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United States v. Drake

United States District Court, M.D. North Carolina

April 18, 2018

UNITED STATES OF AMERICA
v.
SHANNON MICHELLE DRAKE RONALD KEITH EARNEST ROBERT THOMAS TAYLOR

          MEMORANDUM OPINION AND ORDER

          OSTEEN, JR., DISTRICT JUDGE.

         Defendant Shannon Michelle Drake (“Drake”) has filed several related pretrial motions, including a Motion for Ex Parte Hearing (Doc. 122 (joining Defendant Earnest's Motion (Doc. 115))) and a Motion to Dismiss and Suppress Grand Jury Testimony (Doc. 163).[1] Defendant Drake has also joined in Defendant Earnest's motion to dismiss on Fifth Amendment grounds (Doc. 214).[2] Following a motions hearing, this court requested additional briefing. Defendant Drake filed a supplemental brief, (Doc. 224), to which the Government responded, (Doc. 233). Drake then filed a motion to strike the Government's Response, (Doc. 235), to which the Government responded, (Doc. 237). On April 13, 2018, a motions hearing was held at which the parties addressed the substantive issues within the supplemental briefing as well as the motion to strike. (Minute Entry 04/13/2018.) For the reasons stated herein, both of Drake's motions seeking dismissal of the indictment or suppression of her Grand Jury testimony will be denied and Drake's motion for an ex parte hearing will be denied as moot. Drake's motion to strike will also be denied.

         I. FACTUAL BACKGROUND

         In summary, it is not disputed that during the course of a criminal investigation by the United States beginning in 2012, GrandSouth Bank (“the Bank”) engaged attorney Jim Medford and law firm Smith Moore Leatherwood, LLP (“Smith Moore”) to represent the Bank in that investigation. At that time, Defendant Ronald Earnest (“Earnest”) was President and Drake was an employee of the Bank. It is also undisputed that the Bank was subpoenaed to appear and produce records to a Grand Jury in the Middle District of North Carolina as part of that investigation. These motions by Defendant Drake are all premised upon Drake's allegation that she was represented in her individual capacity during that investigation by Smith Moore; that she was improperly induced to testify before a Grand Jury conducted in the Middle District of North Carolina; and further that she has not waived attorney-client privilege as to various documents now in the custody of the Bank. The United States is seeking production of those documents in preparation for trial.

         As will be explained in more detail below, the United States and a Grand Jury in the Middle District of North Carolina were conducting an investigation into bank fraud and tax violations originating from the prior investigation and eventual prosecution of Gregory Harrison. United States v. Harrison, No. 1:10CR411-1 (M.D. N.C. ). The Grand Jury issued a subpoena to the Bank seeking the production of certain records relating to this earlier investigation. Defendant Drake appeared and testified on two occasions, once in 2012 and again in 2013, in response to those subpoenas. On both occasions, the United States advised Drake and her counsel, prior to the Grand Jury and during her Grand Jury testimony, that she was neither a target nor a subject of its investigation. (Government's Consolidated Resp. to Mots. Filed by Def. Shannon Drake on June 9, 2017 (“Government's Consolidated Resp.”), Ex. 1, Drake Sept. 25, 2012 Grand Jury Test. (Doc. 62-1) at 3; Government's Consolidated Resp., Ex. 2, Drake May 29, 2013 Grand Jury Test. (Doc. 62-2) at 2; Tr. of Nov. 9, 2017 Hr'g (Doc. 135) at 198.)[3] The United States also specifically advised Defendant Drake that she was called as a fact witness. (Government's Consolidated Resp., Drake Sept. 25, 2012 Grand Jury Test. (Doc. 62-1) at 3; Government's Consolidated Resp., Ex. 2, Drake May 29, 2013 Grand Jury Test. (Doc. 62-2) at 2.)

         As it turns out, Drake's status, at least in the two weeks prior to her second appearance, was something more complex. This order addresses three issues: (1) whether an attorney-client relationship existed between Drake and Smith Moore during 2012 and 2013 in the matter of the Grand Jury investigation; (2) whether the Government's advice to Drake, that she was neither a target nor a subject of the investigation, was accurate or whether it was misleading; and (3) if misleading, whether a remedy is appropriate in this case as a result of: (a) this court's supervisory powers over grand jury proceedings and/or (b) constitutional violations.

