U.S. v. Crop Growers Corp., 96-0181 (GK).

• Decision Date: 03 January 1997
• Docket Number: No. 96-0181 (GK).,96-0181 (GK).
• Citation: 954 F.Supp. 335
• Parties: UNITED STATES of America v. CROP GROWERS CORPORATION, John J. Hemmingson, and Gary A. Black, Defendants.
• Court: U.S. District Court — District of Columbia

954 F.Supp. 335

UNITED STATES of America v. CROP GROWERS CORPORATION, John J. Hemmingson, and Gary A. Black, Defendants.

No. 96-0181 (GK).

United States District Court, District of Columbia.

January 3, 1997.

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Donald Smaltz, Joseph Savage, Jacob S. Frenkel, Office of Independent Counsel, Alexandria, VA, for Plaintiff.

Barry William Levine, Mark Packman, Dickstein, Shapiro, Morin & Oshinsky, L.L.P., Washington, DC, William J. Mauzy, Minneapolis, MN, Theodore V. Wells, Jr., Lowenstein, Sandler, Kohl, Fisher & Boylan, Roseland, NJ, for Defendant.

MEMORANDUM OPINION

KESSLER, District Judge.

This matter is before the Court upon Defendants' three Motions to Dismiss and one Motion to Strike.¹ The motions arise out of Independent Counsel Donald Smaltz's criminal prosecution of Defendants for conspiring to make illegal campaign contributions and then concealing those contributions from various federal agencies.

I. Background²

Defendant Crop Growers Corporation ("Crop Growers") is a holding company for several wholly-owned subsidiary companies, including Crop Growers Insurance, Inc. ("CGI"), Crop Growers Software, Inc. ("CGS"), and Prairie Mountain Insurance, Inc. ("PMI"). Defendants John J. Hemmingson ("Hemmingson") and Gary A. Black ("Black") were officers of Crop Growers at all relevant times. Hemmingson was an officer and director of CGI and a director of CGS. Black was also a director of Crop Growers, an officer of CGI, an officer and director of CGS, and an officer of PMI. CGI obtains a significant portion of its revenue from the federal Multi-Peril Crop Insurance Program, which the Department of Agriculture regulates.

All three Defendants are charged in an eighteen-count indictment (the "Indictment"), returned on October 31, 1996.³ Independent Counsel Donald Smaltz (the "IC") is prosecuting Defendants as part of his investigation of the acceptance of gifts by former Secretary of Agriculture Alphonso Michael ("Mike") Espy ("Secretary Espy" or the "Secretary") from organizations or individuals with business pending before the Department of Agriculture.

The Indictment charges an elaborate scheme, involving indicted and unindicted co-conspirators, to violate the Federal Election Campaign Act ("FECA") and to conceal that violation in contravention of the campaign finance and securities laws. Essentially, the Indictment charges that Defendants facilitated the making of illegal campaign contributions to Secretary Espy's brother, Henry William Espy, Jr. ("Henry Espy"). These contributions were allegedly hidden by Defendants' falsification of the accounting and business records of Crop Growers and its subsidiaries CGI, CGS, and PMI. Specifically, the Counts of the Indictment charge as follows:

Count One: A five-object conspiracy, existing from 1993 through 1995, to make and conceal illegal campaign contributions of approximately $46,000 to the Henry Espy for Congress Committee.

Counts Two and Three: Causing the Henry Espy for Congress Committee to falsely report the identities of campaign contributors to the Federal Election Commission ("FEC") on March 24, 1993, and August 31, 1993. Crop Growers is not a named defendant in these Counts of the Indictment.

Count Four: Making and keeping false records and accounts comprising the information underlying the financial statements filed by Crop Growers with the Securities and Exchange Commission ("SEC"), from June 23, 1994 through December 31, 1995.

Count Five: Making and keeping false accounting records, from June 23, 1994 through December 31, 1995. Crop Growers is not a named defendant in this Count of the Indictment.

Counts Six through Fifteen: Failing to disclose material facts in filings with the SEC on ten different dates, from April 11, 1994 through March 31, 1995.

Count Sixteen: Failing to provide information about the alleged false information comprising the first fifteen Counts of the Indictment in information relied upon by purchasers and potential purchasers of securities when Crop Growers became a publicly traded corporation registered with the SEC.

Counts Seventeen and Eighteen: Failing to disclose potentially illegal conduct to independent auditors, namely, that management of Crop Growers had been involved in making illegal campaign contributions, on March 25, 1994 and March 28, 1995. Crop Growers is not a named defendant in these Counts of the Indictment.

Defendant Hemmingson and several other persons not indicted here, including Henry Espy, have been indicted and tried in the Eastern District of Louisiana for crimes arising out of similar and/or interrelated events. United States v. Espy, et al., No. CR. 96-198 (E.D.La. Aug. 1996). Secretary Espy is not a defendant in either action.

