EFF Says Lavabit Subpoena Violates Constitution

   (EFF) - 10/27/2013 - Federal law enforcement officers compromised the backbone of the Internet and violated the Fourth Amendment when they demanded private encryption keys from the email provider Lavabit, the Electronic Frontier Foundation (EFF) argues in a brief submitted Thursday afternoon to the US Court of Appeals for the Fourth Circuit. In the amicus brief, EFF asks the panel to overturn a contempt-of-court finding against Lavabit and its owner Ladar Levison for resisting a government subpoena and search warrant that would have put the private communications and data of Lavabit's 400,000 customers at risk of exposure to the government.
   For nearly two decades, secure Internet communication has relied on HTTPS, a encryption system in which there are two keys: A public key that anyone can use to encrypt communications to a service provider, and a private key that only the service provide can use to decrypt the messages.
   In July, the Department of Justice demanded Lavabit's private key—first with a subpoena, then with a search warrant. Although the government was investigating a single user, having access to the private key means the government would have the power to read all of Lavabit's customers' communications. The target of the investigation has not been named, but journalists have noted that the requests came shortly after reports that NSA whistleblower Edward Snowden used a Lavabit email account to communicate.
   "Obtaining a warrant for a service's private key is no different than obtaining a warrant to search all the houses in a city to find the papers of one suspect," EFF Senior Staff Attorney Jennifer Lynch said. "This case represents an unprecedented use of subpoena power, with the government claiming it can compel a disclosure that would, in one fell swoop, expose the communications of every single one of Lavabit's users to government scrutiny."
   EFF's concerns reach beyond this individual case, since the integrity of HTTPS is employed almost universally over the Internet, including in commercial, medical and financial transactions.
   "When a private key has been discovered or disclosed to another party, all users' past and future communications are compromised," EFF Staff Technologist Dan Auerbach said. "If this was Facebook's private key, having it would mean unfettered access to the personal information of 20 percent of the earth's population. A private key not only protects communications on a given service; it also protects passwords, credit card information and a user's search engine query terms."
   Initially, Levison resisted the government request. In response, a district court found Lavabit in contempt of court and levied a $5,000-per-day fine until the company complied. After Levison was forced to turn over Lavabit's key, the certificate authority GoDaddy revoked the key per standard protocol, rendering the secure site effectively unavailable to users.
   Since Lavabit's business model is founded in protecting privacy, Levison shut down the service when it no longer could guarantee security to its customers.
   "The government's request to Lavabit not only disrupts the security model on which the Internet depends, but also violates our Constitutional protections against unreasonable searches and seizures," EFF Staff Attorney Hanni Fakhoury said. "By effectively destroying Lavabit's legitimate business model when it complied with the subpoena, the action was unreasonably burdensome and violated the Fourth Amendment."
   The deadline for the government's response brief is Nov. 12, 2013.
   For EFF's full amicus brief, see: https://www.eff.org/document/lavabit-amicus

Rating Implications of U.S. Debt Ceiling Crisis

   LONDON - (BUSINESS WIRE) -10/12/2013 - Fitch Ratings spokespersons said they continue believe that an agreement will be reached to end the current political impasse and raise the U.S. debt ceiling. Nonetheless, the U.S. Treasury has said that extraordinary measures could be exhausted as soon as October 17, leaving a cash balance of just $30 billion.
   The treasury would still have limited capacity to make payments after that date but would be exposed to volatile revenue and expenditure flows. As in the debt-ceiling crisis in the summer of 2011, it is useful to outline how Fitch may react to a failure to raise the debt ceiling, and to the potential consequences, including a default on U.S. Treasury securities.
   As we said when the U.S. government shut down on Oct. 1, a formal review of the U.S. sovereign 'AAA'/Negative Issuer Default Rating (IDR) with potentially negative implications would be triggered if the U.S. government has not raised the federal debt ceiling in a timely manner before the treasury exhausts extraordinary measures and cash reserves. In such a scenario, Fitch would consider placing the U.S. sovereign IDR on Rating Watch Negative (RWN), reflecting the increasing risk of a near-term default event. If the U.S. sovereign IDR were placed on RWN, all outstanding U.S. sovereign debt securities would also be placed on RWN.
   A widespread and prolonged delay of payments to suppliers of goods and services to the federal government, including salary payments to federal employees, would not in itself constitute an event of default from Fitch's rating perspective. It would, however, damage perceptions of U.S. sovereign creditworthiness and, if payment delays were extensive on non-prioritized obligations, signal that the U.S. government was in financial distress, with negative rating implications. It would also have a detrimental effect on the economy.
   Fitch would only recognize a sovereign default event if the government failed to honor interest and/or principal payments on the due date of U.S. Treasury securities. In this scenario, Fitch would lower the U.S. sovereign IDR to 'Restricted Default (RD)' until the default event was cured. We would also lower the rating of the affected issue(s) from 'AAA' to 'B+', the highest rating for securities in default in expectation of full or near-full recovery. Debt approaching maturity would be vulnerable to a downgrade.
   Once cured, the U.S. sovereign IDR would be raised to a level reflecting Fitch's assessment of the creditworthiness of the U.S. sovereign. This would reflect the scale and duration of the default, the perceived risk of a similar episode occurring in the future, the likely impact on the U.S. sovereign's cost of funding and cost of capital for the economy as a whole, and the implications for long-term growth.
   Willingness to pay, as reflected in the sovereign debt service record, is an important component of all sovereign credit analysis. Even a short-lived default that did not impair the long-term capacity of the U.S. government to service its obligations would call into question the effectiveness of the country's political institutions in ensuring that sovereign debt obligations are honored in a timely manner. This means that if the U.S. sovereign IDR were lowered to 'RD', it would be unlikely to return to 'AAA' in the short to medium term.
   If the U.S. sovereign IDR were downgraded to 'RD', there would be negative rating consequences for those entities whose issuer and issue ratings are underpinned by U.S. sovereign support, such as the government sponsored entities (GSEs). Any rating impact on those entities would be influenced by the potential path of the U.S. sovereign rating as well as the stand-alone credit profiles of the affected issuers.
   The ratings of U.S. states and municipalities would not be directly affected, reflecting their autonomy and discrete powers and taxing authority, although a limited number of U.S. municipal obligations with direct links with the U.S. rating would be. These include pre-refunded and other municipal bonds secured by AAA rated U.S. government and agency obligations held in escrow and U.S.-guaranteed debt obligations, such as debt guaranteed by the Department of Energy under its renewable energy programs. If Fitch downgrades the U.S. sovereign to 'RD' - following the placement on RWN - that would not necessarily lead to an immediate downgrade of these linked ratings. These ratings would remain on RWN and would not be adjusted until the sovereign rating is ultimately resolved.

