Opinion ID: 510623
Heading Depth: 2
Heading Rank: 2

Heading: The Post-McNally Decisions

Text: 22 Some five months after deciding McNally, the Supreme Court filed its first opinion which clarified McNally. In Carpenter v. United States, --- U.S. ----, 108 S.Ct. 316, 98 L.Ed.2d 275 (1987), R. Foster Winans, one of the authors of the Wall Street Journal's (Journal) daily Heard on the Street column, 13 made the information, to be contained in the column, available to a securities broker prior to the column's publication. Because the column's discussion of various stocks often had either a positive or adverse impact on the prices of those stocks, the selective release of confidential information prior to its publication allowed Winans and his co-conspirators to trade on the basis of the probable impact of the column on the market. Id. 23 Winans was ultimately convicted for both mail and wire fraud under 18 U.S.C. Secs. 1341 and 1343. The Second Circuit subsequently upheld the conviction on the theory that Winans had fraudulently misappropriated intangible property from the Journal within the purview of the mail and wire fraud statutes. On appeal to the Supreme Court, Winans argued, among other things, that his convictions for mail and wire fraud were invalid under McNally, because the Journal had not been deprived of money or property. Id. 108 S.Ct. at 320. 24 The Supreme Court disagreed, and affirmed the Second Circuit's decision. It held that McNally did not limit the scope of Sec. 1341 to tangible as distinguished from intangible property rights. Id. The Supreme Court sustained Winans' conviction on the ground that the confidential information secretly parlayed into profits by Winans, constituted that form of intangible property in which the Journal had a proprietary interest and which constituted property within the meaning of the mail fraud statute. Id. While the Carpenter Court broadly interpreted the meaning of property interests by making it clear that a mail fraud conviction could be sustained even in the absence of a purely monetary or tangible property loss, the Supreme Court noted that the Journal had been defrauded of much more than its contractual right to [Winans'] honest and faithful service, an interest too ethereal in itself to fall within the protection of the mail fraud statute, which 'had its origin in the desire to protect individual property rights.'  Id. (quoting McNally, 107 S.Ct. at 2881 n. 8). 25 In the wake of the Court's decisions in McNally and Carpenter, a significant number of pre-McNally criminal convictions have been challenged on the ground that they were based on the now outlawed intangible rights doctrine. In response to these challenges, the courts of appeals have sought to analyze and apply McNally and Carpenter within an appropriate framework. Those cases in which a conviction was based entirely on the intangible rights theory of mail fraud, and in which the instructions to the jury could not assure that money or property interests were implicated, have been overturned on McNally's authority. See, e.g., United States v. Conover, 845 F.2d 266 (11th Cir.1988); United States v. Ochs, 842 F.2d 515 (1st Cir.1988); United States v. Holzer, 840 F.2d 1343 (7th Cir.1988); United States v. Matt, 838 F.2d 1356 (5th Cir.1988); United States v. Covino, 837 F.2d 65 (2d Cir.1988); United States v. Murphy, 836 F.2d 248 (6th Cir.1988); United States v. Gordon, 836 F.2d 1312 (11th Cir.1988); United States v. Murphy, 836 F.2d 248 (6th Cir.1988); United States v. Cooke, 833 F.2d 109 (7th Cir.1987); United States v. Gimbel, 830 F.2d 621 (7th Cir.1987); United States v. Herron, 825 F.2d 50 (5th Cir.1987). 26 However, in those cases in which courts have concluded that monetary or property losses have resulted from fraudulent schemes, convictions have been upheld on the basis of those losses, despite the fact that the government may have relied, at least in part, on the intangible rights theory as a basis for the convictions. See, e.g., United States v. Perholtz, 836 F.2d 554 (D.C.Cir.1988); United States v. Piccolo, 835 F.2d 517; United States v. Richerson, 833 F.2d 1147 (5th Cir.1987); United States v. Runnels, 833 F.2d 1183 (6th Cir.1987); United States v. Wellman, 830 F.2d 1453 (7th Cir.1987); United States v. Fagan, 821 F.2d 1002 (5th Cir.1987), cert. denied, --- U.S. ----, 108 S.Ct. 697, 98 L.Ed.2d 649 (1988). This court's recent decision in United States v. Piccolo, 835 F.2d 517 provides an excellent example of a post-McNally analysis. 27 In Piccolo, the defendant, Anthony Piccolo, participated in a commercial kickback scheme in which he caused his company to issue false invoices as part of a money laundering operation. For his efforts in facilitating the laundering of monies, Piccolo kept part of the money paid to his company. 28 The district court's jury instructions implicated both property losses allegedly suffered by Piccolo's employer and intangible losses arising from Piccolo's dishonesty. The property rights component of the instruction included references to Piccolo's receipt of a bribe and to money lost by a second company (not his employer) as a result of the fraudulent scheme. The district court's instructions stated that in order to return a conviction, the jury must find that the defendant devised a scheme or artifice to defraud [his employer] United Engineers of its right to the honest, faithful and loyal services of its employee ... and further, to defraud both United Engineers and Delmarva Power and Light Company of money. 835 F.2d at 520. 14 29 On appeal, Piccolo argued, as does Asher in the instant case, that his mail fraud conviction should be overturned because the district court's instructions permitted the jury to convict him for conduct outside the post-McNally parameters of the mail fraud statute. Piccolo claimed that the jury was permitted to convict him of mail fraud if it found that he had participated in a scheme to defraud his employer of its right to his honest and faithful services, even if the object of wrongfully obtaining money or property was not part of the scheme. 30 In analyzing the district court's instructions, we stated that a plain reading of [the instructions] fairly compels the conclusion that Piccolo could be convicted of mail fraud only if the jury found that he participated in a scheme to defraud United Engineers ... of money. Id. at 520. We continued by stating that [e]ven if we assume that the [intangible rights instruction] was a misstatement of the law in the present context, we find that the jury could not, given the totality of the instructions, have convicted Piccolo unless it found that an object of the scheme in which he participated was to obtain money from Delmarva Power. Id. Accordingly, we found no reversible error in the jury instructions. But see id. at 521 (Aldisert, J., dissenting). 31 A similar outcome was reached by the Sixth Circuit in United States v. Runnels, 833 F.2d 1183 (6th Cir.1987), though on a somewhat different and more creative theory, and one to which we do not necessarily subscribe. In Runnels, Frank Runnels, the President of Local 22 of the United Automobile Workers (UAW), took bribes in return for referring workers' compensation cases to a particular law firm. Runnels was subsequently charged with committing mail fraud by obtaining money through false and fraudulent pretenses and by depