Monday, July 07, 2014

Tax Evasion, the Mirror Image and "Personal Computer Records"

In 2009, a federal grand jury indicted Stavros M. Ganias on two counts of tax evasion in violation of 26 U.S. Code § 7201.  U.S. v. Ganias, 2014 WL 2722618 (U.S.Court of Appeals for the 2d Circuit 2014). 
After he was sentenced to “twenty-four months imprisonment”, Ganias appealed, arguing, in part, that “his 4th Amendment rights were violated when the Government seized his personal computer records and then retained them for more than two-and-a-half years”. U.S. v. Gania, supra.
The Court of Appeals begins its opinion by explaining that in the 1980s, after working for
the Internal Revenue Service (`IRS’) for some fourteen years, Ganias started his own accounting business in Wallingford, Connecticut. . . . In 1998, he began providing services to James McCarthy and two of [his] businesses, American Boiler and Industrial Property Management (`IPM’). IPM had been hired by the Army to provide maintenance and security at a vacant Army facility in Stratford, Connecticut.

In August 2003, the Criminal Investigative Command . . . received a tip from a confidential source that individuals affiliated with IPM were . . . stealing copper wire and other items from the Army facility and billing the Army for work IPM employees performed for American Boiler. The source alleged evidence of the wrongdoing could be found at the offices of American Boiler and IPM, as well as at the offices of `Steve Ganias [sic],’ who `perform[ed] accounting work for IPM and American Boiler'. . . . 

[T]he Army commenced an investigation. Army investigators obtained several search warrants, including one to search the offices of Ganias's accounting business. The warrant, issued by the United States District Court for the District of Connecticut and dated November 17, 2003, authorized the seizure from Ganias's offices of:

All books, records, documents, materials, computer hardware and software and computer associated data relating to the business, financial and accounting operations of [IPM] and American Boiler. . . .

The warrant was executed two days later. Army computer specialists . . . helped gather the electronic evidence. The agents did not seize Ganias's computers; instead, the computer specialists made . . . forensic mirror images of the hard drives of all three of Ganias's computers. . . . [T]he investigators copied every file on all three computers -- including files beyond the scope of the warrant, such as . . . personal financial records.

Ganias was present as [they] collected the evidence, and he expressed concern about the scope of the seizure. In response, one agent `assured’ Ganias the Army was only looking for files `related to American Boiler and IPM.’ Everything else, the agent explained, `would be purged once they completed their search’ for relevant files.

Back in their offices, the Army computer [searching] the offices of IPM and American Boiler) onto `two sets of 19 DVDs,’ which were `maintained as evidence.’ Some eight months later, the Army Criminal Investigation Lab finally began to review the files.

In the meantime, while reviewing the paper documents retrieved from Ganias's offices, the Army discovered suspicious payments made by IPM to an unregistered business, which was allegedly owned by an individual who had not reported any income from that business. Based on this evidence, in May 2004, the Army invited the IRS to `join the investigation’ of IPM and American Boiler and gave copies of the imaged hard drives to the IRS so it could conduct its own review and analysis. The Army and IRS proceeded, separately, to search the imaged hard drives for files that appeared to be within the scope of the warrant and to extract them for further review.

By December 2004, . . . the Army and IRS investigators had . . . extracted the computer files that were relevant to IPM and American Boiler and thus covered by the search warrant. The investigators were aware that, because of the constraints of the warrant, they were not permitted to review any other computer records. Indeed, [they] were careful, at least until later, to review only data covered by the November 2003 warrant.

They did not . . . purge or delete the non-responsive files. To the contrary, the investigators retained the files because they `viewed the data as the government's property, not Ganias's property.’ Their view was that while items seized from an owner will be returned after an investigation closes, all of the electronic data here were evidence that were to be protected and preserved.

As one agent testified, `[W]e would not routinely go into DVDs to delete data, as we're altering the original data that was seized. And you never know what data you may need in the future. . . . I don't normally go into electronic data and start deleting evidence off of DVDs stored in my evidence room.’ The computer specialists were never asked to delete . . . those files that did not relate to IPM or American Boiler.

In late 2004, IRS investigators discovered accounting irregularities regarding transactions between IPM and American Boiler in the paper documents taken from Ganias's office. After subpoenaing and reviewing the relevant bank records in 2005, they began to suspect Ganias was not properly reporting American Boiler's income. . . .

