To many rank-and-file financial advisors, the Martha Stewart-Peter Bacanovic case is very far removed from their everyday business experience. After all, how many brokers have such high-profile clients? But don't tune the case out completely. The recent convictions of Stewart and Bacanovic have important implications for all financial advisors. And not because of criminal insider trading (Stewart and Bacanovic weren't charged with that). The case is about lying — lying about a crime the government didn't prove — didn't have to prove — the pair did.
At issue is a federal statute, first enacted in 1863, that prohibits making false statements to the U.S. government. Bacanovic's conviction under the statute is a stark illustration of the dangers that can confront a rep when he is asked to participate in an interview with the SEC — or, for that matter, any federal agency.
Today, registered reps are more likely than ever to receive an “invitation” to discuss a matter with federal government officials. Any rep who accepts such an invitation must be wary of the false statement statute — known as “1001” because it is codified at section 1001 of Title 18 of the U.S. Code — and its broad sweep. The penalties for violating section 1001 can be harsh. Someone convicted under the statute faces up to five years of imprisonment, as well as substantial fines.
Few Limitations
Section 1001 penalties apply to any person who, in any matter within the jurisdiction of the executive, legislative or judicial branch of the federal government, “knowingly and willfully”: 1) “falsifies, conceals or covers up” a material fact; 2) “makes any materially false, fictitious or fraudulent statement or representation”; or 3) “makes or uses any false writing or document knowing the same to contain any materially false, fictitious or fraudulent statement or entry.”
To appreciate the broad scope of 1001, a registered rep should realize:
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1001 is not limited to statements made under oath, nor is it necessary that the statements be recorded in a transcript or other official writing. Indeed, the evidentiary bases for the 1001 convictions of Stewart and Bacanovic consisted largely of handwritten notes that SEC attorneys had taken during interviews and of the SEC attorneys' recollections of those interviews.
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1001 is not limited to false statements in a criminal inquiry, nor is it limited to statements made during formal proceedings. Bacanovic was convicted under 1001 based on a pair of statements he made during a telephone interview with SEC staff attorneys.
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1001 does not provide any exception for falsely asserting one's innocence — such assertions are fair game for a criminal indictment, subject to the discretion of prosecutors.
When a Non-Crime's a Crime
In short, 1001 covers just about any willful, material false statement within the jurisdiction of the federal government. It is uncommon — but not unprecedented — for the government to prosecute a person for violating section 1001 (or for obstructing justice or conspiracy) without also prosecuting some underlying criminal conduct.
In 1997, President Clinton's secretary of housing and urban development, Henry Cisneros, was indicted on charges of conspiracy, obstruction of justice and false statements. In 1999, Cisneros pled guilty to a single count of violating section 1001.
The government's power to prosecute a 1001 violation in situations where it may be difficult or impossible to prove any underlying criminal conduct demonstrates again the extraordinary breadth — many would say overbreadth — of the statute. Supreme Court Justice Ruth Bader Ginsburg, in a 1998 opinion, stated that the statue “arms government agents with authority not simply to apprehend lawbreakers, but to generate felonies, crimes of a kind that only a government officer could prompt.” The discretion of federal prosecutors is really all that stands in the way of such scenarios.
The lesson to registered reps is clear. If you are being interviewed by the federal government, always consider yourself “on the record.” Section 1001 can be applied to any statement to U.S. officials, even one from a rep one who is not the target of any investigation, and even one from a rep who engaged in no criminal conduct prior to the interview.
Writer's BIO:
David A. Feldman is a lawyer with Nixon, Peabody LLP in New York City. He represents individuals and businesses in connection with government investigations and white-collar crime.
