Holder Letter

[Counsel Letterhead]

July _____, 2009 The Honorable Eric H. Holder, Jr. Attorney General U.S. Department of Justice 950 Pennsylvania Avenue, NW Washington, DC 20530-0001 Re.:

U.S. v. Armstrong, CR94-0276PJH

Dear Mr. Attorney General: I am writing to summarize a section 2255 motion pending before the Hon. Phyllis Hamilton in the Northern District of California. The underlying criminal matter arose nearly 20 years ago, culminating in the 1992 conviction of my client, Mr. Armstrong. After five years of incarceration, Mr. Armstrong received over 3,000 pages of FOIA documents, including many DOJ memoranda, revealing—for the first time—that the white-collar allegations upon which Armstrong was convicted were the subject of a prior investigation which closed upon a finding of no illegal conduct, and further revealing that Mr. Armstrong’s prosecution was prompted by contacts with FBI Deputy Director Larry Potts by Nancy Pelosi, Barbara Boxer, and Howard Baker. Mr. Armstrong’s motion was accompanied by just enough documentation to prompt an evidentiary hearing. We requested that the motion be sealed, but the judge denied that request and served a show-cause order upon the local U.S. Attorney. That office’s response is due in about 10 days.1 Due to the high sensitivity of issues presented in this case, we request an opportunity to confer with you about Mr. Armstrong’s prosecution and a proper resolution of our motion. As background, Mr. Armstrong was CEO and sole shareholder of Hamilton Taft, a company engaged in the collection and processing of payroll tax deposits for large corporations (Sun Microsystems, Scott Paper, FedEx, etc.) and handling approximately $7 billion of such deposits annually. A central question in Mr. Armstrong’s case was the characterization of these tax monies in the hands of Hamilton Taft. Was Hamilton Taft a fiduciary, holding the tax monies in trust? Or was Hamilton Taft a mere contractor, such that tender of tax monies by its clients 1

The District Court ordered a response within 30 days. On the 29th day, the U.S. Attorney’s office requested an additional 30 days, alleging that the files were in storage and the AUSA who handled the prosecution was no longer with the office. Disturbingly, the initial 30 days elapsed without material effort to retrieve the files from a local FRC, and—contrary to representations of counsel—several of the AUSAs involved with the original case are still in the same office. See Exhibit A.

The Honorable Eric H. Holder, Jr. July ______, 2009 Page 2 of 5 created a debtor-creditor relationship? This technical point was of some moment because it defined the duty owed by Hamilton Taft and, by extension, whether its conduct could produce civil and/or criminal liability. In 1988, Hamilton Taft was owned by Cigna Insurance. Under Cigna’s ownership, Hamilton Taft made inter-company loans to Cigna, prompting a disgruntled Hamilton Taft employee to contact law enforcement and allege that such loans were improper because the subject monies were tax payments held in trust. FOIA documents delivered to Armstrong show the employee found a sympathetic ear, as his complaints were assigned to AUSA Mike Yamaguchi for investigation. Yamaguchi was previously in the tax division of the New York Peat, Marwick office and would later enjoy a brief stint as U.S. Attorney for the Northern District of California. Yamaguchi performed his investigation and closed his file upon a finding that the operations of Hamilton Taft presented no violation of federal law. The FOIA records included a 1981 opinion letter from Baker & McKenzie stating that Hamilton Taft, as a tax collector, was not required to hold the tax monies in a segregated account and enjoyed the same freedom to invest the monies as that enjoyed by the employer, subject, of course, to the quarterly payment requirements. Neither the fact of Yamaguchi’s investigation nor its exculpatory conclusion was disclosed to Armstrong before or during trial. Indeed they were never disclosed but merely transmitted to him under FOIA. Fortunately, the failure to disclose a prior favorable investigation is an oddity, but the Fifth Circuit nonetheless had the recent opportunity to consider the matter in U.S. v. Fernandez.2 There, a unanimous panel analyzed an undisclosed investigation under the three familiar factors of Brady. The panel found that the fact of the investigation was actually well-known during trial with only the results of the investigation remaining undisclosed. The panel further found that the district judge conducted an in camera review of the results and found no exculpatory material. Based upon these findings, the panel held that no Brady violation occurred. Here, of course, the prior Hamilton Taft investigation was clearly exculpatory yet was never disclosed to Armstrong. Further, the Hamilton Taft situation is more troubling from a policy perspective because, unlike the Fernandez investigation that looked for conduct which violated a known law, the Hamilton Taft inquiry turned on whether known conduct could be interpreted as violating a yet-unknown law. Indeed, the aforementioned Baker & McKenzie opinion letter found that “[t]here does not appear to be any case law, regulation, or statute dealing with an independent agent who actually pays over the taxes to the government.” Standing alone, the government’s failure to disclose this exculpatory information is a fact that warrants 2255 relief from the district court. But because this failure is merely one example of serious improper conduct by the prosecution, and because that conduct is overlaid on a backdrop of political influence, I request your personal review of this matter. 2