         II. PROCEDURAL HISTORY

         Drake was originally indicted on June 28, 2016. (Indictment (Doc. 1) at 1.) Subsequently, the Grand Jury returned superseding indictments, and the currently operative Superseding Indictment was returned on August 29, 2017. (Superseding Indictment (Doc. 85) at 1.) Various proceedings took place and this case was ultimately assigned to this court. (Order of Recusal (Doc. 110) at 2-3.) As noted above, a number of motions were filed, and on November 9, 2017, a hearing was held during which the parties presented evidence as to whether there was an attorney-client relationship between Earnest and Smith Moore and/or Drake and Smith Moore and, if so, what documents may be privileged. (Tr. of Nov. 9, 2017 Hr'g (Doc. 135) at 19-20.) Present at that hearing were the parties and their counsel; Jon Berkelhammer on behalf of Smith Moore; and Dan Boyce, Mark Moore, and Andrew Mathias on behalf of the Bank. This court overruled Smith Moore's objection as to attorney-client privilege in part and permitted the testimony of current and former Smith Moore attorneys. (Tr. of Nov. 9, 2017 Hr'g (Doc. 135) at 46-47.) This testimony was subject to specific objections raised by counsel during the hearing. (Id.) This court did not issue a final ruling with respect to the objection as to the production of documents. (Id. at 224.) Both counsel for Smith Moore and the Bank were permitted to participate during the hearing for the purpose of lodging any objections to specific questions propounded by the parties. (Id. at 46-47.)

         Defendant Earnest called as witnesses Bruce Ashley, Laura Dildine, and Stephen Petersen, all of whom were attorneys at Smith Moore during the relevant time period. The hearing was continued to February 8, 2018, at which time Defendant Earnest called as witnesses Professor Nathan Crystal and FBI Special Agent Mike Knapp. (Tr. of Feb. 8, 2018 Hr'g (Doc. 212) at 65, 181.) The United States called as a witness James B. Schwiers, the current President of the Bank. (Id. at 21.) A subsequent hearing was held on March 7, 2018, at which time Defendant Earnest called as witnesses Special Agent Mary Blackerby, Agent Kyle Myles, and Professor Nathan Crystal. (Tr. of Mar. 7, 2018 Hr'g (Doc. 248) at 3.)

         In addition to the testimony and exhibits presented during the hearings, the court has also considered the attachments to pleadings not otherwise objected to by opposing counsel.

         III. ANALYSIS

         This court now determines (1) whether or not an attorney-client relationship existed between Drake and Smith Moore during 2012 and 2013 in the matter of the Grand Jury investigation; (2) whether the Government's advice to Drake, that she was neither a target nor a subject of the investigation, was accurate or whether it was misleading; and (3) if misleading, whether the Government's conduct requires or allows suppression of Drake's testimony or dismissal of the indictment as the result of (a) this court's supervisory powers over grand jury proceedings and/or (b) constitutional violations.

         A. Whether an Attorney-Client Relationship Existed Between Drake and Smith Moore

         Smith Moore represented the Bank in civil litigation involving factoring that started around 2008 and may have been resolved in early 2013. (Tr. of Nov. 9, 2017 Hr'g (Doc. 135) at 54-55.) While that civil case was pending, an individual named Bruce Gregory Harrison, III, was prosecuted and convicted in the Middle District of North Carolina, United States v. Harrison, No. 1:10CR411-1 (M.D. N.C. ), apparently for tax violations that were related to transactions in which the Bank had some involvement.

         On September 11, 2012, following the conviction and sentencing of Harrison, the United States issued a Grand Jury subpoena to the Bank for files related to Harrison and his staffing companies. (See Def. Earnest's Mem. in Supp. of Mot. to Dismiss Indictment (“Def. Earnest's Mem.”), Ex. 10, GrandSouth Bank Sept. 11, 2012 Subpoena (Doc. 146-10).) The subpoena was directed to “GrandSouth Bank, Attn. Legal Order Processing” and sought the production of records and correspondence between the Bank and several entities. (See id.) Apparently, some of those entities were related to Harrison. Additionally, the subpoena sought the personnel file for Douglas Corriher, the Vice President of the Bank, and various emails between Corriher and others, including Drake. (See id. at 2.) Production was directed to occur on September 24, 2012. (Id. at 1.) Earnest was not mentioned specifically in the subpoena.

