[Counsel Letterhead]

July _____, 2009

The Honorable Eric H. Holder, Jr.

Attorney General
U.S. Department of Justice
950 Pennsylvania Avenue, NW
Washington, DC 20530-0001

Re.: U.S. v. Armstrong, CR94-0276PJH

Dear Mr. Attorney General:

I am writing to summarize a section 2255 motion pending before the Hon. Phyllis
Hamilton in the Northern District of California. The underlying criminal matter arose nearly 20
years ago, culminating in the 1992 conviction of my client, Mr. Armstrong. After five years of
incarceration, Mr. Armstrong received over 3,000 pages of FOIA documents, including many
DOJ memoranda, revealing—for the first time—that the white-collar allegations upon which
Armstrong was convicted were the subject of a prior investigation which closed upon a finding
of no illegal conduct, and further revealing that Mr. Armstrong’s prosecution was prompted by
contacts with FBI Deputy Director Larry Potts by Nancy Pelosi, Barbara Boxer, and Howard
Baker.

Mr. Armstrong’s motion was accompanied by just enough documentation to prompt an

evidentiary hearing. We requested that the motion be sealed, but the judge denied that request
and served a show-cause order upon the local U.S. Attorney. That office’s response is due in
about 10 days.1 Due to the high sensitivity of issues presented in this case, we request an
opportunity to confer with you about Mr. Armstrong’s prosecution and a proper resolution of our
motion.

As background, Mr. Armstrong was CEO and sole shareholder of Hamilton Taft, a
company engaged in the collection and processing of payroll tax deposits for large corporations
(Sun Microsystems, Scott Paper, FedEx, etc.) and handling approximately $7 billion of such
deposits annually. A central question in Mr. Armstrong’s case was the characterization of these
tax monies in the hands of Hamilton Taft. Was Hamilton Taft a fiduciary, holding the tax monies
in trust? Or was Hamilton Taft a mere contractor, such that tender of tax monies by its clients
1
The District Court ordered a response within 30 days. On the 29th day, the U.S. Attorney’s office
requested an additional 30 days, alleging that the files were in storage and the AUSA who handled the prosecution
was no longer with the office. Disturbingly, the initial 30 days elapsed without material effort to retrieve the files
from a local FRC, and—contrary to representations of counsel—several of the AUSAs involved with the original
case are still in the same office. See Exhibit A.
The Honorable Eric H. Holder, Jr.
July ______, 2009
Page 2 of 5

created a debtor-creditor relationship? This technical point was of some moment because it
defined the duty owed by Hamilton Taft and, by extension, whether its conduct could produce
civil and/or criminal liability.

In 1988, Hamilton Taft was owned by Cigna Insurance. Under Cigna’s ownership,
Hamilton Taft made inter-company loans to Cigna, prompting a disgruntled Hamilton Taft
employee to contact law enforcement and allege that such loans were improper because the
subject monies were tax payments held in trust. FOIA documents delivered to Armstrong show
the employee found a sympathetic ear, as his complaints were assigned to AUSA Mike
Yamaguchi for investigation. Yamaguchi was previously in the tax division of the New York
Peat, Marwick office and would later enjoy a brief stint as U.S. Attorney for the Northern
District of California.

Yamaguchi performed his investigation and closed his file upon a finding that the
operations of Hamilton Taft presented no violation of federal law. The FOIA records included a
1981 opinion letter from Baker & McKenzie stating that Hamilton Taft, as a tax collector, was
not required to hold the tax monies in a segregated account and enjoyed the same freedom to
invest the monies as that enjoyed by the employer, subject, of course, to the quarterly payment
requirements.

Neither the fact of Yamaguchi’s investigation nor its exculpatory conclusion was
disclosed to Armstrong before or during trial. Indeed they were never disclosed but merely
transmitted to him under FOIA. Fortunately, the failure to disclose a prior favorable
investigation is an oddity, but the Fifth Circuit nonetheless had the recent opportunity to consider
the matter in U.S. v. Fernandez.2 There, a unanimous panel analyzed an undisclosed
investigation under the three familiar factors of Brady. The panel found that the fact of the
investigation was actually well-known during trial with only the results of the investigation
remaining undisclosed. The panel further found that the district judge conducted an in camera
review of the results and found no exculpatory material. Based upon these findings, the panel
held that no Brady violation occurred.

Here, of course, the prior Hamilton Taft investigation was clearly exculpatory yet was
never disclosed to Armstrong. Further, the Hamilton Taft situation is more troubling from a
policy perspective because, unlike the Fernandez investigation that looked for conduct which
violated a known law, the Hamilton Taft inquiry turned on whether known conduct could be
interpreted as violating a yet-unknown law. Indeed, the aforementioned Baker & McKenzie
opinion letter found that “[t]here does not appear to be any case law, regulation, or statute
dealing with an independent agent who actually pays over the taxes to the government.”

