Ineffective Assistance of Counsel, Virtual Currency Fraud, and Bank Immunity

Harvey M. Stone and Richard H. Dolan

This column reports on several significant, representative decisions handed down recently in the U.S. District Court for the Eastern District of New York. Judge Denis R. Hurley, granting a habeas petition, held that (1) counsel’s failure to seek accommodations at trial for his hearing-impaired client amounted to ineffective assistance of counsel, and (2) prejudice had to be presumed. Judge Raymond J. Dearie upheld an indictment charging securities fraud relating to virtual currency. And Judge Eric N. Vitaliano found that a bank had immunity under the Anti-Money Laundering Act, 18 U.S.C. §5318(g)(3)(A), for allegedly reporting plaintiffs’ activities to government authorities, resulting in the loss of property.

Habeas—Ineffective Assistance of Counsel



In Pierotti v. Harris, Superintendent, Green Haven Correctional Facility, 03 CV 3958 (EDNY, Oct. 11, 2018), Judge Hurley granted habeas relief to petitioner, who had been convicted of murder following a state jury trial in 2000, where trial counsel, though aware of petitioner’s severe hearing impairment, failed to seek adequate accommodations for his client.

In 1998 petitioner shot two people outside of a bar in Baldwin, N.Y. Petitioner claimed he was acting in self-defense.

Since then, this case has had a long and tortuous procedural history in state and federal court, starting in Nassau County. Slip op. 3-10. In adopting the 2014 recommendation of Magistrate Judge Gary R. Brown and initially denying the habeas petition, Judge Hurley held that, because the state court had rejected the ineffective assistance claim on an independent state procedural ground, the federal court could not review the merits of that claim. Hurley granted a certificate of appealability. On appeal, the Second Circuit held that the case fell within the limited category of cases in which the “exorbitant application of a generally sound rule renders the state ground inadequate to stop consideration of a federal question.” Pierotti v. Walsh, 834 F.3d 171, 180 (2d Cir. 2016). The Second Circuit remanded the matter to the Eastern District to determine the merits of the ineffective assistance claim.

Here, turning to the merits, Hurley concluded that trial counsel’s performance “fell outside the wide range of professionally competent assistance.” Slip op 13. Based on the evidence, there was “no doubt” that petitioner was unable to hear portions of the testimony. “Petitioner, who would normally rely on two hearing aids, had none.” The expert affidavit attested to the nature and severity of the hearing difficulties, compounded by the conditions in the room and the logistics of the trial. According to trial counsel’s affidavit, on “various occasions” petitioner indicated his inability to hear what was being said.

Affidavits of petitioner and his family corroborate his hearing problems and show counsel’s awareness of them. Counsel’s assertion that the trial court turned on assisted listening devices is unsupported and suggests counsel’s awareness of the need for an accommodation. Slip op. 13-14.

Generally, to prevail on an ineffective assistance claim, a defendant must show that, but for counsel’s errors, the outcome would have been different. But in certain cases prejudice is presumed. Hearing tests conducted by the New York State Department of Correction less than six months after the trial detailed the gravity and extent of petitioner’s hearing disability. On the full record here, Hurley noted: “There is a reasonable probability that petitioner would have been entitled to accommodations. Without accommodation, portions of the trial were, in effect, held in his absence giving rise to an unrebutted presumption of prejudice.” Slip op. 17. As the evidence reveals, petitioner even had difficulty hearing his lawyer’s comments whispered to him at the defense table.

Securities Fraud—Virtual Currency



In United States v. Zaslavskiy, 17 CR 647 (EDNY, Sept. 11, 2018), Judge Dearie denied defendant’s motion to dismiss an indictment charging conspiracy to commit securities fraud and substantive securities fraud in connection with the sale of investment opportunities relating to virtual currency.

The indictment charged that Zaslavskiy raised money from investors by promising them units of virtual currency in one of two ventures. The first, “ReCoin,” purported to engage in real estate investment and the development of real-estate related “smart contracts.” The second, “DRC,” purported to obtain diamonds at discount from diamond retailers. Zaslavskiy moved to dismiss, arguing that the investments were not “securities” and that the securities laws would be unconstitutionally vague if applied to them.

