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Anticipation of an experience can become the main event in itself, leaving only anticlimax to follow. This was the most visceral takeaway from my recent testimony as an expert in a federal criminal trial--my first trip ever to the witness stand after two decades of asking the questions.

 

It was a scant three months ago when I posted about the possible upshot of Diaz v. United States, in which the Supreme Court blessed the practice of having an expert witness in a criminal trial testify about the knowledge that "most" people in the defendant's position would tend to have. Both I and Justices Jackson and Gorsuch (not in that exact order) posited that the ruling would encourage a new era of "standard mens rea" experts opining on whether a generic person in the same situation as the defendant would know, or intend, or be willful as to some critical fact in the case.

 

Then I was asked to do just that, or something like it.

 

The U.S. Attorney's Office for the Central District of California--where I once prosecuted kickback cases--charged the owner of an substance use treatment facility with violating the Eliminating Kickbacks in Recovery Act (EKRA) by paying several marketers (or "body brokers," in the government's vernacular) to help find patients for the facility. EKRA is a fairly new, awkwardly-written, and somewhat confusing law that regulates how addiction-treatment providers may and may not pay for sales and marketing services. Do it the right way, and you're fine. Do it another way, and you may go to jail.

 

I have represented providers investigated for potential violations of EKRA and other kickback laws. More importantly, I have advised providers on how they can arrange to pay sales and marketing staff or contractors for their services without running afoul of the law. As anyone who has done the same can attest, it's not easy. EKRA was designed to mimic the much-older Anti-Kickback Statute, but it has important differences, and was written in such a rush that some of its provisions make little sense. Others are ambiguous. Only four courts so far have provided interpretations of the statute, and the federal government has not issued any guidance--preferring instead to simply prosecute those it thinks have crossed the line.

 

So I was called to explain the above, and opine that it would have been difficult for someone in the defendant's position to know whether the compensation arrangement he had made with outside marketers was permissible. Of that I was quite confident.

 

But as the big day approached, I was increasingly thinking about the very notion of testifying at all. From my first year of practice some twenty years ago, I have sat with designated witnesses, both the fact and expert varieties, to talk them through the do's and don’ts of deposition or trial testimony. My perspective, of course, was always of the person writing, asking, or objecting to the questions, and not of the one on the firing line. I could see what worked and what did not, but I could not speak to how it actually felt to be under the spotlight, with my own words instantly become evidence rather than just argument.

 

After all that, I have to admit: it was uneventful. I got off easy: my direct testimony consisted mainly in describing my own experience, talking about EKRA, and explaining my above thesis. Cross-examination--the bane and dread of most witnesses--was a mere three questions, all predictable.

 

Still, I came away with a few thoughts about what preparation is most effective, particularly for experts:

 

  • Listen to the question and answer only that question. It's not a presidential debate--everyone notices when you don't answer the question. And when you act more as an advocate that a source of requested information. Don't spin or argue. Just respond.


  • Keep answers short where appropriate. If the lawyer asks for a longer explanation, give one. But if it's a simple question with a short answer, just give that.


  • Stay in your lane. You were asked to give only certain opinions. The judge may have cut that list down. Acknowledge what you are and are not testifying about, and stick to the approved subject.


  • Keep it simple, genius. Your professional bona fides will have been spelled out for the jury. But try to explain the concepts in plain English, and only those that need to be explained. Analogies are helpful.


  • Don't look at jury unless invited to. Some lawyers tell witnesses, especially experts, to respond to every question by turning to the jury first, rather than responding to the questioner. I've always thought that looks artificial and coached. The feeling is the same up on the stand. If the questioner asks you to say something directly to the jury, fine. Otherwise, act like you would in an ordinary conversation: answer the person who asked you.

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Imagine you have an expensive watch. Someone steals the watch, and sells it to a pawn shop. This pawn shop is kind of notorious in town for its chain-smoking owner with his un-ironic mullet and his "no questions asked" policy, and petty thieves often go there to cash in their loot. Eventually, the watch turns up on the wrist of someone who bought it from the pawn shop. Can you sue the shop and its owner?

 

Binance runs the world's largest cryptocurrency exchange. In November 2023, Binance and its founder Changpeng Zhao ("CZ") pled guilty to federal criminal charges of violating the Bank Secrecy Act by failing to maintain an effective anti-money laundering program, conducting and conspiring to conduct an unlicensed money transmitting business, and violating U.S. economic sanctions law. The gist of the charges was that Binance created a platform that allowed various evil-doers--criminals, terrorists, people trying to evade U.S. sanctions--to move cryptocurrency around in ways that made it easier to hide  funds that came from illegal activity, but CZ did not put in place the required compliance processes to catch and stop such money laundering. As part of the plea, Binance and CZ admitted as much.

 

On August 16, 2024, a group of plaintiffs filed what they hope will be a class action lawsuit against Binance and CZ, asserting claims under the RICO statute. In essence, the plaintiffs claim that they were ripped off by criminals who defrauded them or hacked their accounts and stole their cryptocurrency. According to the plaintiffs, the criminals then moved the stolen crypto into Binance and used the exchange to conduct transactions to hide the money. Like the Justice Department--and the defendants themselves--the plaintiffs say that the company's Bank Secrecy Act violations allowed this to happen. Thus, the plaintiffs argue, both Binance and CZ are liable for the plaintiffs' losses under RICO, which applies to such violations.

