March 5, 2002


The Honorable Patrick J. Leahy
Chairman
Senate Judiciary Committee
United States Senate
Washington, D.C. 20510

The Honorable Orrin G. Hatch
Ranking Member
Senate Judiciary Committee
United States Senate
Washington, D.C. 20510

Dear Senators Leahy and Hatch:  

I am writing to respond to the assertions made by Judge D. Brooks Smith in his testimony and his letter to this Committee dated February 25^th that he "exercised great caution" in presiding over SEC v. Black and USA v. Black and that his actions in those cases were "far from breaching my ethical obligations."  Respectfully, neither the facts nor the law support these assertions.  

Judge Smith had a legal and ethical obligation to disqualify himself earlier from both SEC v. Black and USA v. Black.  

            Disqualification Was Required from the Outset of SEC v. Black.  

Judge Smith asserts that prior to recusing on October 31, 1997 , he had no reason had no reason to think Mid-State Bank was anything more than a "depository of funds.” This assertion is severely undercut by the first documents filed in the case.  While not charging Mid-State or alleging knowing participation by the Bank in Black’s fraud, these documents (submitted by Community Rights Counsel to the Committee and detailed in our February 20^th letter) clearly establish that the Bank's role was more than simply a depository of funds. The Bank acted as custodian of all the assets lost by local school districts in Black's fraud.  Contracts between Black and the Bank permitted Black to transfer money among numerous Mid-State accounts and, by doing so, made possible Black's investment of school district money in illegal securities.  The misrepresentations at the heart of the SEC's case against Black were misrepresentations of the value of the assets in a Mid-State Bank account. Mid-State is the only financial institution mentioned in the Complaint and it is mentioned seventy-one times in a supporting declaration.[1]  

On this information alone, several local school districts that trusted their money to Mid-State began planning litigation against Mid-State to recover their losses.  On this information alone, school districts that had deposited their money at other banks wanted out expressly because their money was not “in the pooled account at Mid-State.”  On this information alone, Judge Smith should have disqualified himself from SEC v. Black.  As legal ethics expert Steven Lubet told the Pittsburgh Post-Gazette in connection with this matter: "There is no doubt Judge Smith should have disqualified himself and done it much sooner. This comes squarely within the statute. It is not ambiguous."[2]  

By October 27^th, 1997, Judge Smith had Evidence Indicating the Bank Was An Active Participant in Black’s Fraud.  

According to a letter sent to the Committee on February 22, 2002 by Mark Rush, counsel for Trustee Richard Thornburgh in SEC v. Black, on October 27, 1997, the Trustee and Mr. Rush met “in camera” with Judge Smith and informed Judge Smith of the Trustee’s "developing but not confirmed suspicion that Mid-State Bank's role may be more than a depository."  The Trustee also delivered to Judge Smith that morning a report that contained the following statement: “Mid-State Bank carried an aggregate market value of $157,622,923.12 in reports for [Black’s] Clients.  In the Mid-State report to [Black], the market value totaled $86,307,513.87.”  In other words, the Trustee conveyed to Judge Smith that it had uncovered evidence that Mid-State Bank had apparently cooked its books to perpetuate Black’s fraud.[3]  

Judge Smith owned more than $100,000 of stock in the bank, his wife was an officer at the bank, and Judge Smith was informed directly by the Trustee on October 27^th that the Trustee was investigating evidence suggesting that the bank was a partner in Black’s crime.   Yet, Judge Smith presided over SEC v. Black for four more days, issued three important orders, failed to vacate these orders upon recusing and failed to ever inform the parties of his large stock holdings in the bank.  

Despite his earlier recusal and his knowledge of the bank’s apparent role in Black’s crime, and while civil fraud suits were pending against the bank, Judge Smith again decided to preside over the criminal case (USA v. Black) brought against Black and recused from the case only after Black’s counsel took the time, expense and litigation risk of moving for the judge’s recusal.             

            Judge Smith Was Disqualified Under Both Section 455(a) & Section 455 (b).                       

            While recognizing that he was obligated to disqualify himself under 28 U.S.C. § 455(a),[4] Judge Smith asserts, with no explanation, that the “mandatory” recusal provisions of 28 U.S.C. § 455(b) never applied to either SEC v. Black or USA v. Black.  This is incorrect for two reasons.  First, disqualification under 455(a) is just as mandatory as disqualification under 455(b): both sections use the same word “shall.”  While conflicts under 455(a) may be waived by the parties in writing after a full disclosure by the judge on the record, there is no assertion of either a full disclosure or a waiver here.  

