___________ No. 95-2820 No. 95-3036

___________ United States of America, * * Plaintiff - Appellee/ * Cross Appellant, * * Appeals from the United States v. * District Court for the * Western District of Missouri. Swaran Kumar Jain; Center for * Mental Health Services, Inc., * * Defendants - Appellants/ * Cross Appellees. *

___________ Submitted: April 11, 1996 Filed: August 8, 1996

___________ Before BOWMAN, BEAM, and LOKEN, Circuit Judges.

___________ LOKEN, Circuit Judge.
Psychologist Swaran Kumar Jain and his corporation, the Center fo r Mental Health Services, Inc., appeal their convictions for violating the mail fraud and Medica re anti-kickback statutes by receiving payments from
a psychiatric hospital for referring patients to that hospital. Defendant s argue that the distri ct court's jury instructions erroneously defined the term " willfully" in the anti-kickback statute, and that the governmen t failed to prove mail fraud, that is, a scheme to deprive Dr. Jain' s patie nts of their intangible right to his "honest services." Th e governm ent cross-appeals, contending that the district court erred i n determining the improper benefit conferred by the kickbacks for purposes of s entencing Dr. Jain under U.S.S.G. § 2B4.1(b)(1). We reverse th e convictions for mail fraud but otherwise affirm.

### -2- I. Background.

We must v iew the evidence in the light most favorable to the jury's verdict. The government's key witnesses were tw o former administrators of North Hills Hospital ("North Hills"), an acute-care psychiatric hospital which open ed in Kansas City, Missouri, in 1988. Dr. Jain was then a psychol ogist in private practice in Leavenworth, Kansas, operating a n outpat ient therapy clinic and supervising as many as fifteen affiliate d psychologists and counselors. The first North Hills Administrato r testified that his mid-1989 letter promising that North Hills would pay Dr

. Jain $1,000 per month for "marketing" was in fact an agreement to pay mone y for patient referrals. This witness testified that Dr. Jain provided no documentation of any subsequent marketing services; instead, thei r
conv ersations repeatedly linked the payments to Dr. Jain's substantia l volume of patient referrals: Q. Can you com pare the nature of these conversations with Dr. Jain with yo ur other experience with professionals over the years?
A. Well, it is not unusual for professional people to want to affiliate wit h hospitals. . . . It is unusual, though, very unusual for a professional person to make i t so clear that they are willing to exchang e patients for money. Q. Have you ever had that happen before? A. Not in such an open manner. Q. Was there any question in your mind what Dr. Jain was offering in exchange for the hospital to pay money? A. There was no question at all. Q. And what was that? A. Money in exchange for patients.

The next North Hills Administrator testified that Dr. Jain provided little if any tangible marketing support, demanded

### -3-

increa sed payments, threatened to refer his patients elsewhere if th e payments were not increased, and at one time showed the Administrator a letter from a competi ng hospital offering to pay $2500 for each referral. The payments ceased i n October 1990, when a new North Hills Administrator refused to continue the practice. Dr. Jai n testified for the defense. He insisted that North Hills ' first Program Director, who did not testify, agr eed that North Hills would pay Dr. Jain $100 an hour to provide mental health workshops and othe r promotional activitie s in the community. Thus, the letter from the first Administrator did not accurately reflect the understanding. According to Dr. Jain, North Hills persistently under-compensated him for time devoted to these marketing activities, which ultimately led him to terminate the fe e arrangement. Dr. Jain directly contradicted the Administrators ' test imony. He claimed there was no letter from a competing hospita l offeri ng $2500 per patient referral, and he adamantly denied eve r requesting money for patient referrals. Indeed, he asserted on direc t examination that such conduct would be "stupid," "illegal," "unethical," and "wrong." Nonetheless, the jury obviously believed that he did it.

Between July 1989 and October 1990, North Hills made ninetee n payments totaling $40,500 to Dr. Jain, with the payments increasing i n amount and frequency during 1990. He referred forty-nine patients to Nort h Hills in 1989 and 1990. One was a Medicare beneficiary. Thirty wer e insured by the Civilian Health and Medical Program of the Uniforme d Services ("CHAMPUS"), a Defense Department program that provides medical benefit s to the spouses and unmarried children of living and decease d members of the military services. The rest were privately insured.