 

This is not the first such suit against Mr. Z and his creation. In February, a 75-year-old Texan victimized in a "pig-butchering" scheme by a Cambodian online gang brought a similar--though much smaller--RICO case against both Binance and its founder based on essentially the same theory, and citing the same plea agreement.

 

A slam dunk, right? Easy money, fish in a barrel, a no-brainer, no? Well, no. It's actually kind of a brainer, at least as the RICO claims go.

 

Causation in RICO Cases

 

While the federal government can enforce any RICO violation, private plaintiffs have less leeway. To pursue civil RICO claims against a defendant, a plaintiff must first allege and then prove both that it has suffered harm to its "business or property" and that the harm occurred "by reason of" the defendant's racketeering activity. "By reason of" means the plaintiff must show two kinds of causation. First, it must show that the harm would not have occurred "but for" the racketeering. Second, it must show that the racketeering was the "proximate"--or direct--cause of the harm.

 

Proximate causation is a famously fuzzy concept that first-year law students learn about through a case that involves a train, a lady, and an explosion. Judges sometimes use it to eighty-six cases that they find just a bit too squirrely. In the Binance cases, the plaintiffs' task is to explain how the company's failure to follow certain rules for scrutinizing customers led directly to the plaintiffs losing their property.

 

The leading RICO causation case is Hemi Group v. City of New York. A New Mexico company sold cigarettes online to New Yorkers, but failed to disclose certain information on its customers as required by law, which prevented the city from collecting sales taxes from those customers. The city claimed the company's actions amounted to a pattern of fraud and brought a RICO case for the loss of the tax revenue. The Supreme Court held that the connection between the company's actions and the city's loss of tax revenue was too "remote" and "indirect" to meet the proximate causation requirement; the harm was actually caused by the customers who didn't pay the tax, rather than the company that failed to give the city the means to enforce it.

 

The issue was addressed in a recent decision involving a RICO claim against a different crypto-trade facilitator. A group of plaintiffs filed a putative class action in Delaware against a group of companies that built and maintained the Nomad Bridge, a blockchain system that allowed users to exchange different types of digital assets. A flaw in the system enabled hackers to drain $186 million in such assets from Nomad Bridge's users. As in the Binance case, the alleged racketeering activity involved, in part, operating an unlicensed money transmitting business. In April 2024, however, the court dismissed the RICO claim, finding that the losses were "too remote" from the mere act of operating without a proper license.

 

Causation and Binance

 

In the Binance case, the fight will be similar, and perhaps harder for the plaintiffs. The complaint does not allege that Binance or CZ were part of the fraud or theft that originally deprived the victims of their crypto assets, and thus the racketeering conduct is not mail or wire fraud, as in most civil RICO cases. Instead, the plaintiffs assert two basic theories as to how Binance had caused their losses:

 

  1. The availability of Binance as a platform to launder stolen crypto, where anti-money laundering laws were not followed, encouraged the thieves to steal the victims' crypto in the first place.

 

2. By enabling the laundering, Binance prevented the victims or law enforcement from tracking down and recovering the stolen crypto.

 

The flaws in these theories are apparent. As to the first, it requires a fair amount of speculation to conclude that the criminals would not have stolen the crypto if Binance had complied with the Bank Secrecy Act. Other crypto exchanges, and other mechanisms for moving and concealing crypto, are and would continue to be available even if Binance did not exist. The second theory requires one to assume that the stolen assets would have been found and recovered if Binance had followed the rules--again, notwithstanding the availability of other means to hide the assets. It is thus not clear that the claims would even clear the "but for" causation test.

 

Even if they could, the proximate causation requirement would loom large. As in Hemi Group and the Nomad Bridge case, the court may conclude that because someone other than the defendants--here, the thieves themselves--is the actual, direct cause of the losses, the downstream effect of Binance's exchange is too indirect or remote to satisfy RICO's "by reason of" standard. As the Supreme Court put it, “[t]he general tendency of the law, in regard to damages at least, is not to go beyond the first step.”

 

Too Clever by Half, or Not Clever Enough?

 

I give credit where credit is due: the recent complaints' use of Bank Secrecy Act violations as a basis for a RICO claim is somewhat novel, makes good use of the tailwinds that the Binance/CZ guilty pleas provide, and avoids the limitations of a racketeering theory based on mail or wire fraud, which is becoming harder to plead and prove as the Supreme Court has narrowed the scope of those statutes. But it may also show the limitations of using RICO to pursue the supporting cast of the criminal world, rather than the star players.

 

One more thing: Query whether there would be a viable claim under California Penal Code § 496(c), which allows victims of theft to bring lawsuits for RICO-style treble damages against "every person who . . . receives any property that has been stolen . . . knowing the property to be so stolen, or who conceals, sells, withholds, or aids in concealing, selling, or withholding any property from the owner, knowing the property to be so stolen . . . " Fights over knowledge aside, both our apocryphal pawn shop owner and the crypo champions at Binance might be reasonable targets for such a claim.

