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Sponge Bob Square Pants, Alan Greenspan, Elton John, PPP Loans, and a Limited Safe Harbor

“Liar, liar, plants for hire”

On April 23rd the Treasury Department added a 31st question and answer to its series of Paycheck Protection Program (PPP) FAQs issued since April 6th. Question 31 that Treasury asked then answered was “Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?” The relevant parts of the answer were:

“… all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application … borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.”

Tacked to the end of answer 31 was the following stand-alone paragraph:

“Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.”

This last paragraph didn’t get much attention. And the context of Q&A 31 was the “Shake Shack” controversy, where the publicly-traded company obtained two PPP loans totaling $20 million, faced an onslaught of adverse media attention, then publicly announced it would return the money. Among other things, one of the principals of Shake Shack posted an article on LinkedIn that one of the reasons they applied for the PPP loan was that the conditions were “confusing”. Fair enough, and no doubt a true statement that he made from the bottom of his heart.

Liar, Liar Plants for Hire – A Limited Safe Harbor?[1]

On April 24th Treasury published another FAQ document – tacking on four more questions and answers – but just as important, issued its fourth set of PPP-related Interim Final Rules – those pesky regulations that need to be published in the Federal Register that provide the “how things will happen” details to the CARES Act’s “what should happen” general provisions. Included in this fourth PPP Interim Final Rule was the following:

5. Limited Safe Harbor with Respect to Certification Concerning Need for PPP Loan Request
Consistent with section 1102 of the CARES Act, the Borrower Application Form requires PPP applicants to certify that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Any borrower that applied for a PPP loan prior to the issuance of this regulation and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith. The Administrator, in consultation with the Secretary, determined that this safe harbor is necessary and appropriate to ensure that borrowers promptly repay PPP loan funds that the borrower obtained based on a misunderstanding or misapplication of the required certification standard.

The CARES Act itself, and the first set of regulations referred to the certification by the PPP applicant/borrower that the loan is “necessary to support the ongoing operations” of the applicant/borrower. It doesn’t appear that Treasury, the CARES Act, or the SBA have defined or explained what they mean by “necessary to support the ongoing operations” or established the “required certification standard”. This is the Congressional equivalent of Alan Greenspan’s “mumbling with great incoherence.[2]

“I’ve learned to mumble with great incoherence”

No wonder borrowers have a misunderstanding. But I don’t know what Treasury intends by “misapplication”. Regardless, Treasury has given those who’ve misunderstood the standards, as well as those who have misapplied the standards, and even those who flat-out lied in their certifications, a limited safe harbor: “Pay the money back by May 7th and we’ll pretend it never happened.”

“Sorry Seems To Be The Hardest Word”

Let’s hope that there aren’t too many PPP recipients who misunderstood or misapplied the certification standard, or flat out lied about needing the money. Why? What about those deserving small businesses that were shut out of the PPP because of those that lied or cheated their way into a PPP loan? “Sorry seems to be the hardest word …”

One other thing. The FAQ provides a safe harbor-ish to those that applied prior to the issuance of the April 23rd guidance and repays the loan in full by May 7. The Interim Final provides a limited safe harbor for any borrower that applied for a PPP loan prior to the issuance of this regulation. The regulation was issued on April 24th but isn’t effective until the date it is published in the Federal Register. The first Interim Final Rule took almost two weeks to get published. Let’s see if they’re quicker with this fourth PPP Interim Final Rule.

[1] I couldn’t resist. For two years I’ve been looking for a reason to use a quote, any quote, from Sponge Bob Square Pants. In a great 11-second scene, Sponge Bob accuses Patrick of stealing his candy bar. Patrick replies, “Liar, liar, plants for hire”. https://www.youtube.com/watch?v=n-rhuo1vnKE

[2] In Congressional testimony in 1987, then-Federal Reserve Chairman Alan Greenspan said, “Since I’ve become a central banker, I’ve learned to mumble with great incoherence. If I seem unduly clear to you, you must have misunderstood what I said.”

Dusting off the Congressional Version of an “Aged Shelf Company”

On April 21, 2020, the United States Senate resolvedthat the bill from the House of Representatives (H.R. 266) entitled ‘An Act making appropriations for the Department of the Interior, environment, and related agencies for the fiscal year ending September 30, 2019, and for other purposes’, do pass with the following AMENDMENT: Strike all after the enacting clause and insert …” the “Paycheck Protection Program and Health Care Enhancement Act”.

Apparently, in order to extend the Paycheck Protection Program quickly, Congress needed a bill that had been sitting around waiting to be amended and passed in a jiffy. They found it in a bill introduced by Representative Betty McCollum (D. MN. – 4th) on January 8, 2019 for appropriations for the Department of the Interior for 2019. They took that aged bill off the congressional shelf, stripped it of everything but its existence and history, and have re-purposed it for the PPP and healthcare funding for the coronavirus emergency.

What Congress found was the congressional equivalent of an aged shelf company. What is an “aged shelf company”? Apparently, a leading authority on aged shelf companies seems to be Wyoming Corporate Services Inc., which provides some top-shelf information on aged shelf companies.

https://wyomingcompany.com/aged-corporation/ has the following:

What exactly are Shelf Companies & Shell Companies? What are the differences?

A Shell company defined by Wikipedia: “A shell corporation is a company which serves as a vehicle for business transactions without itself having any significant assets or operations … Shell corporations are not in themselves illegal, and they do have legitimate business purposes.”

A Shelf company defined by Wikipedia: “A shelf corporation, shelf company, or aged corporation is a company or corporation that has had no activity.  It was created and left with no activity – metaphorically put on the “shelf” to “age”.  The company can then be sold to a person or group of persons who wish to start a company without going through all the procedures of creating a new one.”

Here at Wyoming Corporate Services, Inc. we do not offer, nor have we ever offered Shell companies, so we are not going to spend additional time discussing them.

