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United States v. Nagle

September 1, 2010

UNITED STATES OF AMERICA
v.
JOSEPH W. NAGLE



The opinion of the court was delivered by: Judge Sylvia H. Rambo

MEMORANDUM

Before the court is Defendant Joseph W. Nagle's motion to suppress all electronic evidence obtained from the computers and server seized from the premises of Schuylkill Products, Inc. ("SPI") and CDS Engineers, Inc. ("CDS") on October 10, 2007.*fn1 (Doc. 41.) Specifically, Defendant argues that the Government indiscriminately rummaged through more than a million computer files from the electronic evidence seized from SPI and CDS, that the warrants used to justify the seizure were unconstitutional general warrants, unconstitutionally over-broad, and were executed in an unreasonable manner.

The Government argues that Defendant does not have standing to challenge the search and seizure of the electronic evidence because he cannot demonstrate that he had a reasonable expectation of privacy in the content of SPI's and CDS's computers, and as such he cannot show that his Fourth Amendment rights were violated by the Government's actions. The court held a hearing on June 24, 2010. Upon consideration of the evidence, the court agrees with the Government. Defendant has failed to demonstrate that he has a personal, reasonable expectation of privacy in the contents of SPI's and CDS's computer systems, and has failed to demonstrate that his Fourth Amendment rights were violated. Accordingly, Defendant's motion to suppress will be denied.

I. Background

Because the court determines that Defendant has not demonstrated that he had a reasonable expectation of privacy in the property searched and seized, the court need not delve too deeply into the facts underlying the methods employed by the Government to conduct its search of the electronic information seized. This is true because even if the Government's warrant were a general warrant or unconstitutionally over-broad, and even if the Government's search methods amounted to a general indiscriminate rummaging of electronic evidence, conclusions which this court does not reach, it is immaterial to the prosecution of Defendant because all of this would have been done at the expense of SPI's and CDS's Fourth Amendment rights as opposed to the Fourth Amendment rights of the Defendant. Accordingly, the court provides the following information as background to provide context for its decision.

A. The Alleged Fraud

At some point in 2007, the Government began an investigation into whether SPI, CDS, Marikina Construction Corporation and Marikina Engineers and Construction Corporation (collectively "Marikina"), a small Connecticut-based certified disadvantaged business enterprise ("DBE"), were engaged in a DBE-fraud scheme. The alleged fraud spanned a period of fifteen years from 1993 through 2008. See, e.g., United States v. Campbell, 1:08-CR-07, slip op. at 3 (M.D. Pa. July 1, 2010). During this time, Marikina received 336 subcontracts worth approximately $119.4 million, making it PennDOT's largest recipient of DBE-designated funds. Id. These subcontracts were awarded to Marikina by general contractors to whom PennDOT had awarded the prime contract to perform federally funded highway work in Pennsylvania, and they generally called for Marikina to "furnish and install" bridge beams. Id. Most of the bridge beams were manufactured by SPI, but some required Marikina to install non-SPI products. Id.

Applicable federal regulations allowed general contractors to count the entire DBE contract amount, including the costs of supplies and materials obtained by the DBE, even if the suppliers of the materials were non-DBE entities, toward the general contractor's DBE goal. See 49 C.F.R. § 26.55(a)(1). Thus, despite the fact that for any given contract the cost of materials may make up the majority of the contract amount, the entire contract amount could be credited towards the general contractor's DBE goal if the DBE performed a commercially useful function.

Here, the Government alleges that Marikina did not perform a commercially useful function in connection with any of the PennDOT DBE subcontracts, and in reality, the subcontracts were actually found, negotiated, coordinated, performed, managed, and supervised by SPI and CDS personnel. Furthermore, upon receiving payment from the general contractor, Marikina remitted all of the funds to SPI if an SPI beam was used. If a non-SPI beam was used, Marikina paid the third-party for the beam and then remitted the balance of the funds to SPI. SPI would then kick-back a fixed amount to Marikina. Thus, with every contract which listed Marikina as the DBE, all of the work and all of the money (except some of the materials and the Marikina fixed fee) would go to SPI and/or CDS. This scheme resulted in money that the Government intended to go to legitimate DBEs performing commercially useful functions, instead being funneled through Marikina directly to non-DBEs.

