Complex Litigation Update: Bridging the Gap between Data on Causation of Lost Profits and the Admissibility of Expert Opinions

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January 6th, 2015

The Eleventh Circuit recently held in Chapman v. Procter & Gamble Distributing, LLC that when determining the admissibility of medical expert causation testimony, the court, acting as the gatekeeper, must find that the expert’s opinion on novel issues of causation is based on generally accepted methodologies rather than untested hypotheses or collateral evidence.  Namely, there must be enough data, analytical evidence, and scientific literature upon which the expert can base an inference—not a hypothesis—of causation.  Here, we address the issue of how Chapman might impact expert causation testimony relating to non-scientific causation testimony, such as an expert’s valuation of a business’s alleged lost profits.

It is well settled that an expert’s testimony must be reliable and relevant to the issue at hand to be admissible.  Specifically, the court must determine that the expert’s methods in reaching his or her conclusion are sufficiently reliable.  The court cannot just take the expert’s word for it.  As set forth in a landmark case dealing with the admissibility of novel causation expert testimony, Daubert v. Merrell Dow Pharmaceuticals, Inc., when determining reliability, the court should look at: “(1) whether the expert’s methodology has been tested or is capable of being tested; (2) whether the theory or technique used by the expert has been subjected to peer review and publication; (3) whether there is a known or potential error rate of methodology; and (4) whether the technique has been generally accepted in the relevant scientific community.”  Although the law addressing the admissibility of expert testimony on causation initially developed in the medical and scientific fields, courts following theDaubert method have utilized the same analysis when dealing with the admissibility of expert testimony in commercial cases.

With the focus being on the expert’s methodology in reaching his or her ultimate conclusion, those seeking to have an expert opine on the lost profits of a business  should ensure the expert’s analysis comports with the Daubert factors.  But as we learned in Chapman, this would likely mean that the expert testifying as to the cause of the plaintiff’s lost profits would have to establish that analytical evidence, generally accepted in the relevant professional community, exists whereby this cause and effect may be inferred, not just hypothesized.  Because hypotheses can only be verified by testing, it would be improper to submit a mere hypothesis of causation to the jury for consideration.  It is not enough for the expert to say the defendant’s action or inaction may have caused the loss of profits, the expert would have to demonstrate that the method utilized in determining loss causation are generally accepted in the relevant community.  The key is to show general acceptance in the relevant professional community of the specific cause and effect, not just a generalized notion that certain acts or inactions can cause the damage.  Experts seeking to opine on the cause of a plaintiff’s alleged lost profits must be armed with evidence to demonstrate their primary methods for proving the cause and effect of the loss in that particular case.

Likewise, parties seeking to exclude an opposing expert’s testimony as to loss causation may look to Chapman for the proposition that expert testimony must establish that the lost profits were in fact cuased by the defendant and did not occur coincidentally.  Just as the court in Chapman determined that the expert seeking to establish that the plaintiff’s exposure to a particular substance was the cause of the injury was required to base his opinion on analytical evidence, an expert in a commercial case seeking to establish that a defendant caused a plaintiffs to suffer lost profits would likewise need analytical evidence to bridge the gap between the data relied upon and the lost profits alleged by the plaintiff.  Just as it was not enough for the experts in Chapman to provide plausible explanations as to the cause and effect that led to the plaintiff’s damage, it will not be enough for experts to simply speculate on untested theories of the cause of lost profits. Chapman may thus prove to be a powerful tool for those defending parties seeking to exclude speculative expert testimony.

Whether seeking to admit expert testimony on a novel issue of loss causation or seeking to have such testimony excluded, Chapman dictates that the expert’s testimony must close the analytical gap between the data and evidence of causation generally accepted in that relevant professional community with the specific opinion being offered.  Requiring experts to rely on more than just unverified methodologies reduces the speculative nature of such opinions and ensures that the jury is not misled by opinions of causation that are insufficient proof of causation.

The commercial litigation attorneys at Fuerst Ittleman David & Joseph are experienced in litigating complex matters involving expert witnesses in state and federal court. We would be happy to address any questions about these or similar legal issues. Please do not hesitate to contact us via email at contact@fidjlaw.com or by telephone at (305) 350-5690.

Money Laundering in the News: Los Angeles Fashion District Raid Puts Trade-Based Money Laundering and Black Market Peso Exchange in Spotlight

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November 11th, 2014

On September 10, 2014, federal and local law enforcement officials raided the Los Angeles Fashion District in an effort to combat alleged money laundering for Mexican drug cartels which was occurring within the District. The raid, part of “Operation Fashion Police,” focused on the Fashion District due to the high potential for vendors to launder cartel money through a technique known as trade-based money laundering.

Law enforcement and financial institutions have seen an increase in trade-based money laundering since June of 2010 when the Mexican government announced regulations limiting deposits of U.S. cash in Mexican banks. (More information on Mexico’s deposit regulations can be found in the FinCEN Advisory entitled: “Newly Released Mexican Regulations Imposing Restrictions on Mexican Banks for Transactions in U.S. Currency” found here.)

A. Defining Trade-Based Money Laundering and understanding its common techniques.

Generally speaking, trade-based money laundering can be broadly defined as the process of disguising illicit proceeds and moving the value of such proceeds through a series of trade transactions in an attempt to disguise and legitimize their origin.

The basic premise of trade-based money laundering is as follows: Foreign drug traffickers who have an abundance of U.S. currency in the U.S. need a technique to move that money, the source of which is illicit drug profits, overseas. To accomplish this objective, traffickers, with the assistance of conspiring importers/exporters, arrange for the purchase of goods in U.S. dollars. Those goods are then shipped to foreign destinations, usually but not necessarily the home countries of the traffickers. Once these goods arrive, they are sold in the local currency. Thus, the traffickers have now moved their proceeds across the border, converted the U.S. dollars into local currency which traffickers use for day-to-day operations, and legitimized their income as the funds appear to be derived from legitimate trade and business transactions.