We do offer Aged Shelf Companies.  Companies that we formed ourselves, placed up on the shelf and have maintained all the State required records and fees.  We guarantee in writing that they are all clean and pristine.  They do not have EIN#, bank accounts, trade lines, D&B credit scores.  They have never been used and this is the reason we can make such a guarantee. Visit our aged shelf companies page to browse a partial list of our current inventory.

Who uses Shelf Companies and why?

    • To save the time and effort involved in creating a new company.  Let’s say you have a real estate closing or transaction and would like to use a Corporation or LLC and need it right away.  In most cases, our shelf companies will come with a PDF copy of all your Articles the same day you order, and you can utilize them that same day. In many cases a bank account can be established for the entity the same day.
      • To have the ability to bid on contracts.  Some jurisdictions require a company to be in business for a certain length of time in order to bid or qualify for consideration.
      • Leasing equipment.  Often leasing companies don’t like to lease to companies that are less than six month old.
      • Perception in the market place that the company has a longevity.  Maybe you have been a sole proprietor for many years and now have decided to incorporate.  You don’t want to appear to new or potential customers that you “just started”, but rather have been in business for awhile.
      • Privacy.  The reality of the world we all now live in is there is very little privacy or the ability to have privacy.  We are often lead to believe that anyone seeking privacy must be “trying to hid something” or they are “doing something illegal”.   Therefore, if we have “nothing to hide” we should filet and display all of our personal and business dealings for public review, approval and consumption.  This is simply not true.  There are many legitimate, legal and varied reasons for one wishing to keep ones personal and business dealing out of the prying public eye.  Fortunately Wyoming is a State that still believes citizens can and most importantly still have a RIGHT to do so.  Wyoming still has the Old West mind set that if you want privacy, you have a right to it.

Please don’t be misled or misinformed by the current furor over the “Panama Papers” and role of shell vs shelf companies. Do your own research – there is a lot of great, informative and accurate information out there.

Apparently, Mitch McConnell uses aged shelf bills to save the time and effort involved in creating a new bill.

Wyoming Corporate Services Inc. is offering its 245 aged shelf companies for $645 for a company aged less than a month all the way to $5,895 for its oldest vintage – July 2006. And aged shelf companies created in January 2019 – like the bill introduced by Representative McCollum that Senator McConnell has dusted off – are going for $995. Mitch may have saved American taxpayers some money!

CARES Act and PPP Loans – Has the SBA Actually “Approved” Any PPP Loans? Or Are Its Deputies Doin’ All the Approvin’?

The Small Business Administration (SBA) has announced that as of April 15th it had “approved” about 1,300,000 Paycheck Protection Program (PPP) loans for about $289 billion (that’s just over $220,000 per loan, on average). The program kicked off on April 3rd: so that’s 1,300,000 approvals in 13 days, or 100,000 approvals every day, including weekends.

That’s a marked improvement over the SBA’s 2019 daily approval rate of about 160 loan approvals every day.

In 2019 the SBA approved a total of just under 59,000 loans totaling about $30 billion. In 2020, through March 20th, the SBA approved 24,745 loans for ~$12.5 billion. According to the SBA’s last congressional report (Fiscal 2021 Congressional Justification & Fiscal 2019 Performance Report), it noted that “The time to process a 7(a) non-delegated loan greater than $350,000 decreased from 15 days to 9 days (40 percent efficiency gain) [from FY 2017] and for loans under $350,000, from 6 to 2 days (67 percent efficiency gain).” So in fiscal 2019, the SBA approved about 46,100 7(a) loans totaling $23.2 billion. Each of those took between 2 and 9 days. And based on SBA’s data, about 20% of its 7(a) loans are under $350,000, and 80% are over $350,000.

So when faced with a volume of 59,000 loans in a year, it takes the SBA about two days to process the smaller loans, and nine days to approve the bigger loans.

So how did the SBA go from approving 160 7(a) loans per day in 2019 to approving 100,000 PPP loans per day in 2020? They deputized the lenders!

The CARES Act Has Deputized PPP Lenders – They Get to Approve the Loans They Make!

Section 1102 of the CARES Act creates the PPP and sets out the “what” that needs to be done (the “how” is reserved to the regulations). Section 1102(a) amends the existing section 7(a) of the Small Business Act (15 U.S.C. 636(a)) to add the PPP provisions in subsection 36 of section 7(a). The key is paragraph (F), titled “Delegated Authority”. It provides:

“(ii) DELEGATED AUTHORITY. (I) IN GENERAL.—For purposes of making covered loans for the purposes described in clause (i), a lender approved to make loans under this subsection shall be deemed to have been delegated authority by the Administrator to make and approve covered loans, subject to the provisions of this paragraph.”

That seems pretty clear: the SBA has deputized the lenders, and its the lenders that will make AND approve PPP loans, not the SBA. Is there anything different in the Interim Final Rule, or regulations? No. In fact, the Interim Final Rule refers to lenders making PPP loans, but is silent on lenders approving loans – even the law now gives lenders delegated authority to make and approve PPP loans. The phrase “make and approve” or “making and approving” doesn’t appear in the final rule.

So when the SBA announces that it has approved 1.3 million PPP loans in the first thirteen days of the PPP, what it really means is that its deputies – the roughly 5,000 banks, credit unions, and other lenders that have signed up for the PPP – have made 1.3 million PPP loans and, through the delegation powers in the statute, approved them. But one needs to question whether those 5,000 lenders have actually approved that many PPP loans, or whether they have simply submitted the electronic paperwork to the SBA’s E-Tran system and the SBA has returned 1.3 million PPP Loan Numbers back to those lenders, and are slowly working through the underwriting requirements and approving PPP loans methodically and carefully. It’s likely the latter.

CARES Act PPP Loans – Is There A Loan “Dead Zone”?