            More importantly, the unwaivable commands of 28 U.S.C. § 455(b) also required disqualification.   Section 455(b) demands disqualification of a judge whenever the judge has a “financial interest in the subject matter” of a case or any other interest “that may be substantially affected” by the outcome of a case.  As custodian of the money lost by Black and the target of lawsuits by school districts to recover these losses, Mid-State Bank (and thus Judge Smith) had a “financial interest in the subject matter” of SEC v. Black and USA v. Black.  It is also difficult to argue that Judge Smith did not have an interest that could be “substantially affected” by the fraud at issue in SEC v. Black and USA v. Black.  After all, Judge Smith's stock in Keystone Financial actually was substantially affected by the conduct of the company as unearthed by the Trustee in SEC v. Black.  The company's stock plummeted 49% in 1999, largely because of a $51 million settlement of civil fraud cases stemming from the Bank's involvement in the fraud at issue in the two Black cases.[5]  

Judge Smith was Obligated to Disclose His Stock Interest in the Bank Prior to and at the Time of Recusal.  

Judge Smith asserts that it was appropriate for him to withhold from the parties in both SEC v. Black and USA v. Black the information that he owned a substantial amount of stock in the bank.  Judge Smith supports this assertion with a citation to the Seventh Circuit's opinion in Hampton v. City of Chicago, 643 F.2d 478 (7th Cir. 1981) that stands for the proposition that a judge need not disclose his reasons for recusing.  Again, this is incorrect for two reasons.  

First, Judge Smith had an ethical obligation to “disclose on the record any information that a judge believes the parties or their lawyers might consider relevant to the issue of disqualification, even if the judge believes there is no real basis for disqualification."[6]  Two federal courts of appeals have recognized that this obligation, derived from the American Bar Association's Model Code of Judicial Conduct, is binding on federal judges.[7]  Particularly given the Third Circuit's ruling in United States v. Nobel, 696 F.2d 231 (3d Cir. 1982) (recusal required when a judge owns stock in a non-party and fully compensated victim of a crime), Judge Smith's stock interest in the Bank was “relevant to the issue of disqualification.”  As Stephen Gillers , a legal ethics expert from New York University law school told the Pittsburgh Post-Gazette, Judge Smith “should have revealed his financial interest in Mid-State and his wife’s employment relationship to Mid-State to the parties right away as soon as he learned that Mid-State had an interest in Black’s litigations.”[8]  

Second, Hampton stands only for the proposition that a judge need not disclose the reasons for disqualifying himself when the judge disqualifies before issuing substantive orders.  See 643 F.2d 478, 479-80 ("defendants moved to recuse immediately after Judge Shadur was assigned this case, before he had, for example, substantial background of experience with it or had entered substantive orders.").  At least since the Supreme Court’s 1988 ruling in Liljeberg v. Health Services Acquisition Corp., 486 U.S. 847 (1988), a judge that has issued orders despite a conflict has duties that go beyond simply disqualifying himself from future actions in the case.  Liljeberg holds that, in certain cases, orders tainted by conflicts must be vacated. Liljeberg requires that in recusing, a judge that has issued orders despite a conflict must either vacate these orders or, at the very least, notify the parties of all the grounds for seeking to have prior orders vacated.   Judge Smith did neither in SEC v. Black and Hampton does not make that acceptable.

Conclusion  

Judge Smith personally held a large amount of stock in a relatively small bank whose stock ultimately plummeted because of its role in the fraud at issue in SEC v. Black.  Mid-State’s interests in the proceeding were or should have been apparent from the face of the complaint.  Judge Smith was apparently informed directly by the Trustee on October 27, 1997 that the Trustee was uncovering evidence indicating that the bank was a partner in Black’s crime.  Judge Smith’s decisions thereafter to (1) issue important orders in SEC v. Black, (2) preside over USA v. Black for four months, and (3) fail to inform the parties of his bank stock appear to be clear violations of legal and ethical mandates.  These issues must be considered by the Senate in assessing Judge Smith’s proposed promotion to the Third Circuit.


Sincerely yours,

Douglas T. Kendall

cc:        Senate Judiciary Committee Members                        

If you have questions or comments about this website or
Community Rights Counsel email us!

© 2005 Community Rights Counsel. All rights reserved.