Trade-based money laundering can take several forms ranging from the very basic to the incredibly complex. While a complete list of trade-based money laundering techniques is beyond the scope of this article, some of the more common forms of trade-based money laundering include:

  • Over/Under invoicing goods and services: This technique involves the misrepresentation of the price of a good or service in order to transfer additional value between the importer and exporter. By invoicing the goods below fair market value, an exporter can transfer monetary value to an importer because the importer will be paying less for the good than the importer will receive when the good is sold. Alternatively, by invoicing at an amount above fair market value, the exporter receives added value as the goods have been purchased by the importer at a price higher than the value the importer will receive when they sell the goods.
  • Multiple invoicing of goods and services: This technique involves the issuance of more than one invoice for the same transaction. Through the issuance of multiple invoices, a money launderer can make multiple payments for the same goods, thus enabling more money to move in each transaction. Further, unlike over/under invoicing, these multiple payments can be made at fair market value. In order to increase difficulty in detection and avoid possible BSA reporting requirements, parties will often make payments for multiple invoices through different financial institutions.
  • Over/Under shipment of goods and services: This technique involves the misrepresentation of the amount of goods being shipped or services being provided. By shipping a greater quantity of goods than was paid for, an exporter can transfer addition value to an importer who will then sell these extra goods in the local market.
  • Falsely described goods and services: This technique involves the misrepresentation of the type or quality of the good being shipped or the service being provided. The false description creates a discrepancy between the listed invoice value and the actual market value of the good. For example, an exporter ships gold worth $3 per unit but falsely describes the shipment on its invoice as silver worth $2 per unit. The importer would pay the exporter $2 per unit for the goods shipped and then sell the higher valued product on the local market for $3 per unit and obtain the extra money as laundered profits.

The Financial Action Task Force, a 35 member inter-governmental policy-making body of which the U.S. is a member and whose purpose is to establish international standards to combat money laundering, has developed a comprehensive guide regarding the various trade-based money laundering techniques used to launder money. This informative guide can be read here.

B. The Black Market Peso Exchange

One advanced trade-based money laundering technique is known as the “Black Market Peso Exchange.” While the particular details of any Black Market Peso Exchange operation will vary on a case by case basis, the basic operation of any black market peso exchange arrangement usually follows the same steps.

To demonstrate, let’s use a hypothetical involving a Mexican drug cartel and apply their activities to the outline of trade-based money laundering provided by the Financial Action Task Force in its guide. In such a case, the black market exchange would operate as follows:

1) Drug traffickers smuggle drugs into the United States which are sold for U.S. dollars;

2) The drug cartel arranges to sell the U.S. dollars at a discount (i.e. a rate cheaper than that paid on the forex) in exchange for currency of the trafficker’s home country (in this example Mexican pesos) to a third party known as a “peso broker;”

3) The peso broker pays the cartel in pesos from his account located in Mexico;

4) The peso broker will then structure deposits of the U.S. dollars into the broker’s U.S. bank accounts, known to as “funnel accounts” in an effort to avoid triggering BSA reporting requirements;

5) The peso broker then locates Mexican importers who import goods from the U.S. and need to pay for these goods with U.S. Dollars;

6) Once located, the broker will arrange to pay the U.S. exporter on behalf of the Mexican importer in U.S. dollars from the broker’s U.S. bank account;

7) Goods are then shipped to the Mexican importer; and finally,

8) The importer sells the goods in Mexico, pays the broker his arranged discounted exchange fee in pesos deposited in the broker’s Mexican bank account, and thus replenishes the broker’s account with the pesos the broker needs to begin the cycle again with a new laundering transaction.

C. Trade-Based Money Laundering and Black Market Exchange Red Flags and Financial Institution Reporting Obligations

Pursuant to the Bank Secrecy Act (“BSA”), financial institutions are required to create reports and records in order to combat fraud, money laundering, and protect against criminal and terrorist activity. More specifically, federal law requires that financial institutions file Suspicious Activity Reports (“SARs”) if the financial institution “knows, suspects, or has reason to suspect” that an attempted or fully conducted transaction: 1) involves funds derived from illegal activities or is an attempt to disguise or hide such funds; 2) is designed to evade the requirements of the BSA and its implementing regulations; or 3) lacks an apparent lawful or business purpose. See 31 C.F.R. § 1020.320; see also 12 C.F.R. § 21.11; (more information on BSA requirements can be found on the Office of the Comptroller of the Currency’s website here).

Due to the complexity of many black market peso exchange arrangements, FinCEN has issued several Advisories regarding potential “red flag” indicators of trade-based money laundering or black market peso exchange activities that financial institutions must be aware of. Such red flags include in part:

  • Third party payments for goods and services made by an intermediary apparently unrelated to the seller or purchaser of good;
  • Wires where no apparent business relationship appears to exist between the originator and the beneficiary;
  • Funds transferred into U.S. domestic accounts that are subsequently transferred out of the account in the same or nearly the same amounts, especially those originating from or destined to high risk jurisdictions;
  • A foreign import business with U.S. accounts receiving payments from locations outside the areas of their customer base;
  • In the case of a business account, the deposits take place in a different geographic region from where the business operates. For example, an account for a company operating locally in Florida receives numerous small deposits, all below the threshold reporting requirement, at bank branches in Texas, Virginia, and Tennessee;
  • In the case of a business account receiving out-of-state deposits, the debits do not appear to be related to the stated business activity of the account holder;
  • If questioned, the individuals opening or depositing funds into these “business accounts” have no detailed knowledge about the state business activity of the account holder or the source of the cash deposited.