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law by the President on March 27, 2020. It is a stunning piece of legislation meant to support our first responders and medical personnel treating those that are stricken, and to provide emergency economic relief to individuals, small businesses, and even large corporations that have been so adversely impacted by the pandemic.

The ink was barely dry on the CARES Act (enacted March 27th), which created the $349 billion Small Business Administration’s Paycheck Protection Program loan program, when the Interim Final Rules were published (April 3rd). Those PPP loans will be doled out by qualified lenders to qualified Applicants, in increments of up to $10 million per Applicant (limit of one per Applicant). Those loans will bear interest at 1% per year, with interest and principle payments deferred for six months and – here’s the best part – the Government will forgive “qualifying” loans.

As of 7:00 am PST on April 7th, there were about 1,800 lenders that had previously been approved, and another 600 or so that have only recently been approved, to act as SBA PPP lenders. How will they be compensated?

According to the Treasury Department’s Treasury PPP Fact Sheet there is a simple fee schedule:

The SBA – not the small business borrower – will pay the lender a processing fee based on the balance of the financing outstanding at the time of final disbursement in the following amounts:

  • five percent for loans of not more than $350,000;
  • three percent for loans of more than $350,000 and less than $2,000,000; and
  • one percent for loans of at least $2,000,000

(see 15 USC s. 636(a)(36)(P)).

And the SBA Interim Final Rule has similar language to the Treasury Fact Sheet. At page 24 of the  Interim Final Rule is this:

What fees will lenders be paid? SBA will pay lenders fees for processing PPP loans in the following amounts:

i. Five (5) percent for loans of not more than $350,000;

ii. Three (3) percent for loans of more than $350,000 and less than $2,000,000; and

iii. One (1) percent for loans of at least $2,000,000.

So this appears to be pretty simple: a loan up to $350,000 gets the lender a fee of 5% of the amount of the loan. A loan of more than $350,000 and less than $2,000,000 gets the lender a fee of 3%. And a loan of $2,000,000 or more gets the lender a fee of 1%.

Was that the intent?

So a PPP loan of, say, $350,000 gets the lender a fee of $17,500 (at 5%) and a loan of, say, $400,000 gets the lender a fee of $12,000 (at 3%)? Or did Treasury intend that a loan of, say, $500,000, would get the lender a fee of 5% on the first $350,000 and 3% on the next $150,000? Or for loans of, say, $4,000,000, the lender would get a fee of 5% on the first $350,000, 3% on the next $1,650,000, and 1% on the balance? If that was the intent, why didn’t Treasury write something like it had in 13 CFR §120.220, but for PPP loans:

  • for loans up to $350,000, five percent of the loan amount;
  • for loans from $350,000 up to $2,000,000, $17,500 on the first $350,000 and 3% on the balance of the loan amount; and
  • for loans of $2,000,000 up to $10,000,000 (the maximum PPP loan), $60,000 on the first $2,000,000 and 1% on the balance of the loan amount

I did some calculations, and something interesting occurs. We get a range of loans where a lender will make less in fees even when lending out more money. Here’s what it looks like: for loan amounts up to $350,000, the lender gets a fee that goes up to $17,500. But for a loan just over $350,000 – and in this example I went up $25,000 – the lender makes over $6,000 less in fees. As can be seen, there is a “Dead Zone” of PPP loans between $350,000 and $600,000 where the lender makes less in fees than if it loaned $350,000 or less. And the PPP Loan Dead Zone is even broader for Agents: that zone extends from $350,000 to $700,000.

(there is also an Agent fee that follows the same ranges as the lender fee, only in amounts of 1%, 0.5%, and 0.25%).

And a similar PPP Loan Dead Zone occurs at the next step-drop in fees – for loans of $2,000,000 or more, the lender fee is 1%. So a lender will make less on a $6,000,000 PPP loan than it would make on a $1,950,000 loan. The high dollar PPP Loan Dead Zone for Agents is $2,000,000 to $4,000,000.

Could this fee structure create some misaligned incentives for lenders? Could a lender somehow “encourage” those $575,000 loans to become $650,000 loans, even if the borrower has only applied for $575,000? Could a lender process a $350,000 loan – with a $17,500 fee – before it processes a $400,000 loan – with a $12,000 fee?

So where does that leave us? As I wrote in my last article, nobody knows. As Yogi Berra once said,

It’s tough to make predictions, especially about the future.

So how can Treasury eliminate the PPP Loan Dead Zone?

Treasury can change the fee structure to something like this:

  • for loans up to $350,000, five percent of the loan amount;
  • for loans from $350,000 up to $2,000,000, $17,500 on the first $350,000 and 3% on the balance of the loan amount; and
  • for loans of $2,000,000 up to $10,000,000 (the maximum PPP loan), $60,000 on the first $2,000,000 and 1% on the balance of the loan amount

With that, there are no PPP Loan Dead Zones … the larger the loan, the greater the fee. Fair enough, let’s get these loans processed!

“Descriptive & Memorable” – The Fed’s soon-to-be-published Pandemic Response Accountability Committee Website

The CARES Act, section 15010(g) (1) (A) requires that: “Not later than 30 days after the date of enactment of this Act, the [Pandemic Response Accountability] Committee shall establish and maintain a user-friendly, public-facing website to foster greater accountability and transparency in the use of covered funds and the Coronavirus response, which shall have a uniform resource locator that is descriptive and memorable.”

Subsection (3) provides that the Committee shall ensure that the website provides “materials and information explaining the Coronavirus response and how covered funds are being used. The materials shall be easy to understand and regularly updated”.

There follows thirteen explicit requirements, including … any progress reports, audits, inspections, or other reports … user-friendly visual presentations to enhance public awareness of the use of covered funds and the Coronavirus response … detailed data on any Federal Government awards over $150,000 … by month to each State and congressional district, where applicable … a means for the public to give feedback on the performance of any covered funds and of the Coronavirus response, including confidential feedback … a link to estimates of the jobs sustained or created by this Act to the extent practicable … a plan from each Federal agency for using covered funds.

