Friday, October 02, 2015

Court denies suppression challenge, finding shareholder and corporate executive did not have reasonable expectation of privacy in employees' offices, employees' computers, or electronic files located on network server, but reverses and remands for new loss calculation in government contracts fraud case

In a matter of first impression, the Court, in United States v. Nagle, Nos. 14-3184, 14-3422 (3d Cir. Sept. 30, 2015), held that defendant, a shareholder and corporate executive, did not have a reasonable expectation of privacy in his employees' offices, employees' computers, or the electronic files located on the company's network server, as required to challenge the search and seizure of the corporate offices.

Defendants Nagle and Fink were co-owners and executives of concrete manufacturing and construction corporations specializing in state highway construction and mass transit projects. The defendants devised and executed a scheme to defraud the United States Government by obtaining subcontracts set aside for disadvantaged business enterprises (DBE). During the execution of two search warrants at the corporations' compound, eleven employee computers plus the network server were seized and imaged. Defendant Nagle moved to suppress the electronic evidence recovered during these searches. The District Court denied the suppression motion, holding that, while Nagle may have had an expectation of privacy in his official capacity as an officer and executive of the companies, Nagle had no personal expectation of privacy in the seized information.

Following a string of cases from other circuits, the Third Circuit ruled, as a matter of first impression, that a shareholder or company executive may not challenge a search of corporate property based merely on his status as a shareholder or executive. He may only challenge the search if he shows some personal connection to the places searched and material seized and protected those places or materials from outside intrusion. Here, Nagle failed to show that he used the employees' offices or computers or that he ever accessed other employees' emails or files on the network server. Accordingly, because Nagle failed to show a personal connection to the computers or files, he had no reasonable expectation of privacy in those items and no basis to move for suppression.

Turning to the loss analysis, the defendants challenged the District Court's determination that they were responsible for the face value of the DBE contracts received without any credit for actual work performed on the contracts. The Third Circuit disagreed, finding that the amount of loss Nagle and Fink were responsible for was the face value of the DBE contracts minus the fair market value of the services they provided under those contracts. The Court found that such an offset would be due regardless of whether it applied U.S.S.G. §2B1.1 Application Note 3(A) (standard loss definition) or Note 3(F)(ii) (special application note for loss in "government benefit" cases). Accordingly, the Court vacated the defendants' sentences and remanded for a new loss calculation applying the appropriate credit for the fair market value of the services rendered under the contracts.