May 10, 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 comment on the written responses submitted by Judge D. Brooks Smith to questions posed by Senator Russ Feingold concerning Judge Smith's rulings in SEC v. Black and USA v. Black. This letter supplements and incorporates by reference earlier letters I have sent to the Committee on February 20th and March 5th discussing this matter. In summary, I believe that Judge Smith's responses to Senator Feingold's questions are impossible to square with the factual record and with standards of judicial ethics. As detailed below, Judge Smith's latest responses reinforce the conclusion of Professor Monroe Freedman - based on earlier submissions to the Committee by Judge Smith - that Judge Smith "has been disingenuous before this Committee in defending his unethical conduct."

General Issues Concerning Judge Smith's Responses Regarding SEC v. Black

Judge Smith owned more than $100,000 of stock in Keystone Financial Inc., the holding company for Mid-State Bank, his wife was a Vice President of Mid-State, and Judge Smith was informed directly on October 27, 1997 of evidence suggesting that the bank may have been an active participant in the fraud at issue in SEC v. Black. Nonetheless, Judge Smith continued to preside over the case, issued important orders affecting Mid-State's interests, failed to vacate these orders upon recusing, and failed to ever inform the parties of his large stock holdings in the bank. In my February 20th and March 5th letters to the Committee, I detailed all the information that Judge Smith knew about the bank's involvement in SEC v. Black prior to recusing and explained in detail why Judge Smith was required under 28 U.S.C.§ 455 to recuse himself from SEC v. Black well before October 31st, the day he ultimately recused. The conclusion that Judge Smith violated 28 U.S.C. § 455 in SEC v. Black has been supported by preeminent legal ethics experts including Professors Monroe Freedman and Steven Lubet.

In his responses to Senator Feingold, Judge Smith contradicts these conclusions and repeatedly asserts that he acted out of an "abundance of caution" in recusing in SEC v. Black on October 31, 1997 before "an appearance of impropriety reared its head" and before he had a "legal obligation to do so." Judge Smith premises his conclusions on two factual predicates. First, Judge Smith asserts that, at the time he recused, Mid-State Bank still appeared to be merely a "repository of funds; it did not appear to have any other involvement in Black's fraud." Second, Judge Smith asserts that he had no indication on October 31st that Mid-State might face civil or criminal lawsuits as a result of its involvement in the fraud at issue in SEC v. Black. Neither of these assertions withstands examination.

On October 27, 1997, Richard Thornburgh, the Trustee in SEC v. Black, and Thornburgh's counsel, Mark Rush, met in camera with Judge Smith and informed him of their "developing but not confirmed suspicion that Mid-State Bank's role may be more than a depository." That same morning, Thornburgh and Rush delivered to Judge Smith a report that stated: "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 evidence suggesting that Mid-State Bank had cooked its books to perpetuate Black's fraud. In response, according to Mr. Rush, Judge Smith indicated an intention to consider recusing himself.

Judge Smith attempts to minimize the significance of the information in the Trustee's report and his meeting with the Trustee. He asserts that the reference to Mid-State's fraudulent reporting in the Trustee's report "appears only in a footnote to an exhibit to another exhibit to the Trustee's Report" and that "the isolated footnote contained no suggestion of the possible significance of this fact." He claims that "it was only much later, when the extent of Mid-State's involvement was known, that this fact took on any importance."

But the information provided by the Trustee to Judge Smith on October 27th plainly suggested that Mid-State may have been an active participant in Black's fraud. Indeed, on October 31st, the same day Judge Smith recused, the Harrisburg Patriot-News ran a story with the title "The Bank Told Black One Thing, His Clients Another, Trustee Says." The Pittsburgh Post-Gazette ran a similar story - which originated in an AP wire story apparently issued on October 30th. Citing to the report the Trustee delivered to Judge Smith in camera on October 27th, these stories state that Mid-State Bank "reported different totals to Black than to his clients, according to a trustee's report."

Thus, notwithstanding Judge Smith's assertion it was "only much later * * * that this [portion of the Trustee's report] took on any importance," it only took an Associated Press reporter, who did not have the benefit of a private briefing by the Trustee, three days to recognize its importance and publish a story detailing its significance. This story ran in the two biggest papers in Western Pennsylvania (and presumably smaller papers throughout Pennsylvania) on the same day that Judge Smith recused.

Judge Smith was presiding over SEC v. Black, married to an officer of the bank, and he was told directly that the Trustee had uncovered "information * * * which may change Mid-State Bank's involvement in the case from that of merely a depository of funds." Major papers across Pennsylvania were running stories reporting on the Bank's active role in Black's fraud. Judge Smith's assertion that at the time he recused it appeared that "[a]t most, Mid-State had been a repository of funds; it did not appear to have any other involvement in Black's fraud" cannot be supported by the record.