Stay tuned – April 26th is the due date for this new descriptive, memorable, and critically important website. Congress and, more importantly, the public, need to keep a watchful eye over how the hundreds of billions of dollars are being allocated and spent. Bookmark your calendar … and stay safe.

Update April 27, 2020 – the website went online at https://pandemic.oversight.gov

The Roger Stone Case – The Shenanigans Continue

Federal Court concludes that Roger Stone’s lawyers’ motion to disqualify Judge Amy Berman-Jackson is “nothing more than an attempt to use the Court’s docket to disseminate a statement for public consumption that has the words ‘judge’ and ‘biased’ in it”


www.merriam-webster.com › shenanigan 1 : a devious trick used especially for an underhand purpose. 2a : tricky or questionable practices or conduct —usually used in plural. b : high-spirited or mischievous activity —usually used in plural.

This is the second article I’ve written on the Roger Stone case. The first from February 12th, “The Roger Stone Case: Whether Outraged or Relieved, At Least Be Informed”, can be found here.

Roger Stone’s five lawyers are continuing their high-spirited activity. They filed a motion seeking to disqualify Federal District Court Judge Amy Berman-Jackson. The factual underpinning of their argument was that they had filed a motion for a new trial, alleging that one of the twelve jurors lied on their juror questionnaire and during their questioning by the Court, and that those lies related to their bias against Roger Stone and Donald Trump. That motion was pending during the sentencing hearing on February 20, 2020. Stone’s lawyers argue that during that hearing, Judge Berman-Jackson made statements that give rise to a reason to question her impartiality in connection with that pending motion for new trial based on alleged juror misconduct. They relied on section 455(a) of title 28 of the United States Code (title 28 governs the federal judiciary and judicial procedure). Section 455(a) states: “any justice, judge, or magistrate judge of the United States shall disqualify himself in any proceeding in which his impartiality might reasonably be questioned.” The purpose of section 455(a) is to promote public confidence in the judiciary by avoiding even the appearance of impropriety whenever possible, and in the District of Columbia, where this court sits, recusal is required when “a reasonable and informed observer would question the judge’s impartiality.”

What did Roger Stone’s lawyers argue? They point to this section of Judge Berman-Jackson’s sentencing:

“Sure, the defense is free to say: So what? Who cares? But, I’ll say this: Congress cared. The United States Department of Justice and the United States Attorney’s Office for the District of Columbia that prosecuted the case and is still prosecuting the case cared. The jurors who served with integrity under difficult circumstances cared. The American people cared. And I care.”

Stone’s lawyers argued that the Judge’s use of the words “jurors” and “with integrity” (which Judge Berman-Jackson noted were “three words on the 88th page of the 96-page transcript of a two-and-a-half-hour hearing”) are disqualifying because there is a pending motion for new trial with respect to a single juror, and the hearing has not yet taken place. They wrote:

“The Court’s ardent conclusion of ‘integrity’ indicates an inability to reserve judgment on an issue which has not yet been heard. Moreover, the categorical finding of integrity made before hearing the facts is likely to lead a reasonably informed observer to question the District Judge’s impartiality … The premature statement blessing ‘the integrity of the jury’ undermines the appearance of impartiality and presents a strong bias for recusal.”

How did Judge Berman-Jackson rule? Writing in the third person (“the Court, “it”, and “its”), the Judge wrote the following:

“Its characterization of the jurors’ service was voiced on the record, and it was entirely and fairly based on the Court’s observations of the jurors in the courthouse; through the nine days of voir dire and trial, when they were uniformly punctual and attentive, and through their thoughtful communications with the Court during deliberation … and the delivery of the verdict … Moreover, the record dating back to January of 2019 reflects that the Court took each issue raised by this defendant seriously; that on each occasion, it ruled with care and impartiality, laying out its reasoning in detail; and that it was scrupulous about ensuring his right to a fair trial. It granted important evidentiary motions in his favor; it proposed utilizing a written questionnaire to ensure that the parties could receive more information than is usually available for jury selection; it struck 58 potential jurors for cause based on the defendant’s motions or on its own motion; and it repeatedly resolved bond issues in his favor, even after he took to social media to intimidate the Court, after he violated conditions imposed by the Court, after he was convicted at trial, and after he was sentenced to a term of incarceration. Moreover, at the sentencing hearing that forms the sole basis for the defendant’s motion, the Court concluded, based in part on many considerations put forth by the defendant, that it was appropriate to vary from the applicable Advisory Sentencing Guideline Range.”

And finally the conclusion:

“At bottom, given the absence of any factual or legal support for the motion for disqualification, the pleading appears to be nothing more than an attempt to use the Court’s docket to disseminate a statement for public consumption that has the words “judge” and “biased” in it. For these reasons, defendant’s motion is hereby DENIED. SO ORDERED. AMY BERMAN JACKSON United States District Judge DATE: February 23, 2020”

The five lawyers that filed the motion to disqualify Judge Berman-Jackson are, no doubt, fine attorneys. This has been, and continues to be a grueling legal case (indeed, with 343 documents having been docketed, that is more than 1 each business day since the indictment was filed on January 24, 2019). I trust they’re sleeping well at night … high-spirited activity can be tiring.

The Roger Stone Case – Whether Outraged or Relieved, At Least Be Informed

“A good deal of hysteria, some of it reflexive, much of it recreational”

The media, social media, politicians, and pundits are reacting loudly and passionately about the President’s decision to weigh in on the sentencing of Roger Stone, the resignations of four Assistant United States Attorneys involved in the case, and the decision of the Department of Justice to submit a revised sentencing recommendation. And the hysteria should continue for the foreseeable future, with the sentencing of Mr. Stone now set for February 20th.

Whether you are outraged or relieved about what is happening in this case, your outrage or relief should at least be informed.

In an essay published on May 10, 2004 in the Wall Street Journal’s Opinion section titled “The Spirit of Liberty: Before Attacking the Patriot Act, Try Reading It”, then chief judge of the U. S. District Court, Southern District of New York Michael Mukasey reminded us that if we were to express opinions on something, those opinions should at least be informed. Judge Mukasey was writing about the USA PATRIOT Act, passed in October 2001 in the wake of the 9/11 terrorist attacks, a statute which had “become the focus of a good deal of hysteria, some of it reflexive, much of it recreational.” Judge Mukasey wrote that “[l]ike any other act of Congress, the Patriot Act should be scrutinized, criticized and, if necessary, amended. But in order to scrutinize and criticize it, it helps to read what is actually in it.”

The Roger Stone case isn’t an act of Congress, but the facts of the case – set out in the 288 documents on the docket – should be read and understood before one expresses an opinion. But 288 documents is a lot of reading. Three of those documents should, in my opinion, be enough to provide enough of a balanced background to allow someone to have and express an informed opinion: the Government’s original Sentencing Memorandum, Roger Stone’s Sentencing Memorandum, and the Government’s Revised Sentencing Memorandum.  These are all publicly available documents. I’ll summarize them here. But first, a stop to explain the Sentencing Guidelines that are used in all federal criminal cases and which have been the subject of much of the rational, irrational, reflexive, or recreational hysteria around the Roger Stone case.

Federal Sentencing Guidelines – a Primer

The following is an excerpt from my April 2019 article on the College Admissions Scandal – College Admissions Scandal – RegTech Consulting Article April 16, 2019.

The Federal Sentencing Guidelines are intended to provide “guideline ranges that specify an appropriate sentence for each class of convicted persons determined by coordinating the offense behavior categories with the offender characteristic categories.” US Sentencing Commission Link

So there are two things to be considered: the defendant’s own criminal histories, if any, and the “offense level” of their crime, adjusted for various aggravating factors, and adjusted down for “acceptance of responsibility”. This gives an offense level of between 1 and 43, organized into four “zones”. The defendant’s criminal history is then considered, resulting in being placed into one of six criminal history categories. The result is a Sentencing Table with the seriousness of the crime on the Y axis and the seriousness of the criminal on the X axis. The court refers to, and can depart from, the ranges set out in the Table. A (partial) sentencing table (showing only the first 30 of the 43 offence levels) is seen below.

United States v. Roger J. Stone, U.S. District Court, District of Columbia Case 19CR00018 – Sentencing Scheduled for February 20, 2020

Government’s Original Sentencing Memorandum – Seeking imprisonment consistent with Sentencing Guidelines of 87-108 months

The Government’s original Sentencing Memorandum went through the history of the case. In January 2019 a federal grand jury indicted Roger Stone on seven criminal counts: one count of obstruction of a Congressional investigation (relating to his sworn testimony before the House Intelligence Committee), five counts of making false statements to Congress (“in his testimony before the House Intelligence Committee, Stone told the Committee five categories of lies”), and one count of witness tampering. In November 2019, after a lengthy trial, a jury convicted Roger Stone of all seven counts. The Memorandum also included a number of issues relating to the pre-trial conduct of Mr. Stone, and the court’s response to that conduct. An episode relating to an image Mr. Stone posted to Instagram of the judge with cross-hairs next to her head was included in the Memorandum.

The Government asked that “a sentence consistent with the applicable advisory Guidelines would accurately reflect the seriousness of his crimes and promote respect for the law.” At page 16 of its Memorandum, the Government set out the Guidelines Range based on an offense level of 29 and a Criminal History category of I (no criminal record), resulting in a range of imprisonment of 87 months to 108 months. That offense level of 29 was determined as follows:

14 for the base offense(s) level

+8 for threatening a witness

+3 for interference with the administration of justice

+2 for an offense that was extensive in scope, planning, or preparation

+2 for obstruction of justice

Roger Stone’s Sentencing Memorandum – Seeking probation below the Sentencing Guidelines of 15-21 months

Roger Stone’s attorneys’ Memorandum included a number of character references (letters) and focused on his exemplary personal life, a life they pointed out was very different than his public persona. They laid out a position that the sentencing guidelines should be based only on the base offense level of 14, without any enhancements, leaving a guideline range of 15 to 21 months, and that the Court should go below that range and sentence the defendant to a period of probation. They concluded ” the Court should impose a non-Guidelines sentence of probation with any conditions that the Court deems reasonable under the
circumstances.”

Government’s Amended Sentencing Memorandum (February 11) – Seeking imprisonment “far less than” Sentencing Guidelines of 87-108 months, but leaving it up to the Judge to decide how much less than

After the four Assistant US Attorneys withdrew from the case, new counsel from the Department of Justice filed an amended Sentencing Memorandum, setting out the Government’s position that:

“The prior filing submitted by the United States on February 10, 2020 (Gov. Sent. Memo. ECF No. 279) does not accurately reflect the Department of Justice’s position on what would be a reasonable sentence in this matter. While it remains the position of the United States that a sentence of incarceration is warranted here, the government respectfully submits that the range of 87 to 108 months presented as the applicable advisory Guidelines range would not be appropriate or serve the interests of justice in this case.”

And the Government concluded:

“The defendant committed serious offenses and deserves a sentence of incarceration that is “sufficient, but not greater than necessary” to satisfy the factors set forth in Section 3553(a). Based on the facts known to the government, a sentence of between 87 to 108 months’ imprisonment, however, could be considered excessive and unwarranted under the circumstances. Ultimately, the government defers to the Court as to what specific sentence is appropriate under the facts and circumstances of this case.”