B. The Structure of SPI and CDS/Layout of the Companies

SPI was started as a family owned company in 1950 by Defendant's grandfather who ran the business until his death in 1980. (Doc. 73, Suppression Hr'g Tr. 153, June 24, 2010.) From 1980 through 2004, the company was run by Defendant's father and Ernest G. Fink ("Fink"), a co-defendant and uncle by marriage to Defendant. (Id.) Upon his father's death in 2004, Defendant assumed control of his father's ownership share. (Id.) At the time of the search in October 2007, Defendant owned 50.1 percent of SPI and Fink owned 49.9 percent. (Id.) CDS was started in 1985 by Defendant's father, and after his death was absorbed as a wholly-owned subsidiary of SPI. (Id.)

At the time the search warrant was executed, Defendant was the President and CEO of both companies, and Fink was the Chairman and Chief Operating Officer of both companies. (Id. at 154.) Both companies employed family and friends of the Nagle and Fink families. (Id.) All told, the company employed 150 people at the time of the search; however, only 12-15 people worked in the SPI corporate office and 6-8 people worked in the CDS office. (Id. at 156-160; see also, Doc. 50-2, Exhibit A to Gov't Br. in Opp'n to Defs.' Motion to Suppress, Descriptive Mem., at 7 of 29.) Although he was the President and CEO, Defendant testified at the suppression hearing that he did not supervise any employees on a day-to-day basis. (Suppression Hr'g Tr. 173-74.)

The corporate offices of SPI and CDS are two separate converted residences with multiple floors that have office workers both in cubicles and offices on all levels. (Id. at 34.) The SPI office had more than fifteen rooms covering an area of 2500 to 3000 square feet. Defendant's office was on the second floor; it had a door that could be locked, and was private from the remainder of the offices. (Id. at 156-57.) As a part of his job, Defendant used a laptop computer that was owned by SPI. (Id. at 158-59.) Defendant's laptop docked at a station on his desk and he connected each day to SPI's computer network. (Id.) In order to access his computer and the company's network, Defendant had to log in using a username and password. (Id. at 159.) CDS's offices were located in another converted residence that was slightly smaller than the SPI office space.

The companies shared one computer network. (Id. at 161.) The network was hosted by a server, and it was used to conduct all or most of the companies' business. The server housed, among other things, the companies' financial records, payroll records, pricing information, estimating standards, and technical data. (Id. at 162.) The server was partitioned into different drives, and certain users were restricted to certain areas on the server. (Id. at 162.) It is not clear from the record whether Defendant had access to the entire server, or only part of it; however, Defendant testified that the server required a password to access it and that the only person whom he was aware of who could access the server directly was the IT administrator. (Id. at 189.) He also testified that he was not aware of how the server worked, and that he did not have access to the server itself. (Id. at 181, 189.)

Each employee who had a computer also had a company e-mail address, which was used to conduct company business. (Id. at 162-63.) In addition to using company e-mail for sending such things as financial records, scheduling information, product details, beam pricing and sales information, e-mail was also used for the company to seek and receive legal advice. (Id. at 163.)

At the suppression hearing, Defendant testified that he would spend approximately three-fourths of his day on his computer, which he used for both personal and business purposes. For instance, Defendant testified that he used the computer for communication with attorneys, banking, home refinancing, as well as communication with his wife and his friends. (Id. at 165.) At the time of the search, Defendant did not have another e-mail address and used his company e-mail for all of his personal e-mail. He also testified that he did not authorize anyone else to use his computer or his e-mail, and that the only other person at either of the companies who would have done so was the "IT administrator." (Id. at 165:21.) Defendant also testified that he never used anyone else's computer at either company. (Id. at 185.)

C. The Warrants

On October 9, 2007, FBI Special Agent Thomas Marakovits applied to Magistrate Judge J. Andrew Smyser for warrants to search the premises of SPI and CDS. The SPI warrant identified the premises to be searched as (a) SPI's corporate administrative offices, located in a two-story building with a detached garage; (b) SPI's transportation office, located in a one-story building; (c) SPI's human resources and payroll office, located above the SPI manufacturing plant; and (d) certain vehicles parked at or adjacent to the SPI manufacturing plant. (See Doc. 42-2, SPI Warrant and Aff. of Probable Cause ("SPI Warrant").) The CDS warrant identified ...


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