Should any of the above red flags be spotted, FinCEN urges financial institutions to submit a Suspicious Activity Report indicating possible trade-based money laundering or black market peso exchange activity. A more complete list of trade-based money laundering red flags can be found in FinCEN’s Advisory FIN-2010-A001, entitled: “Advisory to Financial Institutions on Filing Suspicious Activity Reports regarding Trade-Based Money Laundering” found here. More detailed information regarding funnel account specific red flags can be read in FinCEN’s more recent Advisory, FIN-2014-A005, issued on May 28, 2014 here.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of administrative law, anti-money laundering, regulatory compliance, customs, import and trade law, white collar criminal defense and litigating against the U.S. Department of Justice. If you are a financial institution, or if you seek further information regarding the steps which your business must take to remain compliant, you can reach an attorney by emailing us at contact@fidjlaw.com or by calling us at 305.350.5690.

Florida Litigation Update: Appeals Court Clarifies Procedure to Execute Against Alcoholic Beverage License

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October 21st, 2014

On September 23, 2014, Florida’s First District Court of Appeal issued its opinion in VMI Entertainment, LLC v. Westwood Plaza, LLC, et. al. clarifying the procedure to execute against a judgment debtor’s alcoholic beverage license.

But first, some background:  Westwood, as landlord, leased commercial property to VMI, as tenant.  Thereafter, VMI defaulted on the lease agreement and, as a result, became indebted to Westwood.  In execution proceedings, Westwood obtained a Writ of Attachment pursuant to Fla. Stat. § 76.01, which provides as follows: “Any creditor may have an attachment at law against the goods and chattels, lands, and tenements of his or her debtor under the circumstances and in the manner hereinafter provided.”  The Writ of Attachment specifically included reference to VMI’s alcoholic beverage license.  VMI moved to dissolve the Writ of Attachment; however, the trial court denied VMI’s request.  VMI appealed.

On appeal, Florida’s First District Court of Appeal considered the issue of whether an alcoholic beverage license may be the subject of a writ of attachment.  In ruling that the license could not be attached, the Court relied in part upon Fla. Stat. § 561.65(4), which sets forth the manner by which a lien or security interest in a “spirituous alcoholic beverage license” may be enforceable against the license. Fla. Stat. § 561.65(4) states that the party which holds the lien or security interest must, within ninety (90) days of the date of creation of the lien or security interest, record same with Florida’s Division of Alcoholic Beverages and Tobacco of the Department of Business and Professional Regulation using forms authorized by the division.  The Court also relied on Florida Supreme Court jurisprudence for two propositions:  First, Fla. Stat. 561.65(4) provides the exclusive means of perfecting a lien on an alcoholic beverage license, and second, a specific statute (Fla. Stat. §561.65(4)), controls over a general one (Fla. Stat. § 76.01).

Ultimately, the Court held that an alcoholic beverage license is not subject to attachment pursuant to Fla. Stat. § 76.01. Instead, the Court ruled, in order to attach an alcoholic beverage license, the creditor must follow the procedure set forth by Fla. Stat. § 561.65(4). Accordingly, the Court reversed the trial court’s order denying VMI’s motion to dissolve the writ (insofar as it encompassed VMI’s alcoholic beverage license) and remanded for entry of an order consistent with its opinion.

The attorneys at FIDJ have the experience necessary to perfect and liquidate an alcoholic beverage license lien.  If you have any questions, an attorney can be reached by emailing us at contact@fidjlaw.com or by calling 305.350.5690.

Bitcoin Update: Recent Decision May Provide Roadmap for Calculating Damages Associated with Bitcoin Related Litigation

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October 8th, 2014

On September 18, 2014, the United States District Court for the Eastern District of Texas issued its order granting summary judgment in favor of the United States Securities and Exchange Commission (“SEC”) in the case of SEC v. Shavers, Case No. 4:13-00416 (E.D. Tx. September 18, 2014). While at first glance, the decision may appear to be nothing more than another uncontested motion for summary judgment, the decision is important for the bitcoin industry for several reasons. First, the District Court found that investments in bitcoin can constitute “investment contracts” and thus, “securities” under 15 U.S.C. § 77b the Securities Act of 1933. Second, the Court’s analysis in calculating a reasonable approximation of profits in U.S. dollars from the bitcoin based scheme can provide a roadmap for calculating bitcoin related damages in future litigation.

In its Complaint, the SEC alleged that Shavers violated sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 and section 10(b) and Rule 10b-5 of the Exchange Act, codified at 15 U.S.C. § 77(c) related to his running of a bitcoin investment scheme. As described by the District Court in its Order, the SEC alleged that Shavers founded and operated Bitcoin Savings and Trust (“BST”). From at least February 2011 through August 2012, Shavers sold investments in BST falsely promising investors up to 1% interest daily or 7% interest weekly, purportedly based on Shavers’ trading of bitcoin against the U.S. dollar. What made Shavers’ scheme unique is that he solicited and accepted all investments, and paid all purported returns in Bitcoin. Ultimately, Shavers received at least 732,050 bitcoin in investments of which 180,819 bitcoins constituted ill-gotten gains.

In response to the SEC’s Complaint, Shavers filed a Motion to Dismiss arguing that the District Court lacked subject matter jurisdiction because the investments in BST did not constitute securities under the Securities Act of 1933. More specifically, Shavers argued that 1) bitcoin is not money and is not part of anything regulated by the United States; and 2) that because all transactions were solely in bitcoin, no money ever exchanged hands, thus the investments could not constitute investment contracts and there were not “securities” under the act. [15 U.S.C. § 77b defines “security” as “any note, stock, treasury stock, security future, security-based swap, bond . . . [or] investment contract . . . .” In turn, for purposes of the Securities Act of 1933, an “investment contract” is any contract, transaction, or scheme whereby: 1) a person invests money; 2) in a common enterprise; and 3) is led to expect profits solely from the efforts of the promoter or a third party. See SEC v. W.J. Howey & Co., 328 U.S. 293, 298-299 (1946).]