         Earnest contacted an attorney with Smith Moore “for representation because the firm had done corporate work for the Bank and represented the Bank in related civil litigation.” (Earnest Aff. (Doc. 119) ¶ 3.) Jim Medford, an attorney with Smith Moore and experienced in criminal law, (id. ¶ 4), handled the matter.[4] It is not disputed that Earnest met with Medford and thereafter Medford and Smith Moore began working on the Bank matter.

         Bruce Ashley, an attorney with Smith Moore, represented the Bank in a related civil proceeding. Ashley testified that his understanding was that he represented the Bank through his work in civil litigation. (Tr. of Nov. 9, 2017 Hr'g (Doc. 135) at 64.) Ashley recalls attending a meeting with Medford and Drake after Drake testified before the Grand Jury for the first time. (Id. at 93-94.) Ashley testified that Medford had primary responsibility for the Bank's criminal investigation at Smith Moore. (Id. at 91.)

         Laura Dildine was an attorney with Smith Moore beginning in 2011.[5] She testified that when she “came on board, this was an existing matter, and [she] assisted with responding to subpoenas that the Government had served on GrandSouth Bank for documents and in preparing GrandSouth Bank employees to testify before the grand jury and the Government's investigation of Doug Corriher.” (Id. at 109.) Dildine did not understand the Government to be investigating Earnest or the Bank for criminal conduct. (Id. at 113-14.) Dildine's recollection is that Earnest was “strictly a fact witness as a bank employee in the Government's investigation of Mr. Corriher. . . . in my mind, [Earnest] was testifying . . . as the bank president, but not as someone separate and apart from the bank.” (Id. at 123.) Dildine has no recollection of acting as Earnest's attorney “in a personal or individual capacity. Mr. Earnest, from [her] recollection, was [Smith Moore's] primary point of contact for [the] Bank.” (Id. at 117.) Dildine testified that she did not recall that any officers or employees of the Bank were targets of the Government's investigation. (See id. at 112, 122, 164-65.)

         This court finds, for purposes of this case, that Jim Medford was lead counsel for the Bank at least during 2012 and 2013 with respect to the Grand Jury investigation. Ashley, although his recollection was limited, significantly participated in the representation, including making arrangements of counsel for Corriher and Drake. While Dildine's participation was extensive, it appears to this court that Dildine had limited involvement, and perhaps no involvement, in communications with clients regarding specific representation arrangements but instead acted primarily at the direction of Medford.

         From September 2012 through July 2013, Smith Moore met with Earnest, Drake, and other Bank employees, produced Bank documents as called for in the original subpoena issued in September 2012 as well as a second subpoena issued in November 2012. (See Government's Am. Resp. to Def.'s Mot. to Preclude the Disclosure of Privilege Materials, Attach. 1, Resp. to Subpoena (Doc. 113-1).)

         Notably, during the period of mid-2012 until November 2013, the United States advised counsel for Earnest and Drake, as well as Earnest and Drake themselves, that neither individual was a target nor a subject of the Grand Jury investigation. (Government's Consolidated Resp., Ex. 1, Drake Sept. 25, 2012 Grand Jury Test. (Doc. 62-1) at 3; Government's Consolidated Resp., Ex. 2, Drake May 29, 2013 Grand Jury Test. (Doc. 62-2) at 2; Tr. of Nov. 9, 2017 Hr'g (Doc. 135) at 198.) Both individuals were told they were called before the Grand Jury as fact witnesses. (Government's Consolidated Resp., Drake Sept. 25, 2012 Grand Jury Test. (Doc. 62-1) at 3; Government's Consolidated Resp., Ex. 2, Drake May 29, 2013 Grand Jury Test. (Doc. 62-2) at 2; Resp. of the United States to Mot. to Dismiss or Suppress Based on Sixth Amendment Violations (“Government's Sixth Amendment Resp.”), Ex. 1, Ronald Earnest Mar. 27, 2013 Grand Jury Test. (Doc. 176-1) at 2-3; Government's Sixth Amendment Resp., Ex. 2, Ronald Earnest Aug. 27, 2013 Grand Jury Test. (Doc. 176-2) at 2.)

         1. Drake's First Grand Jury Appearance

         Drake alleges in her affidavit that she received a subpoena to appear before a Grand Jury in the Middle District of North Carolina on September 25, 2012. (Tr. of Feb. 8, 2018 Hr'g (Doc. 212), Ex. 3, Aff. of Shannon Michelle Drake (“Drake Aff.”), ¶¶ 5-6.)[6] Drake further alleges that attorneys from Smith Moore contacted her and said they were going to represent her in connection with her testimony before the Grand Jury. (Id. ¶ 5.) A subpoena was in fact issued to “Shannon Drake, Account Executive” on September 11, 2012, compelling her appearance and testimony before the Grand Jury on September 24, 2012. (Government's Notice Containing Grand Jury Subpoenas (“Government's Notice”), Ex. 1, Subpoenas (Doc. 207-1) at 1-2.) That subpoena appears to have been issued at the same time as the subpoena mentioned above was issued directly to the Bank. (See id. at 4-5.)

         On September 17, 2012, Earnest sent Drake an email, with a copy to Jim Medford, advising as follows:

Shannon: As I indicated to you earlier, Mr. Jim Medford is an attorney with the firm of Smith Moore Leatherwood who is representing GrandSouth Bank. I have mentioned to Jim that you have been subpoenaed to appear before the grand jury and that you may have a need to discuss your involvement with our counsel. Jim can be reached at [phone number]. If you wish, you may call Jim and he can tell you what to expect.

         (Minute Entry 02/16/2018 (correspondence contained in binder produced by the Bank for in camera review).)[7]

         On September 18, 2012, Bruce Ashley with Smith Moore sent a letter to the Assistant United States Attorney (“AUSA”) discussing the subpoena to the Bank and the subpoena to Drake. (Tr. of Mar. 7, 2018 Hr'g (Doc. 248), Ex. 5, September 18, 2012 Letter from Bruce Ashley.) With respect to Drake, Ashley wrote:

Also, as I indicated in my voice messages this week, we will be representing Shannon Drake, the [Bank] employee who recently received a witness subpoena from your office. Please contact us when you would like Ms. Drake to appear. In this regard, please keep in mind that Ms. Drake is based in the Greenville, South Carolina area, and at least two business days' notice would be very much appreciated.

(Id.) Jim Medford was copied on that letter, but none of the other Smith Moore attorneys were copied. Ashley testified that he had no independent recollection of the letter, but did not have any reason to believe it was not accurate. (Tr. of Nov. 9, 2017 Hr'g (Doc. 135) at 92.)

         Drake appeared and testified before the Grand Jury on September 25, 2012. The transcript of that testimony reflects that Drake was initially advised that she was “not a target of this Grand Jury investigation, nor are you a subject of it. And what that means is this Grand Jury is not investigating you, you are simply a fact witness in this investigation.” (Def. Earnest's Mem., Ex. 6, Drake's Sept. 25, 2012 Grand Jury Test. (Doc. 146-6) at 3.) After that advice, the following examination occurred:

Q. Okay. And you have an attorney representing you today, do you not?
A. Yes, sir.
Q. And that's Mr. Medford?
A. Yes, sir.
Q. And he's present outside the Grand Jury room?
A. Yes.
Q. And you understand that at some point if you would like to speak with him, we'll take a break and you can step out?
A. Yes, sir.

(Id. at 5-6.)

         This court finds Drake's statements in her affidavit as well as to the Grand Jury, that Smith Moore represented her for purposes of her Grand Jury testimony on September 25, 2012, to be credible. An attorney-client relationship was formed between Drake and Smith Moore in September 2012. That relationship extended at least from September 18, 2012 through the conclusion of her debriefing following her appearance before the Grand Jury on September 25, 2012.

         2. Drake's Second Grand Jury Appearance

         Following Drake's appearance on September 25, 2012, it does not appear Drake continued to meet with Smith Moore or to have any direct involvement in the case until May 2013. On May 16, 2013, a subpoena was issued compelling Drake to appear and testify before a Grand Jury on May 28, 2013. (Government's Notice, Ex. 1, Subpoenas (Doc. 207-1) at 37.)

         During Drake's second Grand Jury appearance, the prosecutor asked her “are you represented by attorneys today?” to which she responded “I have attorneys with me that represent the bank. . . . Steve and Laura. I'm not sure of their last names.” (Government's Consolidated Resp., Drake May 29, 2013 Grand Jury Test. (Doc. 62-2) at 4.) The prosecutor then stated “so they're, technically, the bank's attorneys, but they're here[, ]” to which Drake responded “[y]es.” (Id.)