Though the government had strong evidence of a patient referra l "kic kback" scheme, it had no evidence of tangible harm to Dr. Jain' s patients. The government conceded that each patient

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referred to North Hills was appropriately hospitalized. Several governmen t witnes ses testified that North Hills was likely the best acute-car e psychiatric hospital in the region. One of Dr. Jain's colleagues, who had
no knowledge of the North Hills fee arrangement, testified that he referre d patients to North Hills because it was the close st psychiatric hospital to their practice in Leavenworth, because North Hills had a very good staff and p rogram, and because Dr. Jain's clinic had good relations with th e staff and easy access to the facility. This psychologist also testified tha t Dr. Jain "was very professional in his interactions with patients , verycaring. He put the patient's well-being as his highest priority. " These views were echoed by another government witness, a psychiatrist on the Nort h Hills staff who was also unaware of the fee arrangement. I n addition, no witness claimed that any patient re ceived unnecessary care or excessive hospitalization. Thus, there was no proof that any government insurance program suffered a financial loss.

After the jury convicted defendants on all nineteen counts of th e indictment, they file d post-trial motions to set aside those convictions. Count One charged a c onspiracy to defraud the United States by soliciting kickbacks for referring Medicare and CHAMPUS pat ients to North Hills. The district court vacated this conviction on the authority of United States

v. Porter , 591 F.2d 1048 (5th Cir. 1979), and the government does no t appeal. Count Three charged Dr. Jain with bribing North Hills officials. The di strict court vacated this conviction because defendants paid n o bribes, and again the government does not appeal. However, the district court upheld the conv ictions under Count Two, which charged violations of the Medicare anti-kickback statute, 42 U.S.C. § 1320a-7b(b)(1)(A), an d counts Four through Nineteen, which alleged a sc heme to deprive Dr. Jain's patients of his honest services as a psychologis t in violation of the mail fraud statutes, 18 U.S.C. §§ 1341, 1346. The di strict court sentenced Dr. Jain to five years pr obation, including six months of home detention, and

### 42 U.S.C. § 1320a-7b provides in relevant part: 1 

### (b) Illegal remunerations (1) whoever knowingly and willfully solicits o r receives any remuneration (including any kickback, bribe , or rebate) directly or indirectly, overtly or covertly, in cash or in kind--

(A) in return for referring an individua l to a person for the furnishing of any item or service for which payment may be made in whole or in part under [Medicare] . . . shall be guilty of a felony an d upon conviction thereof, sha ll be fined not more than $25,000 or imprisoned fo r not more than five years, or both.
-5- a $10,0 00 fine. It imposed special assessments of $850 on Dr. Jain an d $3400 on the corporat e defendant. Defendants appeal the convictions; the government cross-appeals Dr. Jain's sentence.

II. The Medicare Anti-Kickback Convictions.

Defendant s argue that the district court's instructions incorrectly defined the term "willfully" in the Medicare anti-kickback statute. W e 1 will uphold an instruction on the mens rea element of a federal crime if it "fairly and adequately" sets forth the statutory requirement. United States v. Otto , 64 F.3d 367, 370 (8th Cir. 1995) , cert. denied , 116 S. Ct. 956 (1996).

The parties assert radically different positions on this issue o f statutory construction. Based upon the traditional principle tha t ignorance of the law is no defense, the government urges us to apply the genera l rule that "willfully" in a criminal statute "refers t o consciou sness of the act but not to consciousness that the act i s unlawful." Cheek v. United States , 498 U.S. 192, 209 (1991) (Scalia, J., concurring). Defendants urge us to adopt the exception to that genera l rule that has long be en applied in criminal tax cases -- willfulness in a criminal tax statute means

### See Omnibus Reconciliation Act of 1980, Pub. L. No. 96-499, 2 

### tit. IX, § 917, 94 Stat. 2599, 2625.
-6- the "voluntary, inten tional violation of a known legal duty." Cheek , 498 U.S. at 201. Defenda nts rely most heavily upon Ratzlaf v. United States , 114 S. Ct. 655, 663 (1994), which extended the standard applied in ta x
cases to criminal prosecutions for "willfully violating" the anti

structuring provisions of the Money Laundering Control Act of 1986, 3 1 U.S.C. § 5322(a) (1993).

