The Family-owned Business, the FBI Searches and the Motion to Suppress

This post examines a recent decision from the U.S. Court ofAppeals for the 3rd Circuit:  U.S. v. Nagle, 803 F.3d 167 (2015).  The court begins its opinion by explaining how the prosecution arose and what issues are before the Court of Appeals:

Joseph Nagle and Ernest Fink were co-owners and executives of concrete manufacturing and construction businesses. The businesses entered into a relationship with a company owned by a person of Filipino descent. His company would bid for subcontracts on Pennsylvania transportation projects as a disadvantaged business enterprise. If his company won the bid for the subcontract, Nagle and Fink's businesses would perform all of the work.

Fink pled guilty to one count of conspiracy to defraud the United States. Nagle proceeded to trial, where a jury found him guilty of a myriad of charges relating to the scheme. Both defendants filed timely appeals. Nagle challenges the District Court's order denying his motion to suppress electronic evidence discovered during searches of the businesses' offices.

U.S. v. Nagle, supra.  The press release you can find here outlines the charges against Nagle and the facts that, at least allegedly, supported his indictment for, and eventual conviction on, the charges.  It also outlines the penalties the U.S. District Court Judge who had the case imposed on him and on his colleague, Ernest Fink.  And, as the news story you can find here explains, in the opinion this post examines, the Court of Appeals vacated the penalties and remanded the case to the District Court Judge to have them resentenced. 

The Court of Appeals begins its analysis of the case by outlining the background of the prosecution that resulted in these convictions:

The United States Department of Transportation provides funds to state transportation agencies to finance transportation projects. These funds often go towards highway construction, provided through the Federal Highway Administration (`FHWA’), or towards mass transit systems, provided through the Federal Transit Administration (“FTA”). In Pennsylvania, the FHWA provides funds to the Pennsylvania Department of Transportation (PennDOT'), and the FTA provides funds to the Southeastern Pennsylvania Transportation Authority (`SEPTA’).

Federal regulations require states that receive federal transportation funds to set annual goals for participation in transportation construction projects by disadvantaged business enterprises (`DBEs’). 49 C.F.R. § 26.21. A DBE is a for-profit small business that is at least 51% owned by an individual or individuals who are both socially and economically disadvantaged and whose management and daily operations are controlled by one or more of the disadvantaged individuals who own it. 46 C.F.R. § 26.5. A state agency will announce a DBE-participation goal when soliciting bids for a contract, and bids for the contract must show how the contractor will meet the goal. If the prime contractor is not a DBE, this is usually demonstrated by showing that certain subcontractors that will work on a contract are DBEs. States themselves certify businesses as DBEs. 46 C.F.R. § 26.81. A business must be certified as a DBE before it or a prime contractor can rely on its DBE status in bidding for a contract. 46 C.F.R. § 26.81(c).

Most importantly here, in order to count towards a contract's DBE participation, a DBE must `perform[ ] a commercially useful function on [the] contract.’ 46 C.F.R. § 26.55(c). Therefore, a certified DBE whose “role is limited to that of an extra participant in a transaction, contract, or project through which funds are passed in order to obtain the appearance of DBE participation” cannot be counted towards DBE participation. 46 C.F.R. § 26.55(c)(2).

U.S. v. Nagle, supra.  

The court then outlines the events that led to this prosecution:

In the 1950's Joseph Nagle's grandfather established Schuylkill Products Inc. (`SPI’), a Pennsylvania-incorporated S-corporation, in Cressona, Pennsylvania. SPI manufactured concrete beams that are used in highway construction projects. In the 1980's, the Nagle family also established CDS Engineers, Inc. (`CDS’), to operate as a construction company for the concrete beams SPI manufactured. By 2004, CDS was a wholly-owned subsidiary of SPI. Neither SPI nor CDS qualified as or was certified as a DBE in any state.