[O]n July 28, 2005, some twenty months after the seizure of his computer files, the Government officially expanded its investigation to include possible tax violations by Ganias. Further investigation in 2005 and early 2006 indicated Ganias had been improperly reporting income for both of his clients, leading the Government to suspect he might have been underreporting his income.

At that point, the IRS case agent wanted to review Ganias's personal financial records and knew, from her review of seized computer records, they were among the files in the DVDs copied from Ganias's hard drives. The case agent was aware . . . that Ganias's personal financial records were beyond the scope of the November 2003 warrant, and consequently did not believe that she could review the non-responsive files, even though they were already in the Government's possession.

In February 2006, the Government asked Ganias and his counsel for permission to access certain of his personal files that were in the materials seized in November 2003. Ganias did not respond, and thus, on April 24, 2006, the Government obtained another warrant to search the preserved images of Ganias's personal financial records taken in 2003.

At that point, the images had been in the Government's possession for almost two-and-a-half years. Because Ganias had altered the original files shortly after the Army executed the 2003 warrant, the evidence obtained in 2006 would not have existed but for the Government's retention of those images.
U.S. v. Ganias, supra. If you would like an overview of how an IRS criminal investigation is initiated and conducted, check out this site.
In February 2010, Ganias moved to suppress the computer files described above. U.S. v. Ganias, supra. The District Court Judge who had the case held a two-day hearing on the motion and denied it on April 14, 2010.  U.S. v. Ganias, supra.
The Court of Appeals began its analysis of Ganias’ appealing the denial of his motion to suppress by explaining that the 4th Amendment to the U.S. Constitution
protects the rights of individuals `to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures.’ U.S. Const. amend. IV. . . .  A search occurs when the Government acquires information by either `physically intruding on persons, houses, papers, or effects,’ or otherwise invading an area in which the individual has a reasonable expectation of privacy. See Florida v. Jardines, 133 S.Ct. 1409 (2013); see also Katz v. U.S., 389 U.S. 347 (1967).  

A seizure occurs when the Government interferes in some meaningful way with the individual's possession of property. U.S. v. Jones, 132 S.Ct. 945 (2012). Subject to limited exceptions, a search or seizure conducted without a warrant is presumptively unreasonable. See Kyllo v. U.S., 533 U.S. 27 (2001).

We must construe the 4th Amendment `in [ ] light of what was deemed an unreasonable search and seizure when it was adopted, and in a manner which will conserve public interests as well as the interests and rights of individual citizens.’ Kyllo v. U.S. supra.

Applying 18th Century notions about searches and seizures to modern technology, however, is easier said than done, as we are asked to measure Government actions taken in the `computer age’ against 4th Amendment frameworks crafted long before this technology existed. As we do so, we must keep in mind that `the ultimate touchstone of the 4th Amendment is reasonableness.’ Missouri v. McNeely, 133S.Ct. 1552 (2013). Because the degree of privacy secured to citizens by the 4th Amendment has been impacted by the advance of technology, the challenge is to adapt traditional 4th Amendment concepts to the Government's modern, more sophisticated investigative tools.
U.S. v. Ganias, supra.
The court further explained that the  
`chief evil that prompted the framing and adoption of the 4th Amendment was the “indiscriminate searches and seizures” conducted by the British “under the authority of general warrants.’’’ U.S. v. Galpin, 720 F.3d 436 (U.S. Court of Appeals for the 2d Circuit 2013) (quoting Paytonv. New York, 445 U.S. 573 (1980)). General warrants were . . . `not grounded upon a sworn oath of a specific infraction by a particular individual, and thus not limited in scope and application.’ Maryland v. King, 133 S.Ct. 1958 (2013).

The British Crown . . . used these questionable instruments to enter a political opponent's home and seize all his books and papers, hoping to find . . . evidence of criminal activity. See Stanford v. Texas, 379 U.S. 476 (1965). The Framers abhorred this practice, believing `papers are often the dearest property a man can have’ and that permitting the Government to `sweep away all papers whatsoever,’ without any legal justification, `would destroy all the comforts of society.’ Entick v.Carrington, 95 Eng. Rep. 807 (C.P.1765).
U.S. v. Ganias, supra.
Getting back to this case, the court also explained that the 4th Amendment guards
against this practice by providing that a warrant will issue only if: (1) the Government establishes probable cause to believe the search will uncover evidence of a specific crime; and (2) the warrant states with particularity the areas to be searched and the items to be seized. . . .