Conclusion

You’ve read, or will read, the three sentencing memoranda. You have or will have a rudimentary understanding of the Federal Sentencing Guidelines and how they were applied in this case. From there, you can join the debate and express a reasonably learned opinion, backed by some knowledge of the facts. It is my opinion that everyone has a right to their opinion and to express that opinion, but it is their duty to express that opinion only after informing themselves of the facts and, to paraphrase Judge Mukasey, without resorting to reflexive, recreational hysteria.

Google’s PageRank Algorithm: September 4, 2001 – June 4, 2019

Google’s PageRank Algorithm – from the time it was patented in 2001 to when it expired in June 2019, we’ve gone from doing 30 million searches a day against 55 gigabytes of data, to doing 5.6 billion searches a day against 2 trillion gigabytes of data!

It appears that Google’s PageRank algorithm has expired: https://patents.google.com/patent/US6285999B1/en

Lawrence Page, one of the co-founders (with Sergei Brin) of Google, developed the PageRank algorithm in 1997. On January 9, 1998 Brin filed a patent application, and on September 4, 2001 the patent was granted. Notably, the patent expired on June 4, 2019.

The patent is available at https://patentimages.storage.googleapis.com/37/a9/18/d7c46ea42c4b05/US6285999.pdf

The Abstract provided as follows:

A method assigns importance ranks to nodes in a linked database, such as any database of documents containing citations, the World wide web or any other hypermedia database. The rank assigned to a document is calculated from the ranks of documents citing it. In addition, the rank of a document is calculated from a constant representing the probability that a browser through the database will randomly jump to the document. The method is particularly useful in enhancing the performance of Search engine results for hypermedia databases, such as the World wide web, whose documents have a large variation in quality.

The patent also included the following interesting paragraph:

Currently, a popular search engine might execute over 30 million searches per day of the indexable part of the web, which has a size in excess of 500 Gigabytes. Information retrieval systems are traditionally judged by their precision and recall. What is often neglected, however, is the quality of the results produced by these search engines. Large databases of documents such as the web contain many low quality documents. As a result, searches typically return hundreds of irrelevant or unwanted documents which camouflage the few relevant ones. In order to improve the selectivity of the results, common techniques allow the user to constrain the scope of the search to a specified subset of the database, or to provide additional search terms.

This was from September 2001. As of June 2019, according to … Google (!) there are about 63,000 searches per second or 5.6 billion searches per day. And how big is the indexable part of the web? In 2001 it was 500 gigabytes. According to Cisco, as of June 2019 the indexable part of the Web is about 2 zettabytes, which is 2,000 exabytes, which is 2 million petabytes, which is 2 billion terabytes, which is 2 trillion gigabytes.

So … from the time Google’s PageRank algorithm was patented in 2001 to when it expired in June 2019, we’ve gone from doing 30 million searches a day against 55 gigabytes of data, to doing 5.6 billion searches a day against 2 trillion gigabytes of data. If only our mobile devices were as resilient as Google’s algorithms!

The Plaintiffs Trump v Democrat-controlled House Committees’ Subpoenas

One key question – do the Committees’ investigations have a valid legislative purpose? – brings Anti-Money Laundering investigations and legislation into the spotlight

Posted May 11, 2019 with an update from one court’s decision on May 20, 2019

I am not offering an opinion, one way or another, on the relative merits of the parties’ allegations: I am pointing out that these cases could have an impact on AML programs and professionals.

In two different federal courts in a span of seven days, President Trump and various companies he owned or controlled, directly or indirectly (or owns or controls, directly or indirectly, through a trust or otherwise, or otherwise has or had an interest in), and in the New York case, three of his children (all collectively referred to “the Plaintiffs Trump”), sought to quash a number of subpoenas issued by three Democrat-controlled U.S. House of Representative committees. In both cases, the plaintiffs Trump argued that the Democrats or Democrat-controlled committees:

“ignored the constitutional limits on Congress’ power to investigate. Article I of the Constitution does not contain an ‘Investigations Clause’ or an ‘Oversight Clause.’ It gives Congress the power to enact certain legislation. Accordingly, investigations are legitimate only insofar as they further some legitimate legislative purpose. No investigation can be an end in itself. And Congress cannot use investigations to exercise powers that the Constitution assigns to the executive or judicial branch.”

In the Washington DC case, the Plaintiffs Trump allege:

“[the] subpoena … lacks a legitimate legislative purpose. There is no possible legislation at the end of this tunnel; indeed, the Chairman does not claim otherwise. With this subpoena, the Oversight Committee is instead assuming the powers of the Department of Justice, investigating (dubious and partisan) allegations of illegal conduct by private individuals outside of government. Its goal is to expose Plaintiffs’ private financial information for the sake of exposure, with the hope that it will turn up something that Democrats can use as a political tool against the President now and in the 2020 election.”

In the New York case, the Plaintiffs Trump allege:

“The subpoenas … lack any legitimate legislative purpose. There is no possible legislation at the end of this tunnel; indeed, the Committee Chairs have not claimed otherwise. With these subpoenas, the Committees are instead assuming the powers of the Department of Justice, investigating (dubious and partisan) rumors of illegal conduct by private individuals, many of whom are outside of government. Their goal is to rummage around Plaintiffs’ private financial information in the hope that they will stumble upon something they can expose publicly and use as a political tool against the President.”

The cases are very similar and involve the same four basic principles of law: the scope of the investigatory powers of Congress, whether and to what extent the various committees have the power to investigate, whether a committee has a “valid legislative purpose” in issuing a subpoena, and the role of the courts in quashing Congressional subpoenas. In the DC case, the “valid legislative purpose” or purposes involve conflicts of interest and financial disclosure issues: in the New York case, those purposes involve compliance with banking regulations, money laundering, industry-wide compliance with anti-money laundering policies, the use of anonymous corporations as vehicles to launder illicit funds, and transparency regarding ownership of anonymous shell corporations generally.

For AML professionals, the New York case should be watched closely to see if there is any impact on AML legislation, regulation, and expectations.