Standing alone, the government’s failure to disclose this exculpatory information is a fact
that warrants 2255 relief from the district court. But because this failure is merely one example
of serious improper conduct by the prosecution, and because that conduct is overlaid on a
backdrop of political influence, I request your personal review of this matter.
2
559 F.3d 303 (5th Cir. 2009).
The Honorable Eric H. Holder, Jr.
July ______, 2009
Page 3 of 5

As noted, the 1988 Hamilton Taft investigation was initiated by a disgruntled former
employee. Fast forward to 1991, and another Hamilton Taft employee—recently fired for
cocaine use—lodged the same allegation raised in 1988. The employee made frequent entreaties
to the FBI and the IRS, falsely claiming that he was a CPA and was Hamilton Taft’s controller.3
At each turn, FBI and IRS memoranda reveal that the employee was rebuffed and was told
Hamilton Taft had been investigated and that no laws were being violated.

About this same time, Hamilton Taft became engaged in a contractual dispute with one of
its clients, Federal Express. Simultaneously, the FBI and IRS agents in contact with the former
Hamilton Taft employee began receiving inquiries from an unnamed DOJ attorney in
Washington, inquiring about the Hamilton Taft investigation.4 Over the next few days, AUSA
Yamaguchi is assigned the matter, based upon his prior investigation. Yamaguchi notes on
March 8, 1991 that his office does not have probable cause to seek a search warrant. One week
later, the Wall Street Journal publishes a negative article about Hamilton Taft, citing the
disgruntled employee. FBI memoranda reveal that the employee was directed to the Wall Street
Journal by Nancy Pelosi.5 The article was published on Friday, March 15, 1991. On Sunday,
March 17, two days after the article’s publication and nine days after Yamaguchi’s statement that
he lacked probable cause to pursue a warrant, the DOJ issued a press release detailing its
investigation of Hamilton Taft. Eight days later, the press release had its apparently-intended
effect when Hamilton Taft was placed into involuntary bankruptcy by Federal Express.

On April 3, 1991, two weeks after the Federal Express filing, FBI Deputy Director Larry
Potts sends a status report to Howard Baker,6 then a director of Federal Express, and copies the
report to individuals associated with the staffs of Pelosi and Boxer.7 This memo is the only
communiqué produced which reveals contact between Mssrs. Baker and Potts. All documents
initiating the involvement of Mr. Potts are missing, as are the follow-up reports promised in
Potts’ April 3 memo.

Despite the missing documentation, however, extraordinary conduct by the California

prosecution team reveals actions so bizarre that they are only explainable by continued pressure
to commence a prosecution and secure a conviction. Two evidentiary matters illustrate the point.
Near the end of trial, Armstrong learned that the government had placed a wire on his assistant
and was in possession of 70 hours of recorded conversations. Because the time demands of trial

3
Newspaper reports from the time also revealed the employee’s stated wish to receive a 25% bounty under
the False Claims Act.
4
Here, the FOIA records received heavy redaction, and embedded references reveal that numerous
collateral documents were omitted. Mr. Armstrong is filing a discovery motion in the 2255 proceeding that should
fill some gaps.
5
See Exhibit B.
6
The Howard Baker in question is the former Senator from Federal Express’s home state of Tennessee and
the former White House Chief of Staff under President Reagan.
7
See Exhibit C. The memo is copied to persons identified by their last name only. While persons with
these surnames were associated with the referenced congressional and senatorial offices at the relevant time, the
exact identity of the persons copied is not yet known.
The Honorable Eric H. Holder, Jr.
July ______, 2009
Page 4 of 5

deprived the defense of an opportunity to hear these tapes, Armstrong requested a continuance.
This request was denied. AUSA Yamaguchi made an oral assurance to the district court, and FBI
SA Hatcher provided a corresponding sworn affidavit, that the tapes were generated by the
Dallas field office, concerned a different investigation, and were unrelated to Hamilton Taft. To
the contrary, documents received by Armstrong years after trial reveal that AUSA Yamaguchi
actually requested that the Dallas field office conduct the surveillance as a courtesy and in
support of the Hamilton Taft prosecution.8 Aside from applied pressure, it is hard to develop an
explanation for this conduct.