In denying Shavers Motion to Dismiss and rejecting his arguments, the District Court noted:

It is clear that Bitcoin can be used as money. It can be used to purchase goods or services, and as Shavers stated, used to pay for individual living expenses. The only limitation of Bitcoin is that it is limited to those places that accept it as currency. However, it can also be exchanged for conventional currencies, such as the U.S. dollar, Euro, Yen, and Yuan. Therefore, Bitcoin is a currency or form of money, and investors wishing to invest in [BST] provided an investment of money.

Thus, because bitcoin was used as money, the investments in BST constituted an investment of money and as such, an investment contract under the Securities Act of 1933. Therefore, the District Court found that the investments sold by Shaver constituted “securities” under the Securities Act of 1933. A copy of the District Court’s Order denying Shaver’s Motion to Dismiss can read here.

The Shavers case concluded in the District Court granting the SEC’s unopposed Motion for Summary Judgment. In so deciding, the District Court explained that it enjoyed broad equitable power to order securities law violators to disgorge their ill-gotten gains. However, as Shavers’ scheme solely involved bitcoin, the District Court was tasked with the issue of how to properly determine what constitutes a “reasonable approximation of profits casually connected with the violation.” As noted by the District Court, this task became more difficult in light of the large fluctuations in the exchange rate of bitcoin from the time the Ponzi scheme first started to the ultimate determination of liability. Ultimately, the District Court concluded that a reasonable calculation of disgorgement in U.S. Dollars could be obtained by multiplying the total amount of ill-gotten gains in bitcoin by the average daily price of bitcoin between the time the Ponzi scheme ended and the date of the Court’s ruling. In so calculating, the District Court order Shavers to disgorge $38,638,569. It waits to be seen whether other courts adopt the District Court for the Eastern District of Texas’s logic in calculating bitcoin to U.S. dollar exchanges for judgment purposes in light of bitcoin’s historic volatility. A copy of the District Court’s Order granting summary judgment can be read here.

The Shavers’ decision comes at a time when both federal and state regulators have increasingly turned their attention towards virtual currency. As we have previously reported, New York State has recently proposed a highly detailed regulatory framework for virtual currency businesses. In addition, on August 11, 2014, the Consumer Finance Protection Bureau (“CFPB”) issued a consumer advisory warning customers of the potential risks associated with virtual currencies, including their high volatility and potential use in Ponzi schemes In the same announcement, CFPB announced that it has begun accepting consumer complaints regarding bitcoin transactions and dealings. A copy of our report on CFPB’s announcement can be read here.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of anti-money laundering compliance, administrative law, constitutional law, white collar criminal defense and litigation against the U.S. Department of Justice. If you or your company has a question related to its anti-money laundering compliance obligations, our anti-money laundering attorneys can provide further information. You can reach an attorney by emailing us at contact@fidjlaw.com or by calling us at 305.350.5690

Third Circuit decision highlights power of “good faith exception” to the exclusionary rule

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October 8th, 2014

We previously discussed the decision of the United States Court of Appeals for the Third Circuit in United States v. Katzin, wherein the Court found that a warrant is required for GPS monitoring and that there was no good-faith exception to the exclusionary rule.  However, on October 1, 2014, the Third Circuit sitting en banc  overruled the decision of the three judge panel and held that although a warrant is required to use a GPS monitor, because the state of the law before the Supreme Court’s 2012 decision in United States v. Jones supported the FBI agent’s action, the exclusionary rule did not apply.

The Good Faith Exception to the Exclusionary Rule

By reversing its earlier decision, the Third Circuit joined the Second, Fifth Seventh, and Ninth Circuits which have also held that the use and installation of a GPS device without a warrant prior to the Supreme Court’s Jones decision did not require the suppression of the evidence because of the “good faith exception” to the exclusionary rule. Consistent with the Supreme Court’s decisions in Knotts and Karo, both of which stand for the proposition that law enforcement searches which are conducted with an objectively reasonable reliance on binding appellate precedent are not subject to the exclusionary rule, the Third Circuit ruled that the FBI agent acted in good faith reliance upon Jones and therefore the good faith exception to the exclusionary rule applied. In other words, even though the agent’s search was subsequently deemed to be unlawful, because at the time of the search he relied in good faith on binding judicial precedent, the evidence obtained as the fruit of that “unlawful” search was nevertheless allowed to be used against the defendant from whom it was obtained.

As explained by the Third Circuit sitting en banc, the recent trend in Supreme Court jurisprudence is to limit the scope and application of the exclusionary rule to those “unusual cases” in which the suppression of illegally obtained evidence may “appreciably deter governmental violations of the Fourth Amendment.” Indeed, as the Third Circuit observed, the cost of suppressing illegally obtained evidence is that evidence of a criminal defendant’s guilt, even though reliable and trustworthy, will not be admitted “thereby ‘suppress[ing] the truth and set[ting] [a] criminal loose in the community without punishment.”

The Ramifications

Law enforcement’s ability to avoid the suppression of evidence has been dramatically expanded. Katzin and similar decisions in other federal courts are incredibly powerful means for law enforcement to circumvent the Fourth Amendment. Thus, in all criminal cases where a defendant attempts to challenge evidence based upon law enforcement’s clear violations of the defendant’s Fourth Amendment rights, one should anticipate the prosecution’s attempt to establish that law enforcement relied in good faith upon some binding appellate precedent, even if that precedent has since been overruled.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience litigating and trying criminal cases both at the state and federal levels including before the United States Courts of Appeal.  You can contact us via email:  contact@fidjlaw.com or via telephone:  305.350.5690.