Defendants raise several challenges to the substance of the Indictment in their many motions, each of which will now be considered in turn.

II. Independent Counsel Jurisdiction

All three Defendants challenge the IC's jurisdiction to bring the charges in the Indictment, and move that all eighteen Counts be dismissed under Fed R.Crim.P. 12(b)(1) and (2).

The IC acts pursuant to the Ethics in Government Act, 28 U.S.C. § 591 et seq.⁴ The IC was appointed on September 9, 1994, to investigate the acceptance of gifts by Secretary Espy from organizations or individuals with business pending before the Department of Agriculture. In re Espy, Order Appointing Independent Counsel, Div. No. 94-2 (D.C.Cir. Sept. 9, 1994) ("the Appointment Order"). The Appointment Order provided that:

The Independent Counsel shall have jurisdiction and authority to investigate other allegations or evidence of violation of any federal criminal law, other than a Class B or C misdemeanor or infraction, by any organization or individual developed during the Independent Counsel's investigation referred to above and connected with or arising out of that investigation ... [and] to seek indictments and to prosecute any organizations or individuals involved in any of the matters described above, who are reasonably believed to have committed a violation of any federal criminal law arising out of such matters, including organizations or individuals who have engaged in an unlawful conspiracy or who have aided or abetted any federal offense.

Id. at 2. On September 14, 1994, the Department of Justice ("DOJ") referred an additional matter to the IC (the "Supplemental Referral") for investigation, namely, that "Secretary Espy hosted a fundraising dinner, attended by agricultural lobbyists, the purpose of which was to retire the campaign debt of his brother." Notice of Prosecutorial Jurisdiction, United States v. Crop Growers Corp. et al., Criminal No. 96-181 (D.D.C. May 30, 1996). Defendants assert both constitutional and statutory arguments in support of their position that the IC has exceeded his jurisdiction in bringing these charges.

First, Defendants rely on Morrison v. Olson, supra, for the proposition that an IC who attempts to perform more than a "single task" has been improperly appointed by the judiciary in violation of the Appointments Clause of the Constitution, Art. II, § 2, cl. 2. The single task to which the Supreme Court referred in Morrison was the limited grant of authority in an IC's appointment order and any supplemental referrals. Id. at 672, 108 S.Ct. at 2609. Because the Court concludes that the conduct at issue here is sufficiently related to the investigatory powers granted the IC in the Appointment Order and Supplemental Referral, see infra pp. 7-9, it follows that the IC has acted within Morrison's single task parameter.

Second, Defendants contend that they are not "covered persons" under the Act. By its terms, the Act is triggered by the alleged illegal conduct of high ranking executive branch officials. 28 U.S.C. § 591(a), (b). However, the IC is not limited to investigating only those persons covered by the Act. United States v. Tucker, 78 F.3d 1313, 1321-22 (8th Cir.1996), cert. denied, ___ U.S. ___, 117 S.Ct. 76, 136 L.Ed.2d 35 (1996). When the IC investigates non-covered persons, he must show that the persons or organizations and matters being investigated are related to the original subject matter of his investigation so that "there is a reasonable causal or logical connection between the two." United States v. Secord, 725 F.Supp. 563, 566 (D.D.C.1989). Accord, United States v. Sun-Diamond Growers of Ca., 941 F.Supp. 1262, 1273 (D.D.C.1996) [Sun-Diamond I]. Again, given the Court's decision relating to the scope of this Appointment Order and Supplemental Referral, the Court finds that a significant connection exists between gratuities allegedly accepted by Secretary Espy and contributions made to retire his brother's campaign debt because both could conceivably influence the Secretary's opinions and decisions on matters pending before the Department of Agriculture.

Finally, Defendants argue lack of IC jurisdiction under the Appointment Order and the Supplemental Referral. Preliminarily, the Court notes that two other courts have already rejected these arguments, finding that allegations similar to these—illegal campaign contributions made to Secretary Espy's brother by companies with business pending before the Department of Agriculture —fall squarely within the jurisdiction granted to this IC under this Appointment Order. Sun-Diamond I, 941 F.Supp. at 1273-74; United States v. Espy, No.Crim.A. 96-198, 1996 WL 586364 (E.D.La. Oct. 9, 1996).

Defendants assert that neither the original Appointment Order nor the Supplemental Referral provides jurisdiction over the subject matter of the Indictment. Defendants' contention that the only powers granted to the IC are related to the acceptance of gratuities by Secretary Espy is simply without merit. The language of both the Appointment Order and the Supplemental Referral clearly gives the IC the authority to investigate persons and organizations...