         Prior to her appearance before the Grand Jury in May, 2013, Drake again met with attorneys at Smith Moore. One of those attorneys was Stephen Petersen, who had previously participated briefly in the Bank investigation in 2012, solely to help arrange counsel for Corriher and “get the undertaking done.” (Tr. of Nov. 9, 2017 Hr'g (Doc. 135) at 173.) In May of 2013, Petersen helped with Drake's appearance before the Grand Jury. (Id.)

         When Drake was subpoenaed to testify before the Grand Jury in May 2013, Medford was having surgery. Petersen was called on May 22 to help prepare Drake. (Tr. of Nov. 9, 2017 Hr'g (Doc. 135) at 173-74.) Petersen met with Drake on May 23 to prepare for Drake's testimony before the Grand Jury. (Id. at 135.) Other individuals present at the May 23 meeting included Cathy Hawkins, a Smith Moore paralegal, and Laura Dildine. (Id. at 188.) Jim Medford participated by telephone. (Id. at 189.)

         Drake states in her affidavit the following with respect to her May 2013 Grand Jury appearance:

I was contacted again in May 2013 by someone from Smith Moore, who told me the government wanted me to appear before the grand jury again. I again went to Smith Moore's Greensboro offices in or around May 23, 2013. At that time, I met with several lawyers and Jim Medford was on the phone. At no time, was I told that Smith Moore did not represent me. They told me they would again be outside the door when I testified before the grand jury and would provide advice and guidance to me if I had any questions during my testimony.

(Tr. of Feb. 8, 2018 Hr'g (Doc. 212), Ex. 3, Drake Aff., ¶ 8.) However, contrary to Drake's affidavit, Petersen testified that he provided Drake with an Upjohn warning. (Tr. of Nov. 9, 2017 Hr'g (Doc. 135) at 174.) Petersen testified that he advised Drake that he represented the “entity, ” referring to the Bank, and if she wanted her own counsel, they would get her counsel. (Id. at 175.) Specifically, Petersen testified:

If I am representing a corporate entity, and one of the employees or officers of the corporation gets a grand jury subpoena, I will meet with them and tell them that I represent the entity, I am here to prep - help prep you if you want me to. If you want your own counsel, we'll get you your own counsel. That's essentially what happened with Shannon Drake, and she said, “got it.”

(Id. at 175; see also id. at 189-90 (Petersen testifying that he did not get Drake to sign the Upjohn warning and that he does not remember whether memos or notes from these meetings reflect whether an Upjohn warning was given).) Drake's Grand Jury testimony excerpted above is consistent with an Upjohn warning having been given by Petersen, as it acknowledged that both Petersen and Dildine were the Bank's attorneys.

         This court finds Petersen's testimony that he provided an Upjohn warning credible, and further finds his testimony credible that he offered to assist Drake with finding her own counsel. Correspondingly, this court rejects Drake's affidavit in part wherein she states that she was never told that Smith Moore did not represent her, as this court finds, specifically, that Petersen did tell Drake that he (Petersen) did not personally represent her.

         The notes from a meeting involving Medford, Dildine, and the prosecutor on May 23, 2013, suggest that the prosecutor understood that Medford represented the Bank but not Drake individually. (United States' Opp'n to Def. Shannon Drake's Mot. to Dismiss the Indictment (“Government's Opp'n Br.”), Ex. 4, Dildine May 23, 2013 Notes (Doc. 233-4) at 5 (“You guys rep[resent] bank [and] not individual.”).) This makes the notes confusing, as Ashley had previously written the prosecutor to say that Smith Moore represented Drake. (Tr. of Mar. 7, 2018 Hr'g (Doc. 248), Ex. 5, September 18, 2012 Letter from Bruce Ashley.) Medford's comments, as reflected in these notes, seem to suggest he does represent Drake, and the discussion relates to a conflict. (Government's Opp'n Br., Ex. 4, Dildine May 23, 2013 Notes (Doc. 233-4) at 5 (“We've looked carefully at her role - what she knows: no problem.”).) In the absence of any further explanation of Medford's continuing role in the matter, or any evidence to suggest that Medford either gave Drake an Upjohn warning or terminated his attorney-client relationship with Drake, this court finds that Medford and, as a result, Smith Moore, continued to have an attorney-client relationship with Drake relating to her Grand Jury appearance in May 2013. Cf. K.C. v. Cansler, No. 5:11-CV-354-FL, 2012 WL 12914654, at n.16 (W.D. N.C. Jan. 10, 2012).

         3. Analysis

         Considering whether an attorney-client relationship existed in the context of a grand jury subpoena for ...


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