Dearie rejected these arguments. That the investors were to receive units described as “virtual currency” did not render the indictment defective under the securities laws. “The label Zaslavskiy chooses to attach to the alleged scheme does not control our analysis,” because “’Congress’ purpose in enacting the securities laws was to regulate investments, in whatever form they are made and by whatever name they are called.’” Slip op. 6, quoting SEC v. Edwards, 540 U.S. 389, 393 (2004) (internal citation omitted).

Zaslavskiy’s argument that the units he offered were not “investment contracts” within the meaning of SEC v. W.J. Howey Co., 328 U.S. 293 (1946), is best left to the trier of fact. Nothing about the indictment’s description of the crypto-currency transactions would prevent a reasonable jury from concluding that Zaslavskiy promised investors profits from a common enterprise, derived solely from the efforts of Zaslavskiy and his co-conspirators. Slip op. 9-16.

Defendant’s vagueness argument was similarly defective. He failed “to demonstrate that a person of ordinary intelligence would not have sufficient notice that the charged conduct was proscribed.” Slip op. 19. Indeed, the conduct charged falls within the core of the Exchange Act and Rule 10b-5: “’to protect the American public from speculative or fraudulent schemes of promoters’ like Zaslavskiy and ensure ‘full and fair disclosure’ with respect to securities.’” Slip op. 21, quoting SEC v. Glen W. Turner Enter, 474 F.2d 476, 481 (9th Cir. 1973).

Bank Immunity Under the Anti-Money Laundering Act



In Tarazi v. Valley National Bank, 11 CV 4464 (EDNY, Oct. 11, 2018), Judge Vitaliano granted defendant Bank’s motion to dismiss, because the Bank has immunity as a financial institution under the Annunzio-Wylie Anti-Money Laundering Act (the Act), 18 U.S.C. §5318(g)(3)(A).

Plaintiffs leased three safe deposit boxes in 2009 from the Bank’s Avenue M location in Brooklyn to store the family collection of numismatic coins and heirloom jewelry. In May 2009 one of the plaintiffs was at the Bank when he was confronted by U.S. Secret Service agents, who asked him questions about counterfeit currency, saying they had received a tip about counterfeit currency or counterfeiting paraphernalia. Plaintiff opened the boxes and the agents found no evidence of counterfeiting.

On June 4, a DEA agent swore out an application for a search warrant. Magistrate Judge Roanne L. Mann found that the DEA had reasonable cause to “believe that drugs or drug residue was present in plaintiffs’ safe deposit boxes.” In executing the warrant, DEA and Secret Service agents drilled open the plaintiffs’ safe deposit boxes and found no drugs, drug residue or any other contraband. The Bank replaced the locks, but plaintiffs were not notified and did not realize anything had happened until they visited the Bank on July 10, 2009. Plaintiffs alleged that many items were missing from the boxes. Although they initially filed loss of property claims against the Bank, they dropped those claims because of the difficulty of ascertaining the value of the lost property.

Plaintiffs asserted that “but for a tip given by the Bank to the Secret Service and/or the DEA about criminal activity involving the family and their safe-deposit boxes,” none of the boxes would have been opened. But the “safe harbor” provision under the Act protects financial institutions that report “any suspicious transaction relevant to a possible violation of law or regulation.” The relevant federal regulation states that the safe harbor provision “covers all reports of suspected or known criminal violations and suspicious activities to law enforcement and financial institution supervisory authorities, including supporting documentation, regardless of whether such reports are filed pursuant to this section or are filed on a voluntary basis.” 12 C.F.R. §208.62(k).

Here, the Bank qualified as a financial institution. Following Second Circuit precedent, Vitaliano rejected plaintiffs’ argument that the “safe harbor” was not applicable where a bank has acted in bad faith. The Act, moreover, makes it clear that a suit seeking damages based on disclosures allegedly made in a Suspicious Activity Report (SAR) is a non-starter because a financial institution cannot reveal what disclosures were made in a SAR, or even whether it filed a SAR. As Vitaliano observed, “the Act’s grant of absolute immunity under §5318(g)(3) means that the Bank is protected from liability for any claim arising from its report of potentially suspicious activity.” Slip op. 9.

The negligence claims were doomed by plaintiffs’ inability to offer supporting facts. Vitaliano concluded: “the pleadings still do not provide any information as to what property was allegedly stolen, nor do the pleadings address how the Bank allowed the property to be lost.” Slip op. 12.

Harvey M. Stone and Richard H. Dolan are partners at Schlam Stone & Dolan.