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United States v. Educational Development Network Corp.

argued: July 25, 1989.

UNITED STATES OF AMERICA, APPELLEE
v.
EDUCATIONAL DEVELOPMENT NETWORK CORPORATION, APPELLANT AT NO. 89-1239; UNITED STATES OF AMERICA, APPELLEE V. GERALD KRESS, APPELLANT AT NO. 89-1240



Appeal from the United States District Court for the Eastern District of Pennsylvania, D.C. Criminal Action Nos. 88-00271-01, 88-00271-02.

Gibbons, Chief Judge, Hutchinson, Circuit Judge, and Wolin, District Judge*fn*

Author: Hutchinson

Opinion OF THE COURT

HUTCHINSON, Circuit Judge

I.

The issue in this case is whether the criminal division of the United States Attorney's Office's (USAO's) use of subpoenas that the Department of Defense Inspector General issued after the USAO's criminal division filed a Federal Rule of Criminal Procedure 6(e) Notice of Disclosure violated the appellants' Fifth Amendment rights to due process and indictment only by action of a grand jury. We conclude that it did not and will affirm the district court's orders of judgment and conviction.

II.

Educational Development Network Corporation (EDN) and its owner, Gerald Kress (Kress), entered into a non-competitive contract with the United States Department of Defense (DOD) to provide an educational and employment training program to the Army National Guard Bureau (Guard). Lieutenant Colonel Robert Allen Baxter (Baxter),*fn1 chief of the Guard's Recruitment and Retention Center, was the Contract Officer Representative for the EDN contract. Baxter had significant contact with EDN and Kress and oversaw and approved the work called for by EDN's contract. In the summer of 1986, a former EDN employee and several government officials contacted the USAO about possible wrongdoing in connection with the cost and pricing information EDN was providing to the DOD.*fn2 The meetings that followed were attended by representatives from the civil and criminal divisions of the USAO and William Weinstein (Weinstein), a special agent of the DOD Inspector General, Defense Criminal Investigative Service. EDN was informed of an impending investigation by Assistant United States Attorney Leon J. Dobkin (Dobkin) of the USAO criminal division around September 22, 1986.

On October 2, 1986, the USAO's criminal division opened a grand jury file on EDN, Kress and Baxter and filed an ex parte Rule 6(e) Notice of Disclosure with the United States District Court for the Eastern District of Pennsylvania.*fn3 It listed Dobkin as the Assistant United States Attorney in charge of the file. The grand jury docket sheet shows no further activity until January 13, 1988.

On October 3, 1986, Weinstein served an Inspector General (IG) subpoena on EDN. On October 30, 1986, before the documents were due, a federal magistrate issued a search warrant to the DOD covering many of the same documents.*fn4 The DOD took possession of documents during the search and later when EDN turned over the remaining subpoenaed documents. The documents were made available to the civil and criminal divisions of the USAO, the DOD and the Army Criminal Investigation Division (Army), which was investigating Baxter. The government candidly admits on appeal that the USAO and DOD agreed to conduct a joint investigation and to use DOD IG subpoenas so that the agencies could share the evidence obtained.*fn5

On January 6, 1988, the DOD was told to complete all communications with the civil division of the USAO by January 13, 1988, when a "new phase" of the criminal investigation was to begin. (App.) at 56a. The information collected during the joint investigation was then presented to the grand jury. It returned an indictment on July 13, 1988. The indictment alleged that EDN and Kress submitted inflated estimates of EDN's costs on its contract to the DOD and that Baxter received illegal gratuities in return for approving them.

On October 14, 1988, the defendants filed a motion to compel discovery in aid of a suppression motion, alleging that the USAO acted in "bad faith" when it used IG subpoenas and a search warrant to gather evidence during a joint grand jury/criminal/civil/administrative/military investigation. The motion sought an order compelling additional discovery and requested a hearing to determine whether the USAO had in bad faith violated defendants' rights under the Fifth Amendment to due process and indictment only by action of a grand jury.*fn6 Defendants based their requests on United States v. LaSalle Nat'l Bank, 437 U.S. 298, 57 L. Ed. 2d 221, 98 S. Ct. 2357 (1978), which held inter alia that the Internal Revenue Service (IRS) must use its summons authority in good faith when pursuing a civil/criminal investigation. After a hearing, the district court denied the motion, holding that LaSalle applied only to IRS investigations and not to the IG subpoenas.

On November 28, 1988, EDN, Kress and Baxter filed a motion to suppress and dismiss the indictment, based on the same argument. On November 29, 1988, after another hearing, the district court denied the motion. The court found:

The defendants have failed to make out a prima facie showing of grand jury abuse. It is well-settled in this Circuit that grand jury proceedings are generally accorded a presumption of regularity and that a request for inspection of grand jury materials must be bottomed on more than an allegation that improper conduct has occurred and that discovery will verify this belief. Furthermore, although the defendants presented no evidence of improper disclosure of matters occurring before the grand jury, Special Agent Weinstein's affidavit demonstrates that no evidence was presented to the grand jury until January 1988, a date subsequent to the period during which defendants suggest that grand jury material may ...


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