 

Either way, those considering similar claims against crypto exchanges--and those who might be on the receiving end of them--may want to keep an eye on the forthcoming motion to dismiss in this one.

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One of the recurring themes of this blog is how decisions in criminal cases can affect civil cases that somehow invoke criminal law. This is especially true in civil RICO cases, which usually involve allegations that the defendant has violated the federal mail or wire fraud statutes.

 

The latest example is brought to us by Elon Musk, whose litigation exploits--while often just as innovative as his cars and spaceships--have a record more akin to his social media ventures. 

 

This time, Musk has filed a RICO case against OpenAI and its founders Sam Altman and Greg Brockman, alleging that they persuaded him to give millions of dollars and lend his good name to what they promised would be a non-profit effort to develop artificial intelligence for the good of humanity, but then converted it into a purely profit-driven enterprise.


The story set out in the complaint is an interesting one, even if the "perfidy and deceit" it describes are not quite of the "Shakespearean proportions" Musk touts. But a key component of the RICO theory seems to be missing.

 

As expected, Musk alleges that the conduct of Altman, Brockman, and the others amounts to a recurring pattern of federal wire fraud. But under the Ninth Circuit's recent decision in U.S. v. Milheiser, even if a defendant "lie[s] to somebody about an important fact that causes them to give [the defendant] money," it is not wire fraud unless the lie goes to the "nature of the bargain." In Milheiser, the defendants tricked companies into buying printer toner from them by claiming that the defendants were the companies' regular supplier and that toner prices were about to go up. While that was not true, the Ninth Circuit said that because the companies got exactly the printer toner they paid for, there was no wire fraud.

 

Other courts have considered the same issue. Some took the same view as Milheiser. See United States v. Starr, 816 F.2d 94 (2d Cir. 1987); United States v. Sadler, 750 F.3d 585 (6th Cir. 2014); United States v. Takhalov, 827 F.3d 1307 (11th Cir. 2016); United States v. Guertin, 67 F.4th 445 (D.C. Cir. 2023). Some took the opposite position, holding that such misrepresentations counted as mail or wire fraud. United States v. Leahy, 464 F.3d 773 (7th Cir. 2006); United States v. Granberry, 908 F.2d 278 (8th Cir. 1990); United States v. Kousisis, 66 F.4th 406 (3d Cir. 2023).

 

The Supreme Court may soon weigh in on the same issue. In U.S. v. Kousisis, a painting company won a contract from a state agency. Although it was the lowest-price bidder and did quality work, the state agency claimed it was misled into choosing the company because of the company's false claims that it complied with certain requirements designed to ensure contract funds would go to "socially and economically disadvantaged" persons. DOJ prosecuted the company and its owner for wire fraud, and they were convicted. On appeal, the Third Circuit held that even though they provided the contracted service at the promised price, they had violated the law because the disadvantaged-persons provision was an "essential component of the contract."

 

The defendants the petitioned for Supreme Court review, and in June 2024, the Court granted certiorari. One of the questions presented is "[w]hether deception to induce a commercial exchange can constitute mail or wire fraud, even if inflicting economic harm on the alleged victim was not the object of the scheme." The Court will take up the case this fall.

 

In the OpenAI case, Musk claims that based on the promises from Altman and Brockman, he gave $44 million to the non-profit corporation, OpenAI Inc., that was the original base for OpenAI's operations. As a Delaware non-profit, however, OpenAI Inc. has no shareholders or other owners. All that Musk got for his money was a seat on the company's board of directors, from which he resigned in 2018. By his own account--and by the entity's non-profit nature--he did not expect any financial return on his investment. In effect, it was a donation made in return for the moral or psychological benefit of making the world a better place.

 

Assuming that Altman and Brockman misled Musk regarding their ultimate intentions for OpenAI (which they deny), would that amount to wire fraud? The Ninth Circuit (which covers Musk's suit) and the courts that side with it may well say no. In property terms, Musk got exactly what he bargained for--that is, nothing but a vote in the company's decisions. While he may have been denied the satisfaction of seeing the organization grow according to his vision, that is likely not the sort of property right that the Supreme Court has said must be the object of a mail or wire fraud scheme. And if the Court in Kousisis does away with the fraudulent inducement theory of mail and wire fraud, that could seal the lawsuit's fate even further.

 

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There is another, related problem with the Musk's RICO claim. In order to have standing under RICO, Musk must have suffered injury to his "business or property"--that is, a "concrete financial loss"--as a result of the defendants' actions. In the case of OpenAI, it is not clear that the deprivation of Musk's hopes and dreams for the company would suffice.

 

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Such is Elon's enthusiasm for RICO that, after separately suing various companies for antitrust violations based on their boycotting advertisement on X, he suggested that the conduct could also support a RICO claim. That one is easy: antitrust violations do not qualify as "racketeering" for RICO purposes, so such a claim would get no further than a Model X after a 5-day blackout.



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© 2024 by Joshua Robbins. 

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