Evidence of criminal intent can be hard to come by. A pair of highly unusual post-trial rulings by Judge Brian M. Cogan illustrates the challenges facing white-collar prosecutors seeking convictions for complex schemes.

Commentators have roundly criticized the Justice Department for the dearth of individual prosecutions for financial crimes after the 2008 financial crisis. Former Attorney General Eric Holder has said the Department lacked the evidence necessary to prove that specific individuals were responsible for specific decisions. See William D. Cohan, "A Clue to the Scarcity of Financial Crisis Prosecutions," N.Y. Times (July 21, 2016). Others have suggested weak regulators failed to compile necessary information to support such prosecutions. See Gretchen Morgenson and Louise Story, "In Financial Crisis, No Prosecutions of Top Figures," N.Y. Times (April 14, 2011). Finally, some have attributed the failure to the challenges in proving criminal intent for white-collar crime, particularly in the context of complex schemes.

The case of Unites States v. Nordlicht appears to lay bare these difficulties: Conduct that seems unfair or "wrong" to a jury may have been understood by the defendants as technically abiding by legal requirements, a mental state incompatible with criminal intent.

On July 9, 2019, after an 11-week trial, a federal jury convicted Platinum Partners former executives Mark Nordlicht and David Levy of securities fraud, conspiracy to commit securities fraud, and conspiracy to commit wire fraud. In a highly unusual move, the presiding judge overturned those verdicts, granting Levy an acquittal and Nordlicht a new trial, on the grounds that the government's evidence of criminal intent was, as to Levy, insufficient for the jury to have found guilt beyond a reasonable doubt, and, as to Nordlicht, so lacking (while sufficient as a matter of law) as to render the jury's verdict manifestly unfair. Mem. Decision and Order, United States v. Nordlicht, 16-cr-640 (E.D.N.Y. Sept. 27, 2019) (Dkts. 799, 800) (Decision).

The Criminal Case

Nordlicht and Levy were indicted along with five other alleged co-conspirators and charged in eight counts, relating to two alleged schemes while they were hedge fund executives at the now-defunct Platinum Partners. Indictment, Nordlicht, 16-cr-640 (E.D.N.Y. Dec. 14, 2016) (Dkt. 1).

The indictment charged that the defendants participated in a scheme to defraud investors in funds managed by Platinum and in a second scheme to defraud third-party holders of bonds issued by Black Elk, an explorative oil and gas company controlled during the relevant time period by Platinum. The jury found Nordlicht and Levy guilty of the counts involving the second scheme only. Decision at 1-2.

The Black Elk Scheme

According to prosecutors, after Platinum invested $50 million into Black Elk in exchange for most of its preferred stock, the defendants learned that Black Elk was insolvent but held valuable assets. They wanted to sell those assets, but under a Black Elk bond indenture, bondholders would be paid ahead of preferred equity. In an effort to cut in front of the bondholders and profit from the sale, the defendants allegedly engaged in misrepresentations intended to trick the bondholders into consenting to an indenture amendment that permitted payment of the preferred equity first.

Platinum purchased a large volume of Black Elk bonds and additional preferred equity, and transferred some bonds to entities known collectively as Beechwood; Platinum and Beechwood then held nearly two-thirds of the total amount of outstanding bonds. Black Elk next commenced a tender offer to purchase outstanding bonds at par value and solicited consent to modify the indenture. Id. at 3-4.

The government alleged that the defendants secretly controlled Beechwood. Importantly, if Beechwood were under common control with Black Elk (e.g., if both were controlled by Platinum), then under the terms of the indenture and the Trust Indenture Act (TIA), Beechwood would not be permitted to vote on the amendment defendants sought. The consent solicitation itself reiterated that any bonds "owned by the Company or any person directly or indirectly controlling [or controlled] by or under direct or indirect common control with the Company shall be disregarded for the purposes of determining the majority"; and disclosed that Platinum owned approximately $18.3 million of the outstanding ($150 million total) bonds. Id. at 2, 9-10.

When the vote closed, Platinum's various funds held $61 million in Black Elk bonds (the $18.3 million number represented the bonds held by only one of Platinum's several funds), and Beechwood held another $37 million—together, $98 million of the $150 million total. The defendants did not disclose control of Beechwood at the time of the vote, and the amendment passed by virtue of Beechwood's vote of consent. Id. at 13 n.1, 17. The $61 million held by Platinum's funds were excluded; however, the $37 million owned by Beechwood were not. As a result, the preferred equity holders (like defendants) would enjoy the fruits of the asset sale before the bondholders.

