Could Mutual Benefits Be Keechl's "Black Eye"? - 04/25/09
A few years ago practically no one had heard of the doctrine of honest services fraud or Mutual Benefits Corporation. Now HSF and Mutual Benefits are part of the everyday political lingo of South Florida, and local politicians are scared to death.
Public ethics is commonly seen as a group of specific legal proscriptions provided for in state or local laws: for example, don't vote if you have a conflict of interest. This is the underlying philosophy of most codes of ethics applicable to public officials and employees.
Another way to look at public ethics is as a civic obligation inherent in public office. Or, as a U.S. appellate court stated in a 1999 decision: "Public officials inherently owe a fiduciary duty to the public to make governmental decisions in the public's best interest."
In this view, a public official has the duty to provide honest services while in office and to do his best to assure public confidence in the government. The public trust is the imperative. What is in the public trust is determined by prevailing civic values like integrity and professionalism.
As I shall explain further below, the potential reach of HSF as provided in law is very broad and may include conduct not specifically prohibited by law (as in a code of ethics). However, there is no settled jurisprudence on this question as of now.
A document prepared by the Alaska Citizens for Ethical Government summarized this issue:
Although the “paradigm case of honest services fraud is the bribery of a public official,” the statute has been used to address a wide range of conduct that goes beyond the paradigm. [Thus, the 12 circuits of the U.S. Court of Appeals] have widely differing -- and arguably conflicting -- views of how the statute is properly interpreted. Because of the expansion of the statute’s reach, the split among the circuits may continue to widen, and the limits of the statute may be difficult to discern.
No one, to my knowledge, has accused Vice Mayor Ken Keechl of not giving honest services as a public official. However, a brewing series of cases involving securities and honest services fraud could ensnare Keechl politically. Keechl, a Democrat, represents parts of Deerfield Beach on the county commission.
Keechl is expected to run for re-election in 2010 and has already collected tons of cash for his campaign. He will likely face vigorous Republican competition, probably from either Chip LaMarca or former LBTS mayor Oliver Parker. LaMarca is a Lighthouse Point commissioner and chair of the Broward Republican Party.
If there were any district where a Republican has a chance to win, it's District 4, the eastern-most district in Broward County. Registered Democrats outnumber Republicans 2:1 in Broward, but Republicans in District 4 trail Democrats by only four percentage points. Moreover, about a third of D-4's registered voters are independents.
D-4 also offers a good opportunity for an openly gay Democrat for commission because it includes Wilton Manors, which has the third largest per capita gay population in the United States. This was part -- or maybe most -- of the story in 2006, when Keechl upset incumbent Republican commissioner Jim Scott.
What exactly is honest services fraud?
It's a federal crime which was used to prosecute a number of Palm Beach county officials. HSF was the basis of the high-profile prosecution of Washington lobbyist Jack Abramoff in 2006. It has also been used to prosecute a case involving a public pension fund and a number of pay-to-play schemes.
Rumors abound -- which I believe are true -- that the feds are now looking closely at Broward, especially in light of the Mutual Benefits scandal (more on this later) and the connection between this case and some prominent Broward County politicians, including Ken Keechl.
Honest services fraud is a type of mail fraud in federal law. Mail fraud is fraud or attempt to defraud using the mail or almost any type of interstate wire communication, including phone or Internet. A brief history: In 1987, the Supreme Court ruled that schemes to defraud citizens of an intangible right to honest government services by public officials were not encompassed by the mail and wire fraud statute as then written (McNally v. U.S.). Thereafter, Congress enacted § 1346, Title 18 of the U.S. Code, specifically for the purpose of overruling McNally.
§ 1346 is pretty direct. It provides that "For the purposes of [the mail fraud law], the term 'scheme or artifice to defraud' includes a scheme or artifice to deprive another of the intangible right of honest services."
§ 1346 is also very broad and this has been the basis of many of the challenges to the statute. So far the courts, including the U.S. Supreme Court, have not been moved by the vagueness argument, and this is one reason why local public officials are so nervous. Because of the disinterest of local prosecutors in public corruption in the past, officials are used to the idea that they can do just about anything unless it is an out-and-out crime like bribery. Thus the possibility of prosecution under HSF -- unknown in its potential reach -- has got some official's knickers in a twist. If Broward County officials have problems with the concept of avoiding even the appearance of impropriety (which is provided in a county ordinance), as reported, how can they understand something as abstract as honest services fraud?