The second evidentiary point concerned AUSA Yamaguchi’s undisclosed ties to Peat,
Marwick’s tax division. That very office provided accounting services to Hamilton Taft and, at
Armstrong’s request, prepared an opinion letter outlining the characterization of client funds
once paid to Hamilton Taft and the scope of permissible investments for those funds. Armstrong
sought testimony from a Peat, Marwick auditor and introduction of his report. Documents reveal
that AUSA Yamaguchi threatened the auditor with indictment if he tried to testify. Again, this
conduct would seem to be far outside one’s expectations.

The characterization of Hamilton Taft’s cash as trust monies was central to Armstrong’s
prosecution. But in addition to the criminal and civil litigation surrounding Hamilton Taft, the
bankruptcy court was also considering this very question. As a company with large cash flows,
the potential recovery from recaptured preference payments was very seductive to the
bankruptcy trustee. Unfortunately, the trustee’s objectives diverged from those of the criminal
prosecutors on this important point.9 The trustee argued that the monies were not held in trust;
instead, they were the property of Hamilton Taft, were part of the bankruptcy estate, and were
subject to the recapture of preference payments. This also meant, however, that Armstrong’s
ability to invest or distribute those funds was governed only by the contractual relationship
between Hamilton Taft and its clients. Conversely, the prosecution (and Hamilton Taft’s clients)
wanted a trust characterization that would allow a viable prosecution but would preclude the
preference recapture.

The bankruptcy court sided with the prosecution’s view, characterized the monies as trust
monies, and blocked the recapture of preference payments. The trustee appealed to the district
court, and in an odd coincidence, the matter was heard by Judge Charles Legge, who was also
presiding over Armstrong’s criminal prosecution. Judge Legge affirmed the bankruptcy court.
The trustee took his appeal to the ninth circuit, which reversed upon finding that the monies were
the property of Hamilton Taft and not held in trust.

For a lawyer in search of the truth, this collateral bankruptcy proceeding provided a rare
opportunity to receive an advisory opinion on a controlling legal issue. For AUSA Yamaguchi,

8
The tapes have since been reviewed, and despite what hindsight reveals to be significant and
choreographed interrogation by Armstrong’s assistant, the tapes contained no inculpatory information and are in fact
exculpatory.
9
Upon review of the prosecution’s actions coupled with documentation produced under FOIA, there is no
question that the objective of the prosecution was to secure a conviction and not to illuminate the truth.
The Honorable Eric H. Holder, Jr.
July ______, 2009
Page 5 of 5

however, it was an exercise in crisis management. As an example, consider that the ninth circuit
invited the DOJ, upon rehearing, to prepare an amicus brief on whether the Court’s holding
would adversely impact the government’s ability to collect taxes. The DOJ’s tax division
accepted this invitation, yet the brief was actually authored by AUSA Yamaguchi who appeared
“of counsel” to that division.

Armstrong’s trial counsel argued that the ninth circuit’s opinion in the bankruptcy matter
established, effectively, the “law of the case.” The court refused that instruction, and on appeal,
this refusal was affirmed on curious and inexplicable grounds. The ninth circuit noted that the
bankruptcy opinion had been vacated as moot and, regardless, discussed only the relationship
between Hamilton Taft and the IRS, not Hamilton Taft and its clients. In granting vacatur, the
ninth circuit found that the matter had been settled during the pendency of rehearing, thus
mooting the issue. This explanation is curious because the U.S. Supreme Court had recently
reviewed a ninth circuit case and held that “mootness by reason of settlement does not justify
vacatur of a judgment under review.” See U.S. Bancorp Mortg. Co. v. Bonner Mall Partnership,
513 U.S. 18, 29 (U.S. 1994). As to the second ground relied upon by the ninth circuit, it
misstates the prior holding; moreover, it is axiomatic that a finding that the IRS is not a
beneficiary of a trust held by Hamilton Taft requires a corresponding finding that Hamilton Taft
is not a trustee of monies tendered by its clients as putative settlors. 10

These are just a few examples of material irregularities surrounding this prosecution.
Frankly, I cannot recall seeing undisclosed exculpatory investigations, political pressure by very
high-level persons, deliberate misrepresentations to a court by an AUSA and a special agent, and
prosecutorial involvement with collateral bankruptcy litigation all combined into a single case.
As each page turns, we are uncovering more and more concrete examples of misconduct. For
this reason, I respectfully request an opportunity to discuss this matter at your earliest
convenience.11

Very truly yours,

xxxxxxxxxxxxxxxxxxx
Counsel for Armstrong

10
Aside from Yamaguchi’s meddling via an amicus brief, we do not suggest improper conduct by the court
of appeals. Our investigation on the impetus for a vacatur request, in contrast to the typical dismissal, is ongoing.
11
Our motives here are undoubtedly selfish, yet the important goal of public confidence in the DOJ’s
prosecutorial decisions will be well-served by a brief meeting.