In the Courts

Sixth Circuit: Government Must Show Concealment Was The Animating Purpose

The U.S. Court of Appeals for the Sixth Circuit, in an opinion by Circuit Judge Raymond M. Kethledge, partially reversed the money-laundering conviction of Roger Faulkenberry because the government had not demonstrated that the transaction was intended to conceal. United States v. Faulkenberry, Nos. 08-4233, 08-4404, 2010 WL 2925106 (6th Cir. Jul. 28, 2010).

The matter arose from an alleged $2.4-billion fraud by National Century Financial Enterprises (NCFE), which purchased the accounts-receivable of health care providers at a discounted rate and then sold bonds to investors to generate cash for additional purchases. The receivables purchased would be used as collateral for the bonds issued to investors. NCFE made a number of promises to investors about the level of collateral it would keep, the types of receivables that their investments would be used to purchase, and the reserve funds it would have, all of which ultimately proved false. In reality, NCFE allegedly made massive loans to health care providers while receiving minimal collateral in return.

Faulkenberry was NCFE's Director of Securitizations and then the Executive Vice President for Client Development. The evidence showed that, among other actions, Faulkenberry coordinated a $22-million advance to Scott Medical Group. As a part of that transaction, Faulkenberry allegedly had Scott execute a promissory note that falsely identified the funds advanced as coming from an NCFE subsidiary, rather than being improperly taken from investor funds. After the collapse of the firm in 2002, the government indicted Faulkenberry and tried him on four counts of securities fraud, and individual counts of wire fraud, conspiracy to commit securities and wire fraud, conspiracy to commit money laundering, and money laundering. A Southern District of Ohio jury convicted Faulkenberry on all counts and he appealed.

On appeal, Faulkenberry claimed that the government failed to provide sufficient proof to support his conviction for money laundering (based on the Scott transaction) under 18 U.S.C. ' 1956(a)(1)(B)(i). Specifically, he claimed that the government had not provided evidence that the transaction was “designed in whole or in part ' to conceal or disguise the nature, the location, the source, the ownership, or the control of the proceeds of specified unlawful activity ' .”

The Court of Appeals looked to the Supreme Court's decision in Cuellar v. United States, 553 U.S. 550 (2008), where the Court analyzed the definition of “design” in another provision of the statute. There, the Supreme Court found that the term “design” required that “the intended aim of the transportation” of funds was to conceal (emphasis in original). The Court of Appeals applied the same definition to ' 1956(a)(1)(B)(i), finding that “it is not enough for the government to prove merely that a transaction had a concealing effect” or that the transaction was structured to conceal. Rather, “concealment [must] be an animating purpose of the transaction.”

Based on that standard, the Court of Appeals found that the government's proof showed only that the transaction was structured to conceal, not that the defendant was driven to undertake the transaction in order to conceal. Ultimately, “there was no basis to find, beyond a reasonable doubt, that an animating purpose of the Scott advance was to conceal the fraudulent nature or source of the $22 million,” so the Court of Appeals reversed the convictions on money laundering and conspiracy to commit money laundering.

In the Courts and Business Crimes Hotline were written by Associate Editor Kenneth S. Clark and Matthew J. Alexander, respectively. Both are associates at Kirkland & Ellis LLP, Washington, DC.

Sixth Circuit: Government Must Show Concealment Was The Animating Purpose

The U.S. Court of Appeals for the Sixth Circuit, in an opinion by Circuit Judge Raymond M. Kethledge, partially reversed the money-laundering conviction of Roger Faulkenberry because the government had not demonstrated that the transaction was intended to conceal. United States v. Faulkenberry, Nos. 08-4233, 08-4404, 2010 WL 2925106 (6th Cir. Jul. 28, 2010).

The matter arose from an alleged $2.4-billion fraud by National Century Financial Enterprises (NCFE), which purchased the accounts-receivable of health care providers at a discounted rate and then sold bonds to investors to generate cash for additional purchases. The receivables purchased would be used as collateral for the bonds issued to investors. NCFE made a number of promises to investors about the level of collateral it would keep, the types of receivables that their investments would be used to purchase, and the reserve funds it would have, all of which ultimately proved false. In reality, NCFE allegedly made massive loans to health care providers while receiving minimal collateral in return.

Faulkenberry was NCFE's Director of Securitizations and then the Executive Vice President for Client Development. The evidence showed that, among other actions, Faulkenberry coordinated a $22-million advance to Scott Medical Group. As a part of that transaction, Faulkenberry allegedly had Scott execute a promissory note that falsely identified the funds advanced as coming from an NCFE subsidiary, rather than being improperly taken from investor funds. After the collapse of the firm in 2002, the government indicted Faulkenberry and tried him on four counts of securities fraud, and individual counts of wire fraud, conspiracy to commit securities and wire fraud, conspiracy to commit money laundering, and money laundering. A Southern District of Ohio jury convicted Faulkenberry on all counts and he appealed.

On appeal, Faulkenberry claimed that the government failed to provide sufficient proof to support his conviction for money laundering (based on the Scott transaction) under 18 U.S.C. ' 1956(a)(1)(B)(i). Specifically, he claimed that the government had not provided evidence that the transaction was “designed in whole or in part ' to conceal or disguise the nature, the location, the source, the ownership, or the control of the proceeds of specified unlawful activity ' .”

The Court of Appeals looked to the Supreme Court's decision in Cuellar v. United States , 553 U.S. 550 (2008), where the Court analyzed the definition of “design” in another provision of the statute. There, the Supreme Court found that the term “design” required that “the intended aim of the transportation” of funds was to conceal (emphasis in original). The Court of Appeals applied the same definition to ' 1956(a)(1)(B)(i), finding that “it is not enough for the government to prove merely that a transaction had a concealing effect” or that the transaction was structured to conceal. Rather, “concealment [must] be an animating purpose of the transaction.”

Based on that standard, the Court of Appeals found that the government's proof showed only that the transaction was structured to conceal, not that the defendant was driven to undertake the transaction in order to conceal. Ultimately, “there was no basis to find, beyond a reasonable doubt, that an animating purpose of the Scott advance was to conceal the fraudulent nature or source of the $22 million,” so the Court of Appeals reversed the convictions on money laundering and conspiracy to commit money laundering.

In the Courts and Business Crimes Hotline were written by Associate Editor Kenneth S. Clark and Matthew J. Alexander, respectively. Both are associates at Kirkland & Ellis LLP, Washington, DC.