Florida Appeals Court Clarifies Law On Derivative And Direct Shareholder Lawsuits

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July 22nd, 2014

On July 9, 2014, Florida’s Third District Court of Appeal issued a landmark opinion in the case of Dinuro Investments, LLC vs. Felisberto Figueira Camacho, et al., 3D13-1242 & 3D13-1246, (July 9, 2014).  In Dinuro, the Court analyzed whether a member of a limited liability company (“LLC”) had standing to commence a lawsuit directly against fellow LLC members.  In reaching its conclusion, the Court synthesized nearly fifty years of inconsistent Florida case law bringing clarity to which actions must be maintained directly and which actions must be brought derivatively.

Direct Claim vs. Derivative Claim

But first, it’s important to understand the basic distinctions between direct and derivative claims.  Generally, a derivative action is “an action in which a stockholder seeks to sustain in his own name a right of action existing in the corporation. The corporation is the real party in interest, the stockholder being only a nominal plaintiff.” James Talcott, Inc., v. McDowell, 148 So. 2d 36, 37 (Fla. 3d DCA 1962). A derivative action “must allege two distinct wrongs: the act whereby the corporation was caused to suffer damage, and a wrongful refusal by the corporation to seek redress for such act.” Id. at 38.  See also Kaplus v. First Cont’l Corp., 711 So. 2d 108, 110 (Fla. 3d DCA 1998) (“In a derivative action, a stockholder seeks to sustain in his or her name, a right of action belonging to the corporation.”).  Both the Florida Business Corporation Act and Florida Revised Limited Liability Company Act contain provisions for derivative actions.  See Fla. Stat. §607.07401 (shareholder derivative actions) and Fla. Stat. §605.0801-605.0806 (member derivative actions).See also Florida Limited Liability Company Act, specifically, Fla. Stat. §608.60, for derivative actions in LLCs formed before January 1, 2014.  However, effective January 1, 2015 all LLCs will be governed by the Revised Limited Liability Company Act. Comparatively, a direct action (a/k/a an “individual action”) is a suit by a shareholder/member to enforce a right of action existing in him, separate and distinct from that sustained by other shareholders/members. Citizens National Bank of St. Petersburg v. Peters, 175 So. 2d 54, 56 (Fla. 2d DCA 1965).

A significant distinction between a derivative and a direct lawsuit is one that ultimately impacts the bottom line.  In a derivative action, all recoveries belong to the corporate entity. In a direct action, all recoveries belong to the individual shareholder/member plaintiff(s). That said, aggrieved shareholders/members typically prefer to initiate direct actions and pocket the recovery. However, as clarified by Dinuro, the bar to initiate a direct lawsuit has now been raised.

The Dinuro Facts

In Dinuro, three equal members of San Remo Homes, LLC (“San Remo”) obtained financing to purchase pieces of real estate through subsidiary entities. Due to a decline in the housing market San Remo was forced to negotiate a loan modification with its lender. A term of the revised loan agreement required the three members to make additional contributions to San Remo. Two members made the contributions, while one member, Dinuro, did not. Further, the two compliant members refused to front Dinuro’s member contribution. Consequently, the loan went into default.

The two compliant members formed a new corporation, SR Acquisitions, LLC, and successfully negotiated a purchase of San Remo’s defaulted loan from the lender. Thereafter, SR Acquisitions, LLC initiated foreclosure proceedings against San Remo, acquired the San Remo properties, and left San Remo with no viable assets. Dinuro initiated a direct member lawsuit against the two other members and the lender alleging a breach of operating agreements, tortious interference, and conspiracy to cause the damage outlined in previous counts.

The Defendants moved to dismiss on several grounds, including Dinuro’s lack of standing.  The trial court granted the motion to dismiss “finding that Dinuro lacked individual standing to bring a direct claim against the other members for this type of harm, and that its claims should have been brought derivatively on behalf of San Remo.”

The Third District Court of Appeal agreed with the trial court and provided a detailed opinion to “provide clarity on a complicated point of law.”

Florida’s New Two-Prong Approach

Pulling from “scholarly literature and case law from around the country,” including Florida, the Dinuro Court stated as follows:

[t]he only way to reconcile nearly fifty years of apparently divergent case law on this point is by holding that an action may be brought directly only if (1) there is a direct harm to the shareholder or member such that the alleged injury does not flow subsequently from an initial harm to the company and(2) there is a special injury to the shareholder or member that is separate and distinct from those sustained by the other shareholders or members.

(Emphasis added).

The Court also identified an exception to the rule stating that a “shareholder or member need not satisfy this two-prong test when there is a separate duty owed by the defendant(s) to the individual plaintiff under contractual or statutory mandates.”

Succinctly, if a plaintiff cannot satisfy the two-prong test (direct harm and special injury) or demonstrate a contractual or statutory exception, the plaintiff will have to bring his or her claims derivatively on behalf of the corporation or company.  Relying on this new approach, the Dinuro Court reached the same conclusion as the trial court, that is, Dinuro’s claims could only be maintained derivatively because it was the entity that was initially injured, not the individual.

The attorneys at Fuerst Ittleman David & Joseph, PL will monitor subsequent application of Dinuro.  Our attorneys have extensive experience in the areas of complex corporate litigation, business litigation, tax, tax litigation, administrative law, regulatory compliance, and white collar criminal defense.  If you have any questions, an attorney can be reached by emailing us at contact@fidjlaw.com or by calling 305.350.5690.

United States Supreme Court: Warrants are required to search digital data on seized cell phones

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July 2nd, 2014

On June 25, 2014, in Riley v. California, a unanimous United States Supreme Court held that the Fourth Amendment requires that police obtain a warrant prior to searching the digital data found on an arrested suspect’s cell phone. The opinion can be read here.

Generally speaking, a warrantless search is unreasonable and a violation of the Fourth Amendment unless it falls within a specific exception to the warrant requirement. At issue in Riley v. California was whether the warrantless search of the digital data of a cell phone is permissible under the long recognized “search incident to arrest” exception to the warrant requirement which generally provides that law enforcement may search an arrestee at the time of his or her arrest.