In 1993, SPI was owned by two people: Nagle's father, Gordon, who owned 50.1% of SPI, and Fink, Nagle's uncle by marriage, who owned 49.9%. Gordon Nagle was the President and Chief Executive Officer of SPI, while Fink served as Vice–President and General Manager of SPI. That year, SPI entered into an arrangement with a company called Marikina Engineers and Construction Corp. (`Marikina’). Marikina was a Connecticut corporation owned and managed by Romeo P. Cruz, an American citizen of Filipino descent. Because Cruz was of Filipino descent, Marikina qualified as a DBE for FHWA and FTA projects. Marikina was certified as a DBE in Connecticut and Pennsylvania, among other states.

SPI and Marikina agreed that Marikina would bid to serve as a subcontractor for PennDOT and SEPTA contracts that had DBE participation requirements. If Marikina was selected for the subcontracts, SPI and CDS would perform all of the work on those contracts. SPI and CDS would pay Marikina a fixed fee for its participation but otherwise keep the profits from the scheme.

In practice, SPI identified subcontracts that SPI and CDS could fulfill, prepared the bid paperwork, and submitted the information to prime contractors in Marikina's name. SPI used stationery and email addresses bearing Marikina's name to create this correspondence. It also used Marikina's log-in information to access PennDOT's electronic contract management system. CDS employees who performed construction work on site used vehicles with magnetic placards of Marikina's logo covering SPI's and CDS's logos. SPI and CDS employees used Marikina business cards and separate cell phones to disguise whom they worked for. They also used a stamp of Cruz's signature to endorse checks from the prime contractors for deposit into SPI's bank accounts. Although Marikina's payroll account paid CDS's employees, CDS reimbursed Marikina for the labor costs.

In 2004, Gordon Nagle passed away. Joseph Nagle inherited his father's 50.1% stake in SPI and assumed the titles of President and Chief Executive Officer. At that time, Fink became the Chief Operating Officer and Chairman of the Board. SPI's relationship with Marikina lasted until March 2008. Between 1993 and March 2008, Marikina was awarded contracts under the PennDOT DBE program worth over $119 million and contracts under the SEPTA DBE program worth over $16 million. Between 2004 and March 2008, Marikina was awarded contracts under the DBE programs worth nearly $54 million.

U.S. v. Nagle, supra.  

The Court of Appeals then outlines the events that led to Nagle’s motion to suppress:

SPI's and CDS's offices were all located in the same compound in Cressona. None of the offices was open to the public. SPI's administrative office was a converted, two-story white house. The house was subdivided into offices and cubicles. Between twelve and fifteen people worked in the building, as well as Nagle and Fink. CDS's administrative office was also a converted house, owned by Fink and leased to CDS. The compound contained a transportation building, a production building, and various parking lots. In total, SPI and CDS employed around 140 individuals who worked in the compound.

SPI and CDS purchased a computer for nearly every employee who required one. They also created a shared network over a server. The twenty-five employees who had access to the network needed a user identification and password to access it. The network itself was compartmentalized into drives. Only five people, including Nagle and Fink, had access to all of the drives on the network. Emails sent from or received by SPI or CDS accounts were stored on the network as well. Nagle received a company computer, which he took home every night and used for business and personal purposes. He never used any other employee's computer.

In October 2007, the Federal Bureau of Investigation  ('FBI') executed two search warrants at SPI's and CDS's offices. The warrants authorized agents to seize `business records of [Marikina] and all predecessors and affiliated operating entities, [SPI,] and CDS . . . including any and all’ financial documents; contracts and invoices; payroll documents and personnel files; email and correspondence; phone records and calendars; and `[c]omputers and computer equipment.’ . . . During their search of SPI's and CDS's offices pursuant to the warrants, agents found eleven computers and the shared network server. The agents imaged the computers on site. Nagle had brought his computer home with him before the search, so it was not seized and imaged.

U.S. v. Nagle, supra.  

