartered, or even doing business, in Virginia. Rather, he contends that his office has jurisdiction over most securities fraud because the Securities and Exchange Commission’s EDGAR database is physically housed in Alexandria, Va. That means that every publicly traded company technically makes their SEC filings in his district. In addition, MacBride says that the Eastern District may also have jurisdiction in cases involving wire transfers because the Federal Reserve Bank in Richmond is one of the primary hubs for such transfers, and in cases involving alleged misuse of bank-bailout funds as the Federal Deposit Insurance Corp. is also based in Arlington.
Although MacBride’s claim of jurisdiction based on the location of the EDGAR database seems a bit far-fetched at first glance, it has been upheld by the U.S. Court of Appeals for the Fourth Circuit. In U.S. v. Johnson in 2007, the defendant was Charles Johnson, chairman and CEO of a publicly traded company based in Las Vegas. MacBride’s predecessor in the Eastern District of Virginia brought a criminal case against Johnson alleging that he caused his company, Purchase-Pro, to report inflated revenue figures in its Form 10-Q filed with the SEC.
The Fourth Circuit acknowledged that Purchase-Pro’s electronic submission of its Form 10-Q to the EDGAR database represented Johnson’s lone contact with the Eastern District for the purposes of the case filed against him by that office. However, the Court held, “Causing the transmission of the Form 10-Q to the Eastern District of Virginia will suffice to sustain venue in that district.”
Armed with this theory of jurisdiction and his own ambitions of making Virginia a central player in the fight against financial fraud, MacBride teamed up with a large cast of impressive partners on May 21 to herald the creation of the new “Virginia Financial and Securities Fraud Task Force.” Flanked by Robert Khuzami, director of the SEC’s Division of Enforcement, as well as senior officials from the Commodity Futures Trading Commission, the Federal Bureau of Investigation, the U.S. Postal Inspection Service, the Internal Revenue Service, the Attorney General of Virginia, and the Virginia State Corporation Commission, MacBride stated at a press conference in Richmond that the new taskforce would be “an unprecedented partnership between criminal investigators and civil regulators to investigate and prosecute complex financial fraud cases in the nation and in Virginia.”
MacBride explained that, from his perspective, “the complex financial crimes we confront are national in scope. They require criminal and civil authorities across the country to utilize every tool at their disposal to ensure that the guilty are held accountable.” The Eastern District will use its unique jurisdictional advantage “to bring cases here with national significance, regardless of where the fraud occurs,” he said.
MacBride added that his taskforce is designed to be an operational, investigative arm of President Obama’s Financial Fraud Enforcement Task Force. The President’s FFET was created in November 2009 as part of the federal government’s move to strengthen its efforts to combat financial crime, and is led by the Department of Justice along with senior-level officials from more than two dozen departments, agencies and offices. MacBride’s taskforce will focus on facilitating the exchange of information among its members on specific investigations.
Will the new taskforce have any meaningful effect on the prosecution of securities fraud? The answer may hinge on the resources dedicated to it. David Seide, a former federal prosecutor in Los Angeles, believes its potential is “enormous” given the Eastern District’s broad jurisdiction over securities fraud. The key question, he says, is whether new resources—that is, additional prosecutors and FBI agents experienced in financial fraud—will be added to the Eastern District’s team. If so, then this new group of dedicated agents and attorneys could grow to complement and rival the team already in place in the Southern District of New York. Seide believes the new taskforce could move the needle substantially, as there are thousands of public companies out there, and far more potential securities fraud cases than can be handled by New York alone.
On the other hand, the taskforce will likely be far less significant if the Eastern District ends up simply shuffling existing resources. While rearranging prosecutors and agents to focus on securities fraud may still improve efficiency, the opportunity to make a real difference in the fight against such fraud may be missed without the addition of new, seasoned people.
MacBride says that his office has indeed already hired several new prosecutors to focus on white-collar crime, and he promises that more resources are on the way. The Eastern District reportedly had 14 prosecutors working full-time on white-collar cases earlier this year, but Fox News reports that it plans to bring that number up to 21 by the end of this summer as it tries to become the “SDNY of the South.” Steve Nickelsburg, a partner at law firm Clifford Chance, told Reuters that a rivalry between New York and Virginia prosecutors already exists to an extent, as shown in the maneuvering over who should handle big terrorism cases. The Eastern District, for instance, handled the case against Zacarias Moussaoui related to the Sept. 11, 2001, attacks. “They see themselves just as good as and just as capable as handling the largest and most significant cases as the Southern District of New York,” Nickelsburg said.
Even with 21 white-collar prosecutors, the Eastern District will still have less than half of what the SDNY has in this area—but it could still be a big player in handling the surge of cases that appears to be resulting from the Obama administration’s crackdown on financial fraud. The Eastern District’s new prosecutors will come from Justice Department headquarters in Washington, D.C. and elsewhere, the department recently stated.
MacBride’s office in the Eastern District also enjoys some other built-in advantages. First is the speed with which cases are normally handled in that court. Known as the “Rocket Docket,” the Eastern District prides itself on moving cases along on a highly expedited schedule. While it can take years to get a case to trial in many jurisdictions, trials in the Eastern District often start within three to five months of their initial filing. Tara Lee, a litigation partner in DLA Piper’s Virginia office, says that with more criminal cases now sure to be filed by the taskforce in the Rocket Docket, many defendants who have no connection to Virginia other than their company’s SEC filings must now be prepared to defend themselves in what is likely the fastest-moving federal court in the country.
In addition, prosecutors also appreciate that the jury pools in the Eastern District are typically both sophisticated and highly educated, Seide says. Other lawyers report that juries in the Eastern District tend to be more conservative, and more pro-government, than juries elsewhere.
The emergence of the Eastern District as a major player in fighting white-collar crime and securities fraud may also lead to some new problems such as a “race to the courthouse” between prosecutors in Virginia, New York, and possibly in other jurisdictions in prominent cases. Marcel Kahan, a law professor at New York University, told Reuters that he believes the Department of Justice should get involved because “[t]hey can’t just let any U.S. attorney run loose and think, ‘From now on I’m going to prosecute all of these cases.’” Former prosecutor Seide disagrees, saying that competition for cases between prosecutors can be healthy and beneficial.
Ultimately, the real question here is whether the Eastern District can build a unit of white-collar prosecutors and FBI agents that, like its well-established rival in New York, can sustain itself over time. The unraveling of the economic crisis, the Obama administration’s current crackdown on financial fraud, and the apparent popular demand for stronger enforcement and more “perp walks” would seem to present the perfect opportunity for the Eastern District to hit the ground running and stake its claim as the “SDNY of the South.”
Originally published in Compliance Week. Reprinted with permission. ©2010 Haymarket Media, Inc. All Rights Reserved. Compliance Week can be found at http://www.complianceweek.com. Call for more information.