The Mutual Benefits case
Many readers know about the Mutual Benefits case. This was Broward County's mini-version of the Madoff Ponzi scheme. Actually, it wasn't so mini, as it involved nearly a billion dollars and 30,000 investors, according to the Department of Justice.
For those readers who have lost track of the case, we offer a refresher course, and how at least one county official was possibly involved with it. Then we'll get around to Mr. Keechl.
Mutual Benefits Corporation was a viatical settlement operation. Joel Steinger, a Fort Lauderdale resident and a close friend of former state Senator Steve Geller, was a principal of the company. A viatical contract is one of those deals where a senior citizen or terminally ill person sells his life insurance policy to investors at a price discounted from the face value of the policy. The investors pay the premiums and get the money when the insured, or viator, dies. The bulk of Mutual Benefit's viators, according to one source, were AIDS patients. This was one of the company's problems: because of medical advances that prolong the life of AIDS patients, the company often miscalculated when the viators would die. Thus, the company used money from new investors to cover the extended premiums on policies held by older investors.
In 2004, the SEC and federal marshals raided Mutual Benefit's offices and shut it down. The company was accused of running a Ponzi scheme and with several violations of securities laws. It was also suspected of money laundering.
Joel Steinger and other principals were indicted in December, 2008. This is not the first time for Steinger; he was convicted of wire fraud in 1981.
The Broward County official most closely involved with the Mutual Benefits case is County Mayor Stacy Ritter, whose husband, Russ Klenet, was the lobbyist for Mutual Benefits. When Mrs. Klenet was a state legislator, she voted to approve a bill which contained a rider designed to protect Steinger's company from regulatory scrutiny. This obscure amendment was attached to a complex piece of legislation as a result of the efforts of Mr. Klenet on behalf of Mutual Benefits.
Further, Mutual Benefits paid Mr. and Mrs. Klenet handsomely for their representation and paid for extensive renovations to the Klenet's home in Parkland. Depositions related to civil suits in the case revealed that the $100,000 house renovations were a bonus to the Klenets made on the suggestion of Mr. Klenet himself. This "bonus" was paid before Mayor Ritter's vote in the legislature. Her vote, therefore, is suspect and could inspire further investigation by federal authorities. It could already be happening.
(It should be noted that the bill passed the House with a vote of 111-1, so that Ritter's vote was not in any sense decisive.)
In fact, the Klenets may have had an even deeper involvement in the Mutual Benefits case. According to a claim made in a civil suit filed last year, Klenet borrowed around $ 1 million from the domestic partner of Steinger's brother, also a principal in Mutual Benefits, to buy another viatical company. The law suit alleges that Klenet then sold the company, but never repaid the loan. Also, in addition to the bonus paid to Klenet in the form of renovations to his house, he and has wife, Mayor Ritter, got some other "mutual benefits" from Steinger which are detailed in numerous news reports.
Another Broward County politician implicated in the case is Joel Steinger's bosom buddy, Steve Geller. Geller allegedly secured Klenet his job as lobbyist for Mutual Benefits.
Geller is a former State Senator who is now running for county commission against veteran commissioner Sue Gunzburger in District 6. Geller is one of the most pro-development politicians in Broward County. It was Geller who tried to sneak legislation through the state legislature that would have effectively eliminated county oversight over coastal development. Apparently Mr. Geller is an expert at sneaky amendments.
All of these relationships -- the Klenets with Steinger, Steinger with Geller, Geller with the Klenets -- against the background of Mutual Benefits' history of fraud and lawlessness are the architecture of a criminal enterprise in which public officials were involved. In addition to many securities law violations, Mutual Benefits and its subsidiaries have been accused in a class action suit with diverting new investor funds to cover shortfalls on the funds escrowed to cover life insurance premiums on policies assigned to earlier investors (in other words, ran a Ponzi scheme); misleading investors; commingling funds; failing to disclose Steinger's criminal conviction to investors; and selling securities through unlicensed agents. On top of this, Mutual Benefits may have used public officials like Stacy Ritter to advance and protect their interests in Tallahassee.
Ken Keechl's involvement with this corrupt enterprise was on a different level and was prior to his entry into politics as a candidate or public official. Keechl acted on behalf of Mutual Benefits in a number of civil actions, and continued to act as its legal representative after the company came under investigation. The scope of Keechl's work for Mutual Benefits is covered in some detail by Bob Norman in a New Times article which is available online.