The Washington DC Case – Federal District Court, District of Columbia, Civil Case Number 19CV01136 –filed April 22, 2019

In this case, President Trump and various Trump-owned and/or controlled (previously or currently, directly or indirectly through trusts or otherwise) companies, sued Elijah Cummings in his official capacity as Chairman of the House Committee on Oversight & Reform, and Mazars USA LLP. The opening two paragraphs of the complaint paint the picture:

“The Democrat Party, with its newfound control of the U.S. House of Representatives, has declared all-out political war against President Donald J. Trump. Subpoenas are their weapon of choice.”

“This case involves one of those subpoenas. Last week, Defendant Elijah E. Cummings invoked his authority as Chairman of the House Oversight Committee to subpoena Mazars USA LLP—the longtime accountant for President Trump and several Trump entities (all Plaintiffs here). Chairman Cummings asked Mazars for financial statements, supporting documents, and communications about Plaintiffs over an eight-year period—mostly predating the President’s time in office.”

(One week after the complaint was filed, the parties agreed to, essentially, dismiss the case against the accounting firm and the Chairman of the House Committee, and substitute as the sole defendant the actual Committee, to be represented by the Office of General Counsel of the House of Representatives).

On May 9th, Judge Amit Mehta issued an order that has the effect of turning the May 14th hearing on the preliminary injunction into a trial on the merits: the Judge will hear arguments on the 14th and then decide whether the subpoena shall stand or not.

The New York Case – Federal District Court, Southern District of New York, Civil Case Number 19CV03826 – filed April 29, 2019

This complaint is very similar to the complaint filed in Washington DC the prior week. Here, President Trump, a number of his companies, and three of his children (Donald Jr., Eric, and Ivanka: again, “the Plaintiffs Trump”) brought a civil complaint against two of the Plaintiffs Trump’s banks, Deutsche Bank and Capital One, to prevent the banks from responding to subpoenas issued by the House Permanent Select Committee on Intelligence and the House Financial Services Committee. Among other allegations, the Plaintiffs Trump pleaded that the subpoenas “have no legitimate or lawful purpose”, are “to harass” the President, “to rummage through every aspect of his personal finances” and are intended to “ferret about” for incriminating information. And as in the DC case, the Plaintiffs Trump also argue that the Committees are exceeding their constitutional powers:

“The Committees have ignored the constitutional limits on Congress’ power to investigate. Article I of the Constitution does not contain an ‘Investigations Clause’ or an ‘Oversight Clause.’ It gives Congress the power to enact certain legislation. Accordingly, investigations are legitimate only insofar as they further some legitimate legislative purpose. No investigation can be an end in itself. And Congress cannot use investigations to exercise powers that the Constitution assigns to the executive or judicial branch.”

“The subpoenas to Deutsche Bank and Capital One lack any legitimate legislative purpose. There is no possible legislation at the end of this tunnel; indeed, the Committee Chairs have not claimed otherwise. With these subpoenas, the Committees are instead assuming the powers of the Department of Justice, investigating (dubious and partisan) rumors of illegal conduct by private individuals, many of whom are outside of government. Their goal is to rummage around Plaintiffs’ private financial information in the hope that they will stumble upon something they can expose publicly and use as a political tool against the President.”

On May 3rd the plaintiffs filed a Motion for Preliminary Injunction to prevent the defendant banks from responding to the subpoenas. The two Committees intervened, and were added as Intervenor-Defendants (“real parties in interest”) and are represented by the Office of General Counsel of the U.S. House of Representatives. The parties agreed on a schedule for submitting replies to the Motion and for a hearing date – May 15th.

On May 10th the House filed its Opposition to the Trump motion. Among other things, the Opposition addresses the Plaintiffs Trump arguments about the powers of the Congressional committees and their motives in issuing the subpoenas:

  • “Mr. Trump’s request for a preliminary injunction betrays a fundamental misunderstanding of the powers of the Legislative Branch under our constitutional scheme and is flatly inconsistent with nearly a century of Supreme Court precedent.”
  • “Contrary to Mr. Trump’s allegation that the Committees are merely attempting to expose his finances, the Committees are investigating serious and urgent questions concerning the safety of banking practices, money laundering in the financial sector, foreign influence in the U.S. political process, and the threat of foreign financial leverage, including over the President, his family, and his business.”
  • “The Committees are conducting wide-ranging investigations of issues bearing upon the integrity of the U.S. financial system and national security, including bank fraud, money laundering, foreign influence in the U.S. political process, and the counterintelligence risks posed by foreign powers’ use of financial leverage.”

The House Opposition provides some details on what the two committees are investigating. The details relating to the Committee on Financial Services are particularly interesting for AML professionals. That Committee is:

“… investigating serious issues regarding compliance with banking regulations, loan practices, and money laundering … the movement of illicit funds throughout the global financial system … the questionable financing provided to President Trump and the Trump Organization by banks like Deutsche Bank to finance his real estate properties …. industry-wide compliance with banking statutes and regulations, particularly anti-money laundering policies … the use of anonymous corporations as vehicles to launder illicit funds through legitimate investments and enterprises …”

And “[t]he Committee is considering legislation that would increase transparency regarding ownership of anonymous shell corporations generally.”

As of this writing, the Plaintiffs Trump have not yet replied to the House Opposition to their motion.

Update May 20, 2019 – In the District of Columbia case, the District Court judge upheld the Committee’s subpoena and ordered the accounting firm to comply with the subpoena. The Plaintiffs Trump have indicated they will appeal that decision.

In his written opinion, the Judge began with the following (citations omitted):

“I do, therefore, . . . solemnly protest against these proceedings of the House of Representatives, because they are in violation of the rights of the coordinate executive branch of the Government, and
subversive of its constitutional independence; because they are
calculated to foster a band of interested parasites and informers,
ever ready, for their own advantage, to swear before ex parte
committees to pretended private conversations between the
President and themselves, incapable, from their nature, of being
disproved; thus furnishing material for harassing him, degrading
him in the eyes of the country . . .” – President James Buchanan

These words, written by President James Buchanan in March 1860, protested a resolution adopted by the U.S. House of Representatives to form a committee—known as the Covode Committee—to investigate whether the President or any other officer of the Executive Branch had sought to influence the actions of Congress by improper means. 