559 F.3d 303 (5th Cir. 2009).

The Honorable Eric H. Holder, Jr. July ______, 2009 Page 3 of 5

As noted, the 1988 Hamilton Taft investigation was initiated by a disgruntled former employee. Fast forward to 1991, and another Hamilton Taft employee—recently fired for cocaine use—lodged the same allegation raised in 1988. The employee made frequent entreaties to the FBI and the IRS, falsely claiming that he was a CPA and was Hamilton Taft’s controller.3 At each turn, FBI and IRS memoranda reveal that the employee was rebuffed and was told Hamilton Taft had been investigated and that no laws were being violated. About this same time, Hamilton Taft became engaged in a contractual dispute with one of its clients, Federal Express. Simultaneously, the FBI and IRS agents in contact with the former Hamilton Taft employee began receiving inquiries from an unnamed DOJ attorney in Washington, inquiring about the Hamilton Taft investigation.4 Over the next few days, AUSA Yamaguchi is assigned the matter, based upon his prior investigation. Yamaguchi notes on March 8, 1991 that his office does not have probable cause to seek a search warrant. One week later, the Wall Street Journal publishes a negative article about Hamilton Taft, citing the disgruntled employee. FBI memoranda reveal that the employee was directed to the Wall Street Journal by Nancy Pelosi.5 The article was published on Friday, March 15, 1991. On Sunday, March 17, two days after the article’s publication and nine days after Yamaguchi’s statement that he lacked probable cause to pursue a warrant, the DOJ issued a press release detailing its investigation of Hamilton Taft. Eight days later, the press release had its apparently-intended effect when Hamilton Taft was placed into involuntary bankruptcy by Federal Express. On April 3, 1991, two weeks after the Federal Express filing, FBI Deputy Director Larry Potts sends a status report to Howard Baker,6 then a director of Federal Express, and copies the report to individuals associated with the staffs of Pelosi and Boxer.7 This memo is the only communiqué produced which reveals contact between Mssrs. Baker and Potts. All documents initiating the involvement of Mr. Potts are missing, as are the follow-up reports promised in Potts’ April 3 memo. Despite the missing documentation, however, extraordinary conduct by the California prosecution team reveals actions so bizarre that they are only explainable by continued pressure to commence a prosecution and secure a conviction. Two evidentiary matters illustrate the point. Near the end of trial, Armstrong learned that the government had placed a wire on his assistant and was in possession of 70 hours of recorded conversations. Because the time demands of trial 3

Newspaper reports from the time also revealed the employee’s stated wish to receive a 25% bounty under the False Claims Act. 4 Here, the FOIA records received heavy redaction, and embedded references reveal that numerous collateral documents were omitted. Mr. Armstrong is filing a discovery motion in the 2255 proceeding that should fill some gaps. 5 See Exhibit B. 6 The Howard Baker in question is the former Senator from Federal Express’s home state of Tennessee and the former White House Chief of Staff under President Reagan. 7 See Exhibit C. The memo is copied to persons identified by their last name only. While persons with these surnames were associated with the referenced congressional and senatorial offices at the relevant time, the exact identity of the persons copied is not yet known.