In a series of decisions, the Supreme Court has explained the bounds of the search incident to arrest exception. In Chimel v. California, 395 U.S. 752 (1969), the Supreme Court held that for a warrantless search incident to arrest to comport with the Fourth Amendment, the search must be limited to the area within the arrestee’s immediate control. The Chimel court made clear that the purposes behind the search incident to arrest exception are twofold: 1) the need to protect officer safety; and 2) the need to prevent the destruction of evidence.

The Supreme Court further explained the search incident to arrest exception in United States v. Robinson, 414 U.S. 218 (1973). In Robinson, the Court held that physical evidence found on a person during a lawful search incident to arrest could itself be searched pursuant to the doctrine announced in Chimel. Finally, in Arizona v. Gant, 556 U.S. 332 (2009), the Court again relied uponChimel in holding that a search incident to arrest permits searches of a car where the arrestee is unsecured and within reaching distance of the passenger compartment, or where it is reasonable to believe that evidence of the crime of arrest might be found in the vehicle.

In declining to extend Robinson and Gant to warrantless searches of digital data of an arrestee’s cell phone, the Court found that neither of the unique and narrow purposes (officer safety and preventing the destruction of evidence) is served by allowing the search of digital data on cell phones. As to officer safety, the Court found that digital data stored on a cell phone cannot itself be used as a weapon to harm an officer. Thus, while warrantless physical inspections of a seized phone are permissible to ensure officer safety, such as a search to ensure that a cell phone is not concealing a weapon which may harm an arresting officer, searches of digital content require a search warrant.

With regard to the destruction of evidence, the Court rejected the Government’s argument that, because remote wiping of information may be possible, officers should be allowed to conduct warrantless searches of digital data. The Court found that the Government’s briefing did not indicate that wiping and encryption were pervasive problems and that other techniques and technologies, such as simply turning the phone off or placing in a radio wave proof bag, could combat those problems.

Although finding that the purposes of Chimel were not satisfied, the Court did recognize that in certain rare circumstances the need for officer safety or the prevention of the destruction of evidence would necessitate the searching of a cell phone. However, the Court found that those rare instances would be governed by the “exigent circumstances” exception, not the search incident to a lawful arrest exception.

The Supreme Court also made clear that due to the vast storage capabilities of modern cell phones, greater privacy interests are implicated when addressing the Fourth Amendment’s warrants requirement as applied to the search of digital data. As explained by the Court, “[t]he search incident to arrest exception rests not only on the heightened government interests at stake in a volatile arrest situation, but also on an arrestee’s reduced privacy interests upon being taken into police custody.” Riley, 573 U.S. ___ (2014) slip op. at 15. However, the Court noted:

The fact that an arrestee has diminished privacy interests does not mean that the Fourth Amendment falls out of the picture entirely. Not every search is acceptable solely because a person is in custody. To the contrary, when privacy-related concerns are weighty enough a search may require a warrant, notwithstanding the diminished expectations of privacy of the arrestee.

Id. at 16 (internal citations and quotations omitted).

The Supreme Court also found that the privacy concerns regarding digital data on cell phones was different than those concerning the contents of physical objects. First, the Court found that modern “smart” cell phones allow users to store various distinct types of information that, when searched in combination, would reveal much more information than any one particular record in isolation. Second, the storage capacity of cell phones allows far broader access to information than previously possible. As explained by the Court, “the sum of an individual’s private life can be reconstructed through a thousand photographs labeled with dates, locations, and descriptions; the same cannot be said of a photograph or two of loved ones tucked into a wallet.” Id. at 18. Finally, the data on cell phones can date back years. Whereas “before cell phones, a search of a person was limited by physical realities and tended as a general matter to constitute only a narrow intrusion on privacy,” today the search of digital data of seized cell phones would be far more exhaustive, revealing, and intrusive. As a result, greater privacy concerns exist.

Of course, the Court’s decision does not mean that law enforcement is somehow foreclosed from searching cell phones. As explained by the Court:

Modern cell phones are not just another technological convenience. With all they contain and all they may reveal, they hold for many Americans the privacies of life. The fact that technology now allows an individual to carry such information in his hand does not make the information any less worthy of the protection for which the Founders fought. Our answer to the question of what police must do before searching a cell phone seized incident to an arrest is accordingly simple – get a warrant.

Id. at 28 (internal citations and quotations omitted)(emphasis added).

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of administrative law, constitutional law, white collar criminal defense and litigating against the U.S. Department of Justice. You can reach an attorney by emailing us at contact@fidjlaw.com or by calling us at 305.350.5690.

FDA Regulatory Update: International Crack Down on Online Pharmacies Identifies Over 1,900 Websites Selling Unapproved or Potentially Counterfeit Drugs to U.S. Consumers

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By participating in the organized, global action known as Operation Pangea VII, the U.S. Food and Drug Administration (“FDA”) made good on its promise to continue working with the international community to investigate online pharmacies that sell potentially unapproved, counterfeit, or adulterated drugs and medical devices. (To read the full text of FDA’s press release, please click here.) Between May 13 and May 20, 2014, the FDA partnered with the U.S. Customs and Border Protection (“CBP”), the U.S. Department of Homeland Security, INTERPOL and over 111 law enforcement, customs, and regulatory authorities around the world in targeting websites that sell potentially dangerous, unapproved prescription drugs to consumers. (For additional media coverage of Operation Pangea VII, please click here, here, and here.) This world-wide collaborative effort brought together even more countries than in previous years and required participating countries to carry out “extensive examinations at U.S.-based international mail facilities.” (To read INTERPOL’s summary of Operation Pangea VII, please click here and here.)