Judge Smith also repeatedly asserts that he had no knowledge of the fact that Mid-State was a likely target of lawsuits stemming from its role in Black's fraud. He states that "no one informed me of the possibility of lawsuits against Mid-State Bank" and claims that "[a]s far as I know, not even Trustee Thornburgh believed on October 27th that Mid-State Bank might face any civil or criminal lawsuits connected to Black's fraud."

But from the outset of SEC v. Black, Mid-State -- the custodian of the money entrusted to Black by the school districts and lost by Black -- was an obvious target for legal action by the defrauded school districts. By September 30th, the day before Judge Smith's first order in SEC v. Black, the South Butler School District had issued a press release stating that Mid-State should be responsible for its losses, because Mid-State had told South Butler that funds invested through Black would be "continuously secured by any assets" of the bank. By October 8th, the Warwick School District had concluded that "the district may be able to go after Mid-State Bank and its parent company, Keystone Financial, custodians of the school district's investment." By October 15th, the Northern Lebanon School District hired a securities litigation specialist to "prepare suits against * * * Mid-State Bank" declaring that "[w]hat's about to take place is a blizzard of lawsuits." On October 18th, the Superintendent of Warwick School District told the Lancaster Intelligencer Journal that "if the money is missing * * * the case gets to be Mid-State was our custodian, and we need to initiate an action against Mid-State and their holders." On October 31st, the same day Judge Smith recused, South Butler School District sued Mid-State Bank in state court to recover the losses the district incurred because of Mid-State's role in Black's fraud.

These developments were all reported in major Pennsylvania papers. The same districts that were preparing to sue Mid-State were regularly meeting with the Trustee and trying, unsuccessfully, to intervene as parties before Judge Smith in SEC v. Black. It seems quite implausible that either Judge Smith or Trustee Thornburgh were unaware that Mid-State was likely to face lawsuits stemming from its role in Black's fraud.

Moreover, Judge Smith's unqualified assertion that "no one informed him of the possibility of lawsuits against Mid-State Bank" has been directly contradicted by President Bush's Assistant Attorney General Viet Dinh. Mr. Dinh told the Johnstown Tribune-Democrat that "when Thornburgh advised [Judge Smith] of the potential litigation against Mid-States, Judge Smith properly recused himself to avoid conflict."

In summary, Judge Smith's assertion that it was "only much later" that the portion of the Trustee's report noting Mid-State's apparently fraudulent reporting "took on any importance" must be evaluated in light of the fact that: (1) Trustee Thornburgh and Mark Rush met in camera with Judge Smith to discuss this "information" and shared with Smith their suspicions regarding Mid-State; and (2) the same day he recused, papers across Pennsylvania ran stories noting the significance of this portion of the report. Judge Smith's assertion that he had no idea at the time he recused that Mid-State might be sued for its role in Black's fraud must be considered in light of the fact that: (1) newspapers started reporting on threatened suits against Mid-State over a month before Judge Smith recused; (2) Mid-State was, in fact, sued for its role in Black's fraud the same day Judge Smith recused; and (3) according to Viet Dinh, the Trustee informed Judge Smith directly that the Bank might be sued.

If Judge Smith had stayed on the SEC v. Black case a single day longer, he would have been presiding over one of the biggest fraud cases in Pennsylvania history, while reports of the bank's active role in the fraud were filling the local papers, and while litigation was pending against the bank for its role in the fraud. He would have been presiding despite the fact that his wife, Karen Smith, was a Vice President at the bank and the fact that the couple owned more than $100,000 in Bank stock. Viewed from this perspective, Judge Smith's assertions that he exercised an "abundance of caution" in recusing based on the "possible evidentiary role Mid-State would play in the future" and the "future possibility" of an appearance of impropriety are hard to fathom.

Issues Concerning Specific Responses to Questions on SEC v. Black

Response to Question 14:

Judge Smith does not challenge Mr. Rush's assertion that Judge Smith informed the Trustee on October 27th that he was considering recusing himself from SEC v. Black. However, he then continued to issue orders - including important orders that advanced Mid-State's interests - for four more days. When he finally did recuse on October 31, 1997, Judge Smith failed to vacate the orders he issued after October 27th and failed even to inform the parties of his stock interest, the strongest basis for seeking vacatur of his rulings. In strikingly similar circumstances, the Third Circuit in Moody v. Simmons, 858 F.2d 137 (3d Cir. 1988), granted a writ of mandamus and vacated orders issued by a judge after he had recognized a basis for recusal.

Judge Smith defends his decision not to vacate his post-October 27th orders by reference to his obligation to take no further action once he recognized the conflict. But, under Moody, Judge Smith was plainly obligated either to recuse, or tell all the parties of the bases for seeking his recusal, on October 27th. Having continued to issue orders after October 27th, Judge Smith was obligated, at the very least, to disclose to the parties the bases upon which they could seek to vacate his post-October 27th rulings. He failed to do this and now refuses even to recognize that he should have disclosed to the parties his significant financial interest in Mid-State.

Response to Question 17:

Contrary to Judge Smith's assertion, the portion of the Third Circuit's decision in U.S. v. Nobel, 696 F.2d 231, 235-36 (3d. Cir. 1981) that holds that a judge violates 28 U.S.C § 455(a) by ruling on a case despite owning stock in the fully compensated victim of a crime, is not "dicta." This was a holding of the Third Circuit, necessary to reach and decide the question of whether or not the parties had waived this violation by the judge. These are the Third Circuit's words: "[w]e adopt the view that a judge who owns a substantial interest in the victim of a crime must disqualify himself or herself in the subsequent criminal proceeding because the strict overarching standard imposed by section 455(a) requires that the appearance of impartiality be maintained." 696 F.2d at 235-236.

Mid-State Bank, as custodian of $71 million in school district money fraudulently lost by Black, was either: (1) a victim of Black's fraud (in which case Nobel would apply); or (2) a co-conspirator with Black (in which case, recusal was plainly required by 28 U.S.C. 455(a) and (b)). Judge Smith is correct in asserting that Mid-State's precise role in Black's fraud was not fully known at the point he recused. But more than enough was known at the time he recused to make it clear that, under binding Third Circuit precedent, Judge Smith was required to recuse under 28 U.S.C. § 455.

Responses to questions regarding USA v. Black

In his response to question 18, Judge Smith asserts that "any possible effect of USA v. Black on Keystone Financial would have been purely speculative."

But, at the time Judge Smith presided over USA v. Black, there were civil fraud suits seeking $71 million pending against Keystone and Mid-State stemming from their role in the crime at issue in USA v. Black. These lawsuits posed a serious enough threat to Keystone that, in November 1998, Keystone started informing the SEC and its own stockholders of losses stemming from this litigation that "cannot be reasonably estimated at this point."

It is not at all speculative to think that discovery and testimony in USA v. Black could have changed the results in those pending civil suits and that, as the presiding judge, Smith could have ruled in ways that helped or harmed Keystone's (and thus Judge Smith's) financial interests. As noted by Black's counsel in seeking Smith's recusal: "This case will likely have a substantial impact on the numerous civil cases filed against Mid-State Bank arising out of the same factual scenario, and Mid-State Bank therefore has a keen interest in the outcome of this litigation and the efficacy of their witnesses' testimony."

Judge Smith asserts that 28 U.S.C. § 455 did not require him to recuse himself from USA v. Black earlier than he did. Under his reading of the statute, a judge can: (1) own a significant amount of stock in a bank; (2) be married to an officer of that bank; and (3) preside over a criminal case while the bank is being sued for its role in the crime at issue. This is not a plausible interpretation of Section 455.

In his response to Question 21, Judge Smith defends his decision not to disclose his financial interests in Keystone and Mid-State in his recusal order in USA v. Black, stating that "[he] was thinking only of the possibility that the position my wife then held with Mid-State might create a future appearance of impropriety, if Mid-State had a prominent evidentiary role in the litigation." This begs the question of why? Keystone was disclosing risks from this litigation to the SEC and its stockholders (including Judge Smith). The recusal motion filed by Black's lawyer highlights the financial impact the case would have on the "numerous civil cases filed against Mid-State." Judge Smith's financial interests in Keystone were plainly relevant to the recusal motion filed by Black.

Despite his earlier recusal in SEC v. Black, Judge Smith presided over USA v. Black for 4 months, issued several orders including a detailed trial scheduling order, and recused himself again only after counsel for Black expended the time, effort, expense, and litigation risk of moving for Judge Smith's recusal. In his order granting recusal, Judge Smith goes out of his way to harshly criticize counsel for John Gardner Black for raising recusal issues that Judge Smith believed to be lacking merit. At the same time, Judge Smith failed to disclose the single most important fact that demanded his recusal: his large financial interest in Keystone and Mid-State. He now defends his actions as completely appropriate. This is not acceptable judicial conduct, particularly from a district court judge seeking promotion to a circuit court.

I greatly appreciate your consideration of these views.

Sincerely yours,
Douglas T. Kendall

Enclosures

cc (w/enclosures): Senate Judiciary Committee Members