The dis trict court adopted a middle ground. The court declined t o instruct the jury that Jain must have intentiona lly violated a known legal duty because the anti-kickback statute prohibits willful conduct -

- receiv ing remuneration for referring patients to a Medicare provider -

- rather than the willful violation of a statute, as in Ratzlaf . But th e court also concluded that a mens rea instruction more rigorous than th e tradit ional rule was appropriate because the literal language of thi s sta tute might otherwise encompass some types of innocent conduct

. Acc ordingly, modifying language found in 2 Edward J. Devitt, Charles B

. Blackmar & Kevin F. O'Malley, Federal Jury Practice and Instructions ¶ 30. 05 (4th ed. 1990), the court instructed the jury that "the wor d 'wi llfully' means unjustifiably and wrongfully, known to be such by th e defendant Swaran Jain." It also instructed that "good faith" was a defens e to this charge, explaining that Dr. Jain acted in good faith if he believe d he was being paid for promoting North Hills, not for referring patients.

We agree with the district court's resolution of this issue. Th e word "willful" has many meanings and must be construed in light of it s statutory context. Ratzlaf , 114 S. Ct. at 659. Here, the element s "knowingly and willfully" were added to the statute in 1980 to reflec t 2 congressional concern "that criminal penalties may be imposed under curren t law to an individual whose conduct, while improper, was inadvertent." H.R

. Rep. No. 1167, 96th Cong., 2d

### -7-

Sess. 59 (1980), reprinted in1980 U.S.C.C.A.N. 5526, 5572. The reference to "inadvertent" is rather ambiguous in this context, since the traditiona l defin ition of "willfully" -- consciousness of the act -- might b e sufficient to weed out inadvertent violators. But the statute also ha s elaborate "safe harbor" provisions, see § 1320a- 7b(b)(3), provisions which have p rompted pages of administrative agency explication, see 42 C.F.R

. § 1001.952. This confirms that a broad "illegal remunerations" statute is like the statute at issue in Ratzlaf in that it potentially include s condu ct that is not "inevitably nefarious." Only conduct that i s inev itablynefarious, that is, "obviously 'evil' or inherently 'bad,' " warrants the traditional presumption that anyone consciously engaging in it has fair warning o f a criminal violation. Ratzlaf , 114 S. Ct. at 661- 62. Thus, we agree with the district court's decision to instruct the jur y that the government must meet a heightened mens rea burden. See Liparota v. United States , 471 U.S. 419, 423-33 (1985) (knowingly using food stamp cards in an unauthorized manner requires proof that defendant knew hi s conduct was unauthorized); United States v. Curran , 20 F.3d 560, 569 (3d Cir. 1994); United States v. Hern , 926 F.2d 764, 767 & n.6 (8th Cir. 1991)

.

But that does not mean that the specific instruction adopted i n Ratzla f and the criminal tax cases is appropriate in this case. Th e statute at issue in Ratzlaf made criminal a willful violation of another anti-structuring stat ute. Because one cannot willfully violate a statute withou t knowing what the statute prohibits, the Supreme Court require d proof that defendant intentionally violated a "k nown legal duty." See 114 S. Ct. at 658-59. By contrast, in the Medicare anti-kickback statute, the word "willfully" modifies a series of prohibited acts. Both the plai n language of that statute, and respect for the traditional principle that ignorance of the law is no defense, suggest that a heightened mens re a standard should only require proof that Dr. Jainknew that his conduct was wrongful, rather than proof that he knew it violated "a

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known legal duty." Therefore, the district court's definition o f "wi llfully" correctly construed the 1980 amendment to § 1320a-7b

. Hanlester Network v. Shalala , 51 F.3d 1390, 1399-1400 (9th Cir. 1995), doe s not persuade us to adopt defendants' position. That case i s distinguishable because it involved an administrative debarment proceeding

. In add ition, the court adopted Ratzlaf 's heightened mens rea standar d without considering other alternatives to the ge neral rule. Accord United States v. Neufeld , 908 F. Supp. 491, 497 (S.D. Ohio 1995).
Alternatively, we conclude that the district court's refusal to give
an ins truction using the Ratzlaf definition of willfully was harmles s error. Dr. Jain's defense was that he did not t ake money from North Hills for referring patients. On direct examination, he testified that payments for patient referrals are not only "unethical" and "wrong," they ar e "illegal." That test imony effectively took mens rea out of the case, for Dr. Jain acknowledgedthat, if the jury disbelieved his denials, he would be guilty under his own requested instruction as well as the instruction given by the district court.