But, good lawyers sometimes represent bad clients. Attorneys often work for unpopular clients and causes. At the time he did this, Keechl worked in a firm that had been hired to represent Mutual Benefits in certain civil actions. The firm also acted as Mutual Benefits' outside corporate counsel, but Keechl mostly dealt with the law suits. So the unknown factor is what, if anything, Keechl knew about the illegal activities of this client at the time he represented them in court. He denies involvement.
Still, it's hard to believe he did not know something in light of what's happened. What's happened is that Keechl's law partner, Michael McNerney, who worked closely with him on these lawsuits, has been charged by federal authorities along with Steinger and other defendants in the Mutual Benefits case. According to the Justice Department, McNerney "assisted MBC [Mutual Benefits] with the marketing of its fraudulent investment by meeting with investors in his Fort Lauderdale office and encouraging them to purchase MBC investments."
On the other hand (as far as I know), there have been no official complaints of wrongdoing with respect to Keechl's practice as an attorney before he assumed office, including his representation of Mutual Benefits. Keechl was not named in a lawsuit filed against the Brinkley, McNerney law firm by Mutual Benefits investors, which was settled out of court; and was not named in the indictments.
Nonetheless, there could be negative political fallout for Mr. Keechl if Republicans care to make an issue of it in the election next year. Reporter Norman's take on this story is that Keechl's representation of Mutual Benefits was as scummy as the client he represented.
Unlike city elections, county elections are partisan. Republicans in 2010 will be gunning for Keechl to regain the D-4 seat. With the indictments of Steinger and others associated with Mutual Benefits, and the possible investigation of Ritter and her husband in connection with this case, the scandal could be high profile news for a while.
I can think of no good reason why Republicans would not go the full distance to make certain that voters know about Keechl's past connection to the Mutual Benefits scandal.
Is it fair? Most attorneys who have been in practice for a while have represented at least one unsavory client. Both sides of the issue were played out in this Sun-Sentinel article by Vanessa Blum (10/28/06) when Keechl's connection to the fraudulent company was raised by Jim Scott during a 2006 campaign debate:
Keechl called the attack "irrelevant" and a "desperate attempt" by Scott to change the subject.
"As a lawyer, I represented hundreds of clients," he said. "What does this have to do with the future of Broward County?"
Judith Stern, a campaign consultant for Scott, said voters should know Keechl's former law firm paid $10 million to settle a class action suit stemming from its representation of Mutual Benefits.
"This guy keeps on attacking Jim's ethics and Jim's integrity and fails to disclose what went on with his own practice of law," Stern said.
"You can't have it both ways. You can't say your credentials that make you qualified as a candidate come from managing a law firm and then try to distance yourself when something happens to your firm," [Reid]Cocalis [an attorney and registered Democrat] said. "I think it's a little hypocritical."
Keechl said if his client was engaging in a crime, he never saw evidence of it.
"They were entitled to be represented and they were. That's what lawyers do," he said.
Lawyers representing aggrieved Mutual Benefits investors said Brinkley McNerney partners knew the company made false statements to investors and that executives were secretly pocketing millions of dollars. [Keechl was a partner.]
Miami attorney Michael Tein, who represents [the Brinkley McNerney law firm], said the decision to settle was made by insurers "as a matter of convenience" and does not mean Keechl or other firm lawyers did anything wrong.
"I think it's irresponsible and reprehensible for Ken's opponents to even suggest he did anything wrong simply because he represented Mutual Benefits," Tein said. "Any line drawing between the firm and the investigation into this former client is absolutely misguided."
Jacksonville attorney Henry Coxe III, president of the Florida Bar Association, called it "fundamentally unfair" to attack lawyers who run for office based on their clients.
"Any attorney's obligation is to aggressively represent his or her client," he said. "If the reverse were the case, many, many people and companies would go without counsel, which isn't the way our system is organized."
Not everyone agrees. Samuel Popkin, a political science professor at the University of California, San Diego, said the issue is relevant and raises questions about Keechl's judgment.
"Either he didn't know what his client was up to or he didn't care," Popkin said. "I don't know which is worse."
[Some portions of the article are omitted.]
The difference, especially, between then and now is that now indictments have been handed down. Keechl's former law partner and co-worker has been named as a defendant in the case. This implies that Keechl's law firm (of which he was partner and not a mere gofer) was more involved in the messy parts of this story than we knew at the time of the 2006 election.
So will his involvement with Mutual Benefits be his "black eye" in the election next year? Between the now now and the now in November, 2010, there could be further revelations. I doubt there will ever be a revelation that would completely erase the suspicion in the minds of skeptics that Keechl was more than an innocent bystander in this affair.