The next development was that, in November of 2009, a

federal grand jury in the Middle District of Pennsylvania returned an indictment against Nagle and Fink. The indictment charged them with one count of conspiracy to defraud the United States, in violation of 18 U.S. Code § 371; eleven counts of wire fraud, in violation of 18 U.S. Code § 1343; six counts of mail fraud, in violation of 18 U.S. Code § 1341; one count of conspiracy to engage in unlawful monetary transactions, in violation of 18 U.S. Code § 1956(h); and eleven counts of engaging in unlawful monetary transactions, in violation of 18 U.S. Code § 1957. Cruz, the owner of Marikina; Dennis Campbell, an SPI executive; and Timothy Hubler, a CDS executive, were indicted separately, pled guilty to the charges, and agreed to cooperate against Nagle and Fink.

Nagle and Fink jointly moved to suppress the electronic evidence that the FBI agents had imaged from SPI's and CDS's computers and network server during the October 2007 search. They argued (1) that the warrants were unconstitutional general warrants, (2) that the warrants were unconstitutionally overbroad, and (3) that the agents had executed the warrant in an unreasonable manner. The United States opposed the motion, contesting each of the arguments and also suggesting that Nagle and Fink lacked the requisite privacy interest to challenge the searches. The District Court held a hearing and took evidence. Two FBI agents and an FBI employee testified about the preparation and execution of the warrants as well as the FBI's review and analysis of the imaged data. Nagle and Fink testified about the history and structure of SPI and CDS, the two companies' computers and network use, and their own use of the companies' computer infrastructure.

U.S. v. Nagle, supra.  

After the hearing, Fink pled guilty to

one count of conspiracy to defraud the United States, in violation of 18 U.S. Code § 371. Nagle, however, continued his challenge to the search. In September 2010, the District Court denied Nagle's suppression motion. The District Court concluded Nagle failed to show he had a personal expectation of privacy in the electronic information that the agents had imaged from SPI's and CDS's computers and network server. The District Court reasoned that Nagle never used the other employees' computers and that `[w]hile [Nagle] may have had the expectation that, as President and CEO of SPI and CDS, the contents of the companies' server would remain private, he had this expectation in his official capacity as an executive and officer of these corporations as opposed to himself as an individual.’ . . . Therefore, the District Court held that `Defendant has not demonstrated that any of his Fourth Amendment rights were violated, and thus his ownership of the companies whose records were seized is irrelevant.’ . . .

On April 5, 2012, after a trial, a jury found Nagle guilty on all of the charges presented in the indictment except for four of the wire fraud charges.

U.S. v. Nagle, supra (emphasis in the original). The District Court Judge later sentenced Nagle to “84 months of incarceration, one year of supervised release, a $25,000 fine, a $2,600 special assessment, and no restitution.”  U.S. v. Nagle, supra.  

The Court of Appeals began its analysis of Nagle’s appeal of the District Court’s denial of his motion to suppress by explaining that a defendant who

seeks to suppress evidence allegedly seized or discovered in violation of the Fourth Amendment must first demonstrate that the Government physically occupied his property for the purpose of obtaining information or that he had `a legitimate expectation of privacy that has been invaded by government action.’ Free Speech Coal., Inc. v. Att'y Gen., 677 F.3d 519 (U.S. Court of Appeals for the 3d Circuit 2012). . . .To have a legitimate expectation of privacy, the defendant must show `an actual or subjective expectation of privacy in the subject of the search or seizure’ and show that `this expectation of privacy is objectively justifiable under the circumstances.’ U.S. v. Donahue,  764 F.3d 293 (U.S. Court of Appeals for the 3d Circuit 2014). . . . In other words, the expectation of privacy must be `one that society is prepared to recognize as reasonable.’ Smithv. Maryland, 442 U.S. 735 (1979).