III. The Mail Fraud Convictions.

The mail fraud statute prohibits use of the mails to execute "an y scheme or artifice to defraud." 18 U.S.C. § 134 1. "Essential to a scheme to defraud is fraudulent intent. . . . The schem e to defraud need not have been successful or complete. Therefore, the victims of the scheme need no t have been injured. However, the government must show that some actual har m or injury was contemp lated by the schemer." United States v. D'Amato , 39 F.3d 1249, 1257 (2d C ir. 1994) (citations and quotation omitted). Accord United States v. Sawyer , 85 F.3d 713, 725 (1st Cir. 1996). Defendant s argue that the government failed to prove a scheme to defraud. We agree.

### -9- The gover nment alleged that Dr. Jain's patients were the victims of
a fraudulent referral fees scheme. But there was no evidence that an y patient suffered tang ible harm. So far as the trial record reflects, Dr. Jain provided quality psychological services. Each hospitalized patient required h ospitalization. North Hills was as good or better than an y alternative facility and provided his patients with proper care. And no pat ient was financially harmed by Dr. Jain's fee arrangement with Nort h Hills. The government argues that tangible harm is irrelevant because i t proved a scheme to defraud under 18 U.S.C. § 1346, which defines "scheme
or artifice to defraud" to include a scheme "to deprive another of th e intangible right of honest services." Section 1 346 was enacted in 1988 to overrule the Supreme Court's decision in McNally v. United States , 483 U.S

. 350 (1987). Though McNally and the vast majority of earlier "intangible rights" mail fraud cases involved corrupt public officials, the government argues that § 1346 encompasses unethical violations of a privat e professional's fiduciary duty to provide "honest services" to his clients.

It is cer tainly true that the literal language of § 1346 extends to priva te sector schemes to defraud another of the right to "hones t
serv ices." But the transition from public to private sector in thi s context raises troubl esome issues. In a democracy, citizens elect public officials to act for the common good. When official action is corrupted by secret bribes or kickbacks, the essence of the political contract i s violated. But in the private sector, most relationships are limited t o more concrete matters . When there is no tangible harm to the victim of a private scheme, it is hard to discern what intangible "rights" have been violated. For example, what "honest services" do we expect from a used ca r salesman, beyond a truthful description of the car being sold? Thus, prio r intangible rights con victions involving private sector relationships have almost invariably included proof of actual harm to the victims' tangible interests. In United States v. Garfinkel ,

### The regulat ions of the Kansas Behavioral Sciences Regulatory 3 

### Board define unprofessional conduct by a licensed psychologist to includ e receiving fees for the referral of clients or patients

. See Kan. Admin. Regs. 102-1-10(b)(20); see also America n Psychological Ass'n, Ethical Principles of Psychologists and Code of Conduct , Ethical Std. 1.27 (1992).
-10- 29 F.3d 1253, 1258 (8th Cir. 1994), for example, defendant was a Universit y of Minnesota psychiatrist whose scheme deprived a financial sponsor of the valuable benefits of legitimate pharmaceutical research.
Of course, the government limits its argument to undisclosed br eaches of a healt h care professional's fiduciary duty to his clients. But when 3 the client was not harmed because the breach did not affect the services rendered, how has the client's right to "honest services" been violated? Even in pre- McNallycases involving public official misfeasance -