The latter requirement . . . `makes general searches . . . impossible’ because it `prevents the seizure of one thing under a warrant describing another.’ U.S. v. Galpin, supra. This restricts the Government's ability to remove all of an individual's papers for later examination because it is generally unconstitutional to seize any item not described in the warrant. 
U.S. v. Ganias, supra.
The court then noted that the parties agreed that the personal financial records at issue
in this appeal were not covered by the 2003 warrant, and that they had been segregated from the responsive files by December 2004, before the Government began to suspect Ganias was involved in any criminal activity. . . . Ganias does not directly challenge the Government's practice of making mirror images of computer hard drives when searching for electronic data, but rather challenges the reasonableness of its off-site review.

Accordingly, we need not address whether: (1) the description of the computer files to be seized in the 2003 warrant was stated with sufficient particularity. . . ;  (2) the 2003 warrant authorized the Government to make a mirror image of the entire hard drive so it could search for relevant files off-site; or (3) the resulting off-site sorting process was unreasonably long.
U.S. v. Ganias, supra.
The Court of Appeals noted that, instead,
we consider a more limited question: whether the 4th Amendment permits officials executing a warrant for the seizure of particular data on a computer to seize and indefinitely retain every file on that computer for use in future criminal investigations. We hold that it does not.
U.S. v. Ganias, supra.  It found that if the 2003 warrant authorized the Government
to retain all the data on Ganias's computers on the off-chance the information would become relevant to a subsequent criminal investigation, it would be the equivalent of a general warrant. The Government's retention of copies of Ganias's personal computer records for two-and-a-half years deprived him of exclusive control over those files for an unreasonable amount of time.

This combination of circumstances enabled the Government to possess indefinitely personal records of Ganias that were beyond the scope of the warrant while it looked for other evidence to give it probable cause to search the files. This was a meaningful interference with Ganias's possessory rights in those files and constituted a seizure within the meaning of the 4th Amendment. . . .

We conclude the unauthorized seizure and retention of these documents was unreasonable. The Government had no warrant authorizing the seizure of Ganias's personal records in 2003. By December 2004, these documents had been separated from those relevant to the investigation of American Boiler and IPM.

Nevertheless, the Government continued to retain them for another year-and-a-half until it finally developed probable cause to search and seize them in 2006. Without some independent basis for its retention of those documents in the interim, the Government clearly violated Ganias's 4th Amendment rights by retaining the files for a prolonged period of time and then using them in a future criminal investigation.
U.S. v. Ganias, supra. 
In reaching this result, the court rejected the government’s argument that it
must be allowed to make the mirror image copies as a matter of practical necessity and, according to the Government's investigators, those mirror images were `the government's property.’ . . .

[P]ractical considerations may well justify a reasonable accommodation in the manner of executing a search warrant, such as making mirror images of hard drives and permitting off-site review, but these considerations do not justify the indefinite retention of non-responsive documents. . . .

Without a warrant authorizing seizure of Ganias's personal financial records, the copies of those documents could not become ipso facto `the government's property’ without running afoul of the Fourth Amendment.
U.S. v. Ganias, supra. 
It also rejected the government’s claim that it “cured any defect of the wrongfully retained files” when it obtained the 2006 search warrant.  U.S. v. Ganias, supra.  The court noted that “[i]f the Government could seize and retain non-responsive electronic records indefinitely, so it could search them whenever it later developed probable cause, every warrant to search for particular electronic data would become, in essence, a general warrant.” U.S. v. Ganias, supra. 

For these and other reasons, the Court of Appeals held that “[b]ecause the Government has demonstrated no legal basis for retaining the non-responsive documents, its retention and subsequent search of those documents were unconstitutional.” U.S. v. Ganias, supra.  It therefore reversed the denial of Ganias’ motion to suppress, vacated his conviction and remanded the case for further proceedings. U.S. v. Ganias, supra. 

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