Operation Pangea VII resulted in the detention or seizure of 19,618 packages containing over 9.4 million unapproved or suspected counterfeit drugs, including insulin, estrogen, bimatroprost, tramadol, and sildenafil citrate. A large number of these packages claimed to contain medicines from Australia, the United Kingdom, New Zealand, and Canada. Upon further investigation, however, many of those packages were found to contain unapproved or suspected counterfeit drugs from other countries, such as India, China, Singapore, Taiwan, Mexico, Laos, and Malaysia. The total value of these seized and detained products amounted to approximately $36 million.

Based on these findings, regulators and customs authorities across the globe ordered more than 10,000 websites to shut down their operations and remove over 19,000 advertisements for these medicines on social media. Through these efforts, the FDA identified over 1,975 websites as selling products in violation of U.S. law and notified related internet service providers and domain name registrars of the websites’ allegedly violative practices.

Together, the participating countries launched roughly 1,235 investigations and made 239 arrests in connection with online operations for the sale of potentially dangerous or unapproved prescription drugs. Furthermore, INTERPOL’s report explained that Operation Pangea VII “identifi[ed] and dismantle[d] three illicit laboratories in Colombia” and “targeted the main areas exploited by organized crime in the illegal online medicine trade: rogue doman name registrars, electronic payment system and delivery services.” (To read the full text of INTERPOL’s announcement, please click here.)

As we previously reported here, after 2012’s Operation Pangea V, which targeted over 4,100 internet pharmacies and required 18,000 pharmacy websites to shut down their operations, the FDA launched a new website, BeSafeRx: Know Your Online Pharmacy, to provide consumers with information about the dangers of purchasing medicine from online pharmacies. Last year, the FDA participated in Operation Pangea VI, which resulted in the shutdown of over 9,600 websites and seizure of more than $41 million worth of illegal medicines worldwide. (To read the FDA’s announcement regarding Operation Pangea VI, please click here.)  The FDA’s continued participation in Operation Pangea sends a strong signal to industry that the FDA does not plan to back down anytime soon. Rather, it seems clear that the FDA intends to closely monitor online pharmacies and will continue to actively enforce drug and medical device regulations.

Fuerst Ittleman David & Joseph, PL will continue to monitor the regulation of online pharmaceutical drug companies. The attorneys in the Food, Drug, and Life Sciences practice group are well-versed in the complex regulatory framework for prescription drugs and medical devices. If you have any questions or would like more information, please email us at contact@fidjlaw.com or call us at (305) 350-5690.

Florida Litigation Update: Arbitration Clauses are Not Always Enforceable

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In Basulto, et. al. v. Hialeah Automotive, etc., et. al., SC09-2358 (March 20, 2014), the Florida Supreme Court addressed the enforceability of an arbitration clause between a car dealership and purchasers. In the Basulto case, purchasers signed blank contracts for the purchase of a new vehicle and trade-in of their existing vehicle following representations by the dealership that the agreed upon dollar amounts would be inserted into the contracts prospectively. Ultimately, the dealership inserted a value for the purchasers’ vehicle trade-in without the consent or agreement of the purchasers. After several days of negotiations (and the purchasers leaving the dealership with the vehicle), the dealer refused to revise the contracts.  Seeking to rescind the deal, the purchasers requested the return of their trade-in (which they only drove a total of seven miles), only to be advised that the vehicle had been sold.
The purchasers filed a lawsuit in Miami-Dade County against the dealership alleging Fraud in the Inducement, a violation of the Florida Unfair Deceptive Trade Practices Act, rescission of the arbitration agreements, and rescission of the loan agreement. The dealership moved to compel arbitration (per the terms of the agreements).  During an evidentiary hearing, the following additional facts were unveiled:  (a) despite the fact that the purchasers could only communicate in Spanish, all contracts were in English; (b) dealership employees attempted to explain the arbitration clauses to the purchasers; however, the dealership employees had virtually no understanding as to the meaning of such clauses; (c) the purchasers were never informed that they were actually waiving their rights vis-à-vis the arbitration clauses; (d) the finance manager advised the purchasers that if they refused to sign the form contracts there would be no deal; and (e) the purchasers were compelled to sign all documents in rapid succession without the ability to understand exactly what they were signing.
At this point, you might be thinking, among other things, that the purchasers appear at fault for signing contracts the terms of which were written in a language they did not speak and which included blanks to be filled in at a later time. Thus, because the agreements contained arbitration clauses, the purchasers should be required to arbitrate, right? Wrong. That was not how the courts in Florida ruled. First, in Florida, “there are three elements for courts to consider in ruling on a motion to compel arbitration of a given dispute: (1) whether a valid written agreement to arbitrate exists; (2) whether an arbitrable issue exists; and (3) whether the right to arbitration was waived.” Seifert v. U.S. Home Corp., 750 So. 2d 633 (Fla. 1999). The trial court, relying on Seifert, held that there was no valid agreement to arbitrate because the contracts, when read in unison, contained multiple conflicting dispute resolution provisions which could not be reconciled.  The trial court further reasoned that despite a finding that there was never a “meeting of the minds,” the agreements would have been deemed unenforceable being both procedurally and substantively unconscionable. The dealership then appealed to Florida’s Third District Court of Appeal, which held that one of the arbitration clauses was enforceable. However, the Court of Appeals failed to perform a Seifert analysis in reaching its conclusion.  The purchasers appealed to the Florida Supreme Court.
Before the Florida Supreme Court, the dealership argued that under Florida contract law, it should not matter whether a party to an agreement is “blind, illiterate, or has limited understanding of the language.”  Rejecting this, and several other arguments presented by the dealership, the Florida Supreme Court reversed the appellate court’s decision and affirmed the trial court’s application of Seifert. Succinctly, as established by Basulto, arbitration clauses in Florida will be enforced unless (a) an agreement to arbitrate fails to satisfy a Seifert analysis, (b) there is a finding that that the parties never reached a “meeting of the minds,” or (c) the agreements at issue are found to be both procedurally and substantively unconscionable. The Florida Supreme Court’s ruling in this case was critical, and will govern how arbitration clauses in Florida will be enforced for the foreseeable future.
FIDJ, P.L. has extensive experience dealing with commercial contract disputes, including those involving arbitration clauses.  If we can be of assistance to you, email us at contact@fidjlaw.com or call 305.350.5690.