Lawyer Sentenced for Securities, Wire Fraud

   (NEW YORK) - 10/4/2013 - Everette L. Scott, Jr., a New Jersey attorney, was sentenced on Sept. 24 in New York federal court to 30 months in prison for engaging in securities and wire fraud in connection with two separate schemes, U.S. Attorney for the Southern District of New York Preet Bharara recently announced. 
   In the larger of the two schemes, Scott and co-defendant Tyrone L. Gilliams, Jr., solicited and misappropriated $5 million in investments in a bogus U.S. Treasury Strips investment program. In the other scheme, the defendants solicited and misappropriated a $450,000 investment in a Utah coal mine. In addition to buying luxury cars, jewelry, and other items, Gilliams spent hundreds of thousands of dollars of investor money organizing and promoting a multi-day festival in Philadelphia that headlined Sean “Diddy” Combs. Scott and Gilliams were found guilty following a jury trial in February 2013, and Scott was sentenced by U.S. District Judge Deborah A. Batts.
   “With his sentence today, Everette Scott meets the just punishment that befalls an attorney who uses a law license as a vehicle for fraud – time in federal prison,” Bharara said. “This office will continue to make sure the perpetrators of fraud are brought to justice and pay the price for their crimes.”
   According to the Indictment and the evidence presented at trial:
   In 2009 and 2010, Gilliams was the owner of TL Gilliams, LLC, which purported to engage in transactions in commodities like oil and gold. Scott was an attorney at a small law firm in New Jersey and acted as TL Gilliams’s general counsel.
   In the summer of 2010, Gilliams solicited $5 million dollars from two investors for purposes of trading in U.S. Treasury Strips, which are a derivative of U.S. Treasury Bonds. Gilliams and Scott arranged for the investors to make their investments by wiring them into an attorney trust account maintained by Scott’s law firm. Upon receiving the money, Scott – at Gilliams’s direction – misappropriated more than $700,000 to satisfy expenses stemming from an unrelated and failed venture to buy a coal mine in Utah. Scott also claimed $50,000 of the investment money for himself as purported fees. At Gilliams’s direction, Scott transferred most of the remainder to bank and brokerage accounts that Gilliams controlled.
   At most, Gilliams purchased $250,000 worth of Treasury Strips with the more than $4 million in investment money transferred by Scott. Over a span of less than six months, Gilliams spent more than $1.6 million on an unrelated gold investment; more than $200,000 to purchase a commercial warehouse in Denver; at least $100,000 to buy or lease luxury cars; at least $50,000 for construction work on his home; at least $100,000 on luxury hotel and travel expenses; and more than $500,000 promoting two events – “Joy to the World,” involving an album release party with Jamie Foxx at the Vault nightclub in Philadelphia, and culminating in a red carpet, black tie gala at the Philadelphia Ritz-Carlton, headlined for a $120,000 fee by Sean “Diddy” Combs, and the “Gatta Be Jokin’ Comedy Jam,” a December 2010 comedy performance in Nassau, Bahamas.
   Gilliams did not engage in any trading of Treasury Strips and, as a result, did not derive any profits. Nonetheless, during the period when he was spending investor money, Gilliams provided investors with false reports of trades and profits, and made occasional, nominal payments that he falsely claimed represented profits from Treasury Strips trading. Other than these purported profit payments, which totaled approximately $100,000, neither investor received any of his combined $5 million investment back.
   In a separate scheme, Gilliams and Scott arranged in late 2009 for an investor to transfer $450,000 to SCOTT’s attorney trust account, to be held in escrow until used in connection with a venture to purchase the assets of a bankrupt Utah coal mine. Once the money was in Scott’s account, he secretly misappropriated approximately $112,000 by claiming it as purported fees, and transferred the rest to Gilliams or other individuals and entities at Gilliams’s direction. Until August 2010, Gilliams and Scott falsely assured the victim that his $450,000 remained safely in escrow, long after Scott’s escrow account had been emptied. Although the victim repeatedly demanded the return of his funds, Gilliams and Scott pacified him by producing forged bank documents and a false attorney attestation letter written by Scott purporting to show that Gilliams was in possession of the millions of dollars necessary to purchase and operate the Utah coal mine. In August 2010, after an attorney for the victim threatened Scott with professional discipline for his failure to return the escrowed funds, Gilliams and Scott paid the victim $450,000 using funds they raised for investment in Treasury Strips.
   In addition to the prison term, Batts sentenced Scott, 52, of Sewell, New Jersey, to three years of probation. He was also ordered to make restitution in the amount of $1,005,000, and pay a $300 special assessment fee.
   Gilliams is scheduled to be sentenced by Judge Batts on Oct. 31, 2013, at 10:30 a.m.
   Source: Financial Fraud Enforcement Task Force