To establish a scheme to defraud the third-party bondholders, the government argued that Beechwood was a covert affiliate. It contended that the defendants rigged the vote by concealing their control of Beechwood such that Beechwood's bonds were improperly counted, and by causing Beechwood to vote in favor. Additionally, it posited that the consent solicitation materially misrepresented the volume of bonds held by Black Elk affiliates (disclosing only the $18.3 million held by a single Platinum fund). Id. at 16-17.

In their motions for acquittal, the defendants argued (inter alia) that the government failed to prove criminal intent in connection with the transaction because the evidence was insufficient to establish that (1) Beechwood was an affiliate of Black Elk and (2) Nordlicht and Levy appreciated that fact. Mem. in Supp. of Levy's Post-Trial Mots., Nordlicht, 16-cr-640 (E.D.N.Y. July 30, 2019) (Dkt. 785) (Levy Mem.); Mem. in Supp. of Nordlicht's Mot. for Acquittal or New Trial, Nordlicht, 16-cr-640 (E.D.N.Y. July 30, 2019) (Dkt. 786-1). The court concluded that the government had introduced sufficient evidence from which a reasonable jury could conclude that Beechwood was a legal affiliate, but, as to Levy, not that Levy understood and appreciated that. The court held that the government had introduced legally sufficient evidence that Nordlicht appreciated that fact but that it would be a manifest injustice to allow the jury's verdict to stand as to him. Decision at 18-23, 27-31, 33-35.

Common Control

The bond indenture and TIA defined "affiliate" as "any other Person directly or indirectly controlling or controlled by or under direct or indirect common control" with Black Elk. As pertinent, the indenture defined "control" as "the possession directly or indirectly, or the power to direct or cause the direction of the management or policies of [Black Elk], whether through the ownership of voting securities, by agreement or otherwise … ." Id. at 9-10; see Levy Mem. at 9.

To prove common control, the government introduced evidence that Platinum and Black Elk shared personnel. For instance, Nordlicht, one of Platinum's founding partners and its Chief Investment Officer (CIO), co-founded Beechwood. Levy, who was Black Elk's co-portfolio manager, and who later became co-CIO of Platinum, was a minority partner in Beechwood and CIO for a Beechwood fund. Nordlicht and Levy decided which investments would be transferred from Platinum to Beechwood upon its founding. (There were other common personnel as well.) Additionally, Beechwood and Platinum had offices within several blocks of each other, and just before the vote Nordlicht instructed a Beechwood portfolio manager to purchase $8 million in Black Elk bonds. That portfolio manager testified that he looked to Nordlicht for guidance on how Beechwood should vote the bonds, although he did not perceive Nordlicht as having authority to order him how to vote or to buy a position. Decision at 2, 6, 8, 22.

Despite the indicia of a relationship between Beechwood and Platinum, the evidentiary picture was complicated by facts showing efforts at Beechwood's founding to establish the company so that it properly would not qualify as a legal affiliate of Platinum. Id. at 6, 8. Moreover, the outside attorney who administered the vote testified that he knew Platinum had purchased Black Elk bonds with the intention of "flipping" them to "friendlies who will [d]o right by the company," and that this was allowed so long as the "friendlies" were not affiliates. Id. at 10.  Further, the court found the evidence suggested that Nordlicht and Beechwood "went to great lengths to comply with the affiliate rule" (while still getting their desired outcome). Id. at 33.

The narrative of executives who went out of their way to abide by the indenture's and TIA's technical requirements while evading their spirit did not, to Judge Cogan, demonstrate criminal intent. White-collar practitioners regularly argue about lack of criminal intent, as a matter of fact or as a matter of evidence. Here, even after the jury concluded such intent did exist, the court found the proof so deficient as to warrant this extraordinary remedy. Although the results are rarely this dramatic, debates over the evidence necessary to prove criminal intent will continue to rage.

Katya Jestin is co-chair of Jenner & Block's investigations, compliance and defense practice and a former Assistant U.S. Attorney in the Eastern District of New York. Anne Cortina Perry is a partner and Lori B. Day is an associate in the practice.