White Collar Criminal Defense Update: Third Circuit Court of Appeals Discusses “Willful Blindness” Jury Instruction and Burden Shifting

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The following post, which was authored by Joseph DiRuzzo, originally appeared on the Federal Tax Crimes Blog on May 5, 2014. We re-post it here with permission.

 

On April 30, 2014, the Philadelphia based U.S. Court of Appeals for the Third Circuit issued its precedential opinion in United States v. Tai, ___ F.3d ___, 2014 U.S. App. LEXIS 8129 (3d Cir. April 30, 2014), here. A copy of the Tai decision is available here.

Before filing an appeal with the Third Circuit, Tai was convicted for mail and wire fraud related to the “Fen-Phen Settlement Trust” which was created to compensate victims who underwent surgery for heart valve replacement or primary pulmonary hypertension (PPH) after taking Fen Phen. The trust was established by the U.S. District Court for the Eastern District of Pennsylvania to administer all claims and benefit payments to Fen Phen victims who registered as part of the Nationwide Class Action Settlement Agreement with American Home Products Corporation.

Individuals wishing to make claims were required to submit a physician’s report from a cardiologist and the Trust would review the documents to ensure that the claims were legitimate. Tai was one of the cardiologists hired to prepare reports in support of individuals claims.  Tai admitted that in about 10% of his cases, he drafted reports that he knew were incorrect.  When Tai’s reports were audited, a substantial number were not only clearly incorrect, but included measurements which were “inconsistent with a human adult heart.” Slip op. at 6.

Tai was charged with mail and wire fraud in violation of 18 U.S.C. sections 1341 and 1343; he was found guilty on all charges and sentenced to 6 years in prison.  Tai appealed his conviction arguing that, among other things, the jury instruction was “constitutionally infirm because it shifts the burden of proof to the defendant to disprove intent.”

As a threshold matter, because Tai did not raise his objection to the jury instruction at the trial level and thereby failed to preserve it, the Third Circuit employed a “plain error” test, which is a highly deferential standard of review. Under the “plain error” test, criminal defendants have the burden of establishing than any error was “plain” and he must show:  (1) an error; (2) that is plain; (3) that affects substantial rights; and (4) which seriously affects the fairness, integrity, or public reputation of judicial proceedings.Johnson v. United States, 520 U.S. 461, 466-67 (1997).

Regarding the instruction, the Third Circuit observed that a “willful blindness instruction is typically delivered in the context of explaining how the Government may sustain its burden to prove that a defendant acted knowingly in committing a charged offense.”  A jury instruction must track the applicable law, but District Court judges have substantial latitude in the actual wording of the jury instruction.  However, insofar as jury instructions related to the Fifth Amendment’s requirement that the Government prove its case beyond a reasonable doubt on each element of the offense, “a jury instruction violates due process if it fails to place squarely on the Government the full burden of proving beyond a reasonable doubt the required mental state for the offense.”  Slip op. at 10 citing Patterson v. New York, 432 U.S. 197, 204-07 (1977).

In other words, as Tai argued, shifting the burden of proof in a criminal case violates the Fifth Amendment and can often result in a conviction being overturned.  SeeMullaney v. Wilbur, 421 U.S. 684, 703–04 (1975) (due process does not permit shifting the burden of proof to the defendant by the use of conclusive or burden-shifting presumptions); see also Boles Trucking v. United States, 77 F.3d 236, 241 (8th Cir. 1996)(discussing in a civil case that “it is reversible error to place the burden of proof on the wrong party or to place an unwarranted burden of proof on one party.” (internal quotations and citations omitted)). However, because the “willful blindness instruction then explicitly explained that ‘the Government may prove’ this element through evidence that established beyond a reasonable doubt that Tai ‘deliberately closed his eyes to what would otherwise have been obvious to him,’” (slip op. at 11), there was no impermissible burden shifting.  Ultimately, the Third Circuit concluded that the “instructions told the jury when willful blindness does or does not exist, but did not imply in any way that Tai must present evidence concerning his own beliefs or knowledge.” Accordingly, “there was no implicit or explicit shifting of the burden of proof to Tai.” Id.

The Tai case is instructive in criminal tax and Bank Secrecy Act cases to the extent that it addresses the willful blindness jury instructions which often arise in those cases.  Since the mens rea requirement requires that the Government prove that a criminal defendant had the culpable mental state, often the defense strategy will be along the lines of ignorance, negligence, incompetence, or lack of sophistication, but falling short of being criminal. In order to rebut this defense, the Government will typically attempt to introduce evidence that when a defendant “sticks his head in the sand” such deliberate acts – i.e., the willful blindness – cannot be used to escape criminal liability.  This essentially pits the criminal defendant’s subjective belief against the jury’s belief as to what was reasonable under the circumstances.

One other, special point is also worth mentioning. The Government may attempt to argue in “willful blindness” cases that the defendant’s actions were not objectively reasonable and hence the jury can conclude that the defendant intentionally intended to be willfully blind to the facts.  This subjective versus objective tension will often dictate the outcome of the case, but will almost always require a criminal defendant to take the stand in his defense to assert a Cheek defense. In Cheek v. United States, 498 U.S. 192 (1991), the Supreme Court established that a genuine, good faith belief that one is not violating the Federal tax law based on a misunderstanding caused by the complexity of the tax law is a valid defense to a charge of “willfulness,” even though the defendant’s belief is objectively irrational or unreasonable.

More often than not, willful blindness cases boil down to one question:  does the jury believe the defendant?