Grand Jury Target

Having a business partner can be a wonderful advantage. But it can also be dangerous if your business partner turns out to be unethical. Karen Olson, a former Alaska executive director of the United States Department of Agriculture’s Farm Service Agency, found that out the hard way.

Her business partner concealed information from the federal government on certain USDA grant applications. Ms. Olson knew about it and didn’t tell anyone. She ended up with a felony conviction herself. The Ninth Circuit recently affirmed her conviction and published an opinion interpreting the misprision of a felony statute.

The Facts

The USDA awarded a grant to Robert Wells to open a milk processing facility. Under the grant, certain equipment for the facility had to be purchased with grant funds. Ms. Olson had an informal deal with Mr. Wells related to the facility. The deal entitled her to 50% of the profits from the facility.

Around the same time, a gentleman named Kyle Beus also received a grant from the USDA. The purpose of his grant was to develop an ice cream and cheese manufacturing facility. Mr. Wells, Mr. Beus and Ms. Olson decided to build their two projects at the same facility.

However, the Ninth Circuit opinion notes that “unbeknownst to Wells and Olson, Beus instructed his contractor, Nether Industries, to inflate the value of certain dairy processing equipment.” Mr. Beus ended up inflating the value of that equipment on his submission to the USDA grant program for reimbursement.

Here’s where the partnership first went sideways for Ms. Olson.

Mr. Beus couldn’t keep his mouth shut. About a year after he inflated the price on his USDA grant submission, Mr. Beus told Mr. Wells and Ms. Olson that he had leased some “technologically obsolete” equipment and submitted for reimbursement.

Leasing old equipment likely wouldn’t be a problem in the private sector. The USDA grant, however, required them to purchase new equipment. Mr. Beus leased old equipment.

Ms. Olson was not a fool. She told the USDA that they had leased equipment as part of their partnership. She did identify two specific pieces of equipment as leased, rather than purchased. Ms. Olson also filed a final report after the USDA released the grant funds. This final report falsely stated that the two pieces of equipment were purchased new.

Here’s where it all went sideways a second time.

Ms. Olson then learned that Mr. Beus had been submitting false invoices to Nether Industries (his contractor) and receiving kickbacks in return after he was reimbursed by the USDA. He also used grant funds to make a personal investment in another dairy-industry manufacturer. The Ninth Circuit opinion points to her notations in her day planner as evidence that she knew Mr. Beus’ actions were improper.

The Trial

Ms. Olson went to trial. She was convicted of misprision of a felony under 18 U.S.C. § 4, as well as false statements. The misprision conviction was based on her knowledge that Mr. Beus submitted false statements the USDA as part of his scheme to misappropriate grant funds.

She was ultimately sentenced to 30 days in prison and 3 years’ supervised release.

The Meaning of “Felony” and the Knowledge Requirement

On appeal, the Ninth Circuit addressed the proper construction of the misprision statute, 18 U.S.C. § 4.

This statute states:

Whoever, having knowledge of the actual commission of a felony cognizable by a court of the United States, conceals and does not as soon as possible make known the same to some judge or other person in civil or military authority under the United States, shall be fined under this title or imprisoned not more than three years, or both.

The first question was what the government had to show to prove that a defendant has “knowledge of the actual commission of a felony cognizable by a court of the United States.”

The parties apparently agreed that the government had to prove that Ms. Olson knew that Mr. Beus “engaged in conduct that satisfies the essential elements of the underlying felony.”

The parties disagreed about the second question—whether the government had to prove that Ms. Olson knew Mr. Beus’ conduct was a felony. Ms. Olson argued that the government had to prove that she knew his conduct was a felony.

I won’t bury the lede: Ms. Olson won the argument and lost the war. Her conviction was affirmed.

The court’s reasoning was fairly straightforward.

First, it noted that Ms. Olson’s proposed construction of the statute “is consistent with the general presumption that a mens rea requirement applies to each element of an offense.” The government had to prove that she knew that Mr. Beus’ conduct was a felony.

For you history buffs out there, the Ninth Circuit also considered the history of misprision and concluded that this history supported Ms. Olson’s interpretation. It explained that in the old days citizens were partly responsible for fighting crime, and they had a duty to report crime. It concluded that “Congress intended the misprision statute to apply solely to conduct the average person would understand as criminal and serious.”

The court of appeals then considered how the government could prove that certain conduct constitutes a felony. It’s not as though we expect the average citizen to understand what conduct is a felony and what conduct is a misdemeanor and what conduct is not a crime at all.

The Ninth Circuit concluded that the term felony was defined “as part of the federal criminal code is a crime punishable by death or a term of imprisonment exceeding one year.” It cited 18 U.S.C. § 3559(a) in support of this conclusion.

The Ninth Circuit then stated

We therefore hold the government must prove the defendant knew the underlying offense was punishable by death or more than one year in prison. The defendant need not know the precise term of imprisonment authorized by law, but at least you must know the potential punishment exceeds one year in prison.

In other words, the government must prove that the defendant knew about the other party’s conduct and that the other party’s conduct was punishable by a year in prison.

The Facts Applied to this Interpretation

In a normal case, it would likely be challenging for the government to prove that the defendant knew the conduct of the other person could be punishable by more than a year in prison. People don’t just walk around knowing the sentences for certain crimes.

This was a bit of a special case, and Ms. Olson was a bit of a special defendant.

The Ninth Circuit concluded that there was plenty of evidence to support the jury’s verdict that she was guilty of this offense.

First, the form that Miss Olson had filled out stated that anyone who made false statements to the USDA could be imprisoned up to five years. She had apparently seen similar warnings “many times” as part of her prior job with the USDA.

Second, the Ninth Circuit pointed to her past experience as executive director of the USDA Farm Service agency supports the jury’s verdict. This experience offered a level of “sophistication” in these matters that a typical defendant would not have.

Unfortunately, even though Ms. Olson won on the law, she lost on the facts.

Making Good Law

As part of the defense bar, we push for rulings that help our clients. Sometimes, our hard work doesn’t help our own clients but contributes generally to the defense bar’s efforts to resist government overreach. We try to “make good law.”

That’s what happened here.

Ms. Olson didn’t win. But the ruling her case makes it just a tick harder for the government to bring these types of cases in the future. I find the misprision statute troubling because it requires you to report on someone’s illegal conduct, even when there’s no independent requirement to do so. It would be all too easy to tack on a misprision charge in any case where there is more than one participant.

Using Misprision of a Felony in Plea Negotiations

That said, the misprision statute can be used to reduce a more serious charge (with a more serious penalty) to a lesser charge during plea negotiations. You may be able to convince a prosecutor in a wire fraud case to offer a plea to misprision of a felony, for example.

The guideline sentence for a misprision charge is in section 2X4.1. The base offense level is set at 9 levels lower than the underlying offense, though it cannot go below 4.  The sentencing calculation ends there, so there’s a good chance the final offense level is 4. In contrast, the base offense level for fraud, section 2B1.1, is either 6 or 7, and then you add levels for the loss amount. This is a big difference.

I don’t want the statute to disappear; I just want it to be a bit harder to include it in any multi-defendant case.