The Honorable Eric H. Holder, Jr. July ______, 2009 Page 4 of 5 deprived the defense of an opportunity to hear these tapes, Armstrong requested a continuance. This request was denied. AUSA Yamaguchi made an oral assurance to the district court, and FBI SA Hatcher provided a corresponding sworn affidavit, that the tapes were generated by the Dallas field office, concerned a different investigation, and were unrelated to Hamilton Taft. To the contrary, documents received by Armstrong years after trial reveal that AUSA Yamaguchi actually requested that the Dallas field office conduct the surveillance as a courtesy and in support of the Hamilton Taft prosecution.8 Aside from applied pressure, it is hard to develop an explanation for this conduct. The second evidentiary point concerned AUSA Yamaguchi’s undisclosed ties to Peat, Marwick’s tax division. That very office provided accounting services to Hamilton Taft and, at Armstrong’s request, prepared an opinion letter outlining the characterization of client funds once paid to Hamilton Taft and the scope of permissible investments for those funds. Armstrong sought testimony from a Peat, Marwick auditor and introduction of his report. Documents reveal that AUSA Yamaguchi threatened the auditor with indictment if he tried to testify. Again, this conduct would seem to be far outside one’s expectations. The characterization of Hamilton Taft’s cash as trust monies was central to Armstrong’s prosecution. But in addition to the criminal and civil litigation surrounding Hamilton Taft, the bankruptcy court was also considering this very question. As a company with large cash flows, the potential recovery from recaptured preference payments was very seductive to the bankruptcy trustee. Unfortunately, the trustee’s objectives diverged from those of the criminal prosecutors on this important point.9 The trustee argued that the monies were not held in trust; instead, they were the property of Hamilton Taft, were part of the bankruptcy estate, and were subject to the recapture of preference payments. This also meant, however, that Armstrong’s ability to invest or distribute those funds was governed only by the contractual relationship between Hamilton Taft and its clients. Conversely, the prosecution (and Hamilton Taft’s clients) wanted a trust characterization that would allow a viable prosecution but would preclude the preference recapture. The bankruptcy court sided with the prosecution’s view, characterized the monies as trust monies, and blocked the recapture of preference payments. The trustee appealed to the district court, and in an odd coincidence, the matter was heard by Judge Charles Legge, who was also presiding over Armstrong’s criminal prosecution. Judge Legge affirmed the bankruptcy court. The trustee took his appeal to the ninth circuit, which reversed upon finding that the monies were the property of Hamilton Taft and not held in trust. For a lawyer in search of the truth, this collateral bankruptcy proceeding provided a rare opportunity to receive an advisory opinion on a controlling legal issue. For AUSA Yamaguchi, 8

The tapes have since been reviewed, and despite what hindsight reveals to be significant and choreographed interrogation by Armstrong’s assistant, the tapes contained no inculpatory information and are in fact exculpatory. 9 Upon review of the prosecution’s actions coupled with documentation produced under FOIA, there is no question that the objective of the prosecution was to secure a conviction and not to illuminate the truth.

The Honorable Eric H. Holder, Jr. July ______, 2009 Page 5 of 5 however, it was an exercise in crisis management. As an example, consider that the ninth circuit invited the DOJ, upon rehearing, to prepare an amicus brief on whether the Court’s holding would adversely impact the government’s ability to collect taxes. The DOJ’s tax division accepted this invitation, yet the brief was actually authored by AUSA Yamaguchi who appeared “of counsel” to that division. Armstrong’s trial counsel argued that the ninth circuit’s opinion in the bankruptcy matter established, effectively, the “law of the case.” The court refused that instruction, and on appeal, this refusal was affirmed on curious and inexplicable grounds. The ninth circuit noted that the bankruptcy opinion had been vacated as moot and, regardless, discussed only the relationship between Hamilton Taft and the IRS, not Hamilton Taft and its clients. In granting vacatur, the ninth circuit found that the matter had been settled during the pendency of rehearing, thus mooting the issue. This explanation is curious because the U.S. Supreme Court had recently reviewed a ninth circuit case and held that “mootness by reason of settlement does not justify vacatur of a judgment under review.” See U.S. Bancorp Mortg. Co. v. Bonner Mall Partnership, 513 U.S. 18, 29 (U.S. 1994). As to the second ground relied upon by the ninth circuit, it misstates the prior holding; moreover, it is axiomatic that a finding that the IRS is not a beneficiary of a trust held by Hamilton Taft requires a corresponding finding that Hamilton Taft is not a trustee of monies tendered by its clients as putative settlors. 10 These are just a few examples of material irregularities surrounding this prosecution. Frankly, I cannot recall seeing undisclosed exculpatory investigations, political pressure by very high-level persons, deliberate misrepresentations to a court by an AUSA and a special agent, and prosecutorial involvement with collateral bankruptcy litigation all combined into a single case. As each page turns, we are uncovering more and more concrete examples of misconduct. For this reason, I respectfully request an opportunity to discuss this matter at your earliest convenience.11 Very truly yours,

xxxxxxxxxxxxxxxxxxx Counsel for Armstrong

10

Aside from Yamaguchi’s meddling via an amicus brief, we do not suggest improper conduct by the court of appeals. Our investigation on the impetus for a vacatur request, in contrast to the typical dismissal, is ongoing. 11 Our motives here are undoubtedly selfish, yet the important goal of public confidence in the DOJ’s prosecutorial decisions will be well-served by a brief meeting.