No one disputes that SPI and CDS, as corporate entities, could challenge the search of their respective offices, whether through a motion to suppress—had they been charged with a crime—or through a Bivens action. Nagle argues that because he is the majority owner of the small, family-operated corporations, he should have the same ability to challenge the searches that the corporations do. In other words, Nagle says, because the Government physically intruded on the corporations' property and otherwise invaded their legitimate expectations of privacy, and because he is the majority owner of the corporations, the Government physically intruded on his property and otherwise invaded his legitimate expectation of privacy. In support of that argument, Nagle cites a line from New York v. Burger, 482 U.S. 691 (1987): `An owner or operator of a business . . . has an expectation of privacy in commercial property, which society is prepared to consider to be reasonable.’

U.S. v. Nagle, supra (emphasis in the original).

The court also noted that the above expectation of privacy in commercial property

`is different from, and indeed less than, a similar expectation in an individual's home.’ New York v. Burger, supra.  Although the Supreme Court has not clarified precisely how much `less] of an expectation of privacy a business owner has in commercial premises, we see a consensus among the Courts of Appeals that a corporate shareholder has a legitimate expectation of privacy in corporate property only if the shareholder demonstrates a personal expectation of privacy in the areas searched independent of his status as a shareholder.

In United States v. SDI Future Health, Inc., 568 F.3d 684 (U.S. Court of Appeals for the 9thCircuit 2009), the defendants were part-owners of an incorporated business and sought to challenge a warrant authorizing a search of the corporation's premises. United States v. SDI Future Health, Inc., supra. The Ninth Circuit rejected their argument that `mere ownership and management of’ the corporation allowed them to challenge the search of the corporation's premises. United States v. SDI Future Health, Inc., supra. This was because `a reasonable expectation of privacy does not arise ex officio, but must be established with respect to the person in question.’ United States v. SDI Future Health, Inc., supra.  

However, the defendants could still show a legitimate expectation of privacy in the corporation's property if they `show[ed] some personal connection to the places searched and the materials seized” and “took precautions on [their] own behalf to secure the place searched or things seized from any interference without [their] authorization.’ United States v. SDI Future Health, Inc., supra.  The court remanded the matter for further fact finding.

U.S. v. Nagle, supra.  

The Court of Appeals went on to point out that the cases discussed above

all support a common proposition: a shareholder may not challenge a search of corporate property merely because he is a shareholder, but he may challenge the search if he `show[ed] some personal connection to the places searched and the materials seized,’ United States v. SDI Future Health, Inc., supra, and protected those places or materials from outside intrusion.

U.S. v. Nagle, supra.  

It therefore held that

[w]e find this line of authority persuasive and adopt it. To show he can challenge the search of SPI's and CDS's offices and the seizure of the employees' computers and network server as a shareholder and executive, Nagle must show a personal connection to the place searched or to the item seized and that he attempted to keep the place and item private. Nagle has failed to meet this standard.

The employees' computers that were seized and imaged were discovered in the employees' offices. Nagle did not show that he used these employees' offices, nor that he used their computers or accessed their files. Accordingly, he failed to show a personal connection to the computers or the place where they were discovered.

The server is, however, slightly more complicated. The server was not seized from his office. Therefore, Nagle must show a personal connection to the electronic files located on the server and that he kept them private in order to demonstrate a reasonable expectation of privacy. Nagle failed to show that he ever accessed other employees' files and emails on the server and, therefore, failed to establish a personal connection to their files. Although Nagle certainly had a personal connection to his own files and emails located on the server, he failed to show what efforts he made to keep his materials private from others. Although the server was password protected and only five individuals, including Nagle, had access to every drive on the server, Nagle did not establish where his files and emails were located on the server and how many people had access to those drives. Thus, Nagle did not meet his burden of proof to demonstrate a subjective expectation of privacy in his files and emails on the server.

U.S. v. Nagle, supra (emphasis in the original).

The Court of Appeals therefore held that,

[f]or these reasons, we conclude that Nagle failed to establish that he had a reasonable expectation of privacy in the places searched and items seized or that the Government intruded onto his property. . . . Therefore, the District Court properly denied the motion to suppress.

U.S. v. Nagle, supra (emphasis in the original).