Buchanan “cheerfully admitted” that the House of Representatives had the authority to make inquiries “incident to their legislative duties,” as “necessary to enable them to discover and to provide the appropriate legislative remedies for any abuses which may be ascertained.” But he objected to the Covode Committee’s investigation of his conduct. He maintained that the House of Representatives possessed no general powers to investigate him, except when sitting as an impeaching body. Buchanan feared that, if the House were to exercise such authority, it “would establish a precedent dangerous and embarrassing to all my successors, to whatever political party they might be attached.” 

Some 160 years later, President Donald J. Trump has taken up the fight of his predecessor.

*****

Echoing the protests of President Buchanan, President Trump and his associated entities are before this court, claiming that the Oversight Committee’s subpoena to Mazars exceeds the Committee’s constitutional power to conduct investigations. The President argues that there is no legislative purpose for the subpoena. The Oversight Committee’s true motive, the President insists, is to collect personal information about him solely for political advantage. He asks the court to declare the Mazars subpoena invalid and unenforceable.

Courts have grappled for more than a century with the question of the scope of Congress’s investigative power. The binding principle that emerges from these judicial decisions is that courts must presume Congress is acting in furtherance of its constitutional responsibility to legislate and must defer to congressional judgments about what Congress needs to carry out that purpose. To be sure, there are limits on Congress’s investigative authority. But those limits do not substantially constrain Congress. So long as Congress investigates on a subject matter on which “legislation could be had,” Congress acts as contemplated by Article I of the Constitution.

Applying those principles here compels the conclusion that President Trump cannot block the subpoena to Mazars.

*****

… it is not for the court to question whether the Committee’s actions are truly motivated by political considerations. Accordingly, the court will enter judgment in favor of the Oversight Committee. 

More to come …

AG Sessions: “No more guidance!” AG Barr: “Here’s new guidance!”

Does “good faith” mean “effective”?

On November 17, 2017 the DOJ issued a press release titled “Attorney General Jeff Sessions Ends the Department’s Practice of Regulation by Guidance”. It provided, in part:

“Today, in an action to further uphold the rule of law in the executive branch, Attorney General Jeff Sessions issued a memo prohibiting the Department of Justice from issuing guidance documents that have the effect of adopting new regulatory requirements or amending the law. The memo prevents the Department of Justice from evading required rulemaking processes by using guidance memos to create de facto regulations. ‘Guidance documents can be used to explain existing law,’ Associate Attorney General Brand said.  ‘But they should not be used to change the law or to impose new standards to determine compliance with the law … This Department of Justice will not use guidance documents to circumvent the rulemaking process, and we will proactively work to rescind existing guidance documents that go too far.’”

See https://www.justice.gov/opa/pr/attorney-general-jeff-sessions-ends-department-s-practice-regulation-guidance

On April 30, 2019 the DOJ issued a press release titled “Criminal Division Announces Publication of Guidance on Evaluating Corporate Compliance Programs.” It provided, in part:

“The Criminal Division announced today the release of a guidance document for white-collar prosecutors on the evaluation of corporate compliance programs.  The document, entitled ‘The Evaluation of Corporate Compliance Programs,’ updates a prior version issued by the Division’s Fraud Section in February 2017.  It seeks to better harmonize the guidance with other Department guidance and standards while providing additional context to the multifactor analysis of a company’s compliance program.”

See https://www.justice.gov/opa/pr/criminal-division-announces-publication-guidance-evaluating-corporate-compliance-programs

This new Guidance Document brings far-reaching consequences for corporations and those that work for corporations. It provides as follows:

“As the Justice Manual notes, there are three ‘fundamental questions’ a prosecutor should ask:

  1. ‘Is the corporation’s compliance program well designed?’
  2. ‘Is the program being applied earnestly and in good faith?’ In other words, is the program being implemented effectively?
  3. ‘Does the corporation’s compliance program work’ in practice?

And then it cites JM [Justice Manual] § 9-28.800.

So as I usually do, I went to the source – the Justice Manual – to make sure that it does, in fact, have those same three fundamental changes. What does that section actually provide? Accessing  https://www.justice.gov/jm/jm-9-28000-principles-federal-prosecution-business-organizations#9-28.800 on May 3, 2019, it provides as follows:

“The fundamental questions any prosecutor should ask are: Is the corporation’s compliance program well designed? Is the program being applied earnestly and in good faith? Does the corporation’s compliance program work?”

So it appears that the Guidance has interpreted “applied earnestly and in good faith” to mean “implemented effectively.”

This appears to be a shift from one that appears more focused on intent – earnestness and good faith both describe the intent of the actor – to one that is more focused on outcome – effectiveness.

That appears to be a real change.  Does it mean that acting earnestly and in good faith doesn’t bear much weight if, at the end of the day, the program was found to have been implemented ineffectively?

Notwithstanding former AG Sessions “no more guidance!” command, perhaps AG Barr can provide some guidance on the guidance of whether they’ve shifted from an intent standard to a result standard.

Finally, I didn’t see anything in the new Guidance, nor in the DOJ press release, that referenced the September 5, 2015 memo (guidance) put out by then-DAG Sally Yates titled “Individual Accountability for Corporate Wrongdoing”. Among other things, that guidance provided that “to be eligible for any cooperation credit, corporations must provide to the Department all relevant facts about the individuals involved in corporate misconduct.”

Perhaps that guidance was rescinded by then-AG Sessions at or around the same time he rescinded the Cole and Ogden Memos around federal priorities for cannabis prosecutions?