- deci sions whose vitality was restored by § 1346 -- we cautioned tha t "[e] verycase of breach of public trust and misfeasance in office i n connection with which some mailing has occurred does not and cannot fall within the confines of the mail fraud statute." United States v. Rabbitt , 583 F.2d 1014, 1024 (8th Cir. 1978), cert. denied , 439 U.S. 1116 (1979); see also United States v. McNeive , 536 F.2d 1245, 1249 (8th Cir. 1976).
Fortunately, this case does not require us to define the outer limits of the private sector rights to "honest services" that are now protected by § 1346. That statute does not stand alone -- it modifies the definitio n of "scheme or artific e to defraud" in § 1341. The essence of a scheme to defra ud is an intent to harm the victim. When there has been no actua l harm, "the government must produce evidence independent of the allege d scheme to show the defendant's fraudulent intent." D'Amato , 39 F.3d a t 1257; see United States v. Pintar , 630 F.2d 1270 , 1279-80 (8th Cir. 1980). Here, all the evidence suggests that Dr. Jain intended to provide

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and did in fact provide his patients with the highest quality psychologica l servic es. While he also extracted undisclosed, unethical referral fee s from an interested th ird party provider, there is no independent evidence proving that he there by intended to defraud his patients. True, Dr. Jain did not disclose the referral fees, but a fiduciary's nondisclosure must be material to constitute a criminal scheme to d efraud. See United States v. Bronston , 658 F.2d920, 927 (2d Cir. 1981), cert. denied , 456 U.S. 915 (1982); United States v. Brown , 540 F.2d 364, 375 (8th Cir. 1976). There is simply no evidence that any patient would have considered Dr. Jain' s relationship with North Hills material if it didnot affect the quality or cost of his services to that patient. For t hese reasons, we conclude the mail fraud convictions must b e reversed. The government's theory and proof bring to mind our conclusion in an e arly intangible rights case involving a greedy but uncorrupte d public official, McNeive , 536 F.2d at 1252:

The Government here is attempting to criminalize cupidity and we do not believe that § 1341 can be extended to that extreme

. . . . [T]here must be, at a minimum, a cognizable scheme to defraud. While we do not place our imprimatur upon McNieve's avariciousness, we fail to find from the Government's proo f th at McNeive engaged in a scheme to defraud the City of St

. Louis of any tangible or intangible right so as to fall within the broad reaches of the mail fraud statute.

IV. The Sentencing Cross-Appeal.

The district court sentenced Dr. Jai n for his Medicare anti-kickback offens e under U.S.S.G. § 2B4.1, which governs commercial bribery an d kickback offenses. That guideline mandates an increase in the base offens e level if an improper benefit exceeding $2000 was conferred upon th e defend ant. See U.S.S.G. §§ 2B4.1(a), (b)(1), and 2C1.1, comment

. (backg'd). The amoun t of the increase is determined by a cross-reference to the table in § 2F1.1. The

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district court declined to impose an increase because it found that Dr

. Jain received less than $2,000 for referring one Medicare patient to North Hills. O n appeal, the government argues that all of the $40,500 i n referr al payments should have been counted as relevant conduct becaus e there was one common scheme or plan.

The d istrict court's factual determination of relevant conduct i s revi ewed under the clearly erroneous standard. See United States v

. Sheahan , 31 F.3d 595, 599 (8th Cir. 1994). Relevant conduct for sentencin g purposes must be criminal conduct. Id. at 600. The district cour t acquitted Dr. Jain of the bribery charge, and we have acquitted him of the mail fraud charges. At the time in question, Medicare did not reimburse payments for psychologist services, so there is no factual basis to presum e that the Jain/North H ills fee arrangement targeted Medicare patients. In these circumstances, while a sentencing court may consider conduct fo r which the defendant has been acquitted, see Unit ed States v. Galloway , 976 F.2d 41 4, 424 n.6 (8th Cir. 1992) (en banc), cert. denied , 507 U.S. 97 4 (1993), we conclude t hat the district court's findings regarding relevant conduct a re not clearly erroneous. See United States v. Balano , 8 F.3 d 629, 631 (8th Cir. 1993).

The convictions of Dr. Jain and the Center for Mental Healt h Services, Inc., for violating the Medicare anti-kickback statute, 42 U.S.C

. § 1320a-7(b), are affirmed. The district court's determination of relevan t conduct for purposes of sentencing Dr. Jain for that offense is affirmed. Defendants' convictions for violating the federal mail fraud statute are reversed and the cases are therefore remanded for resentencing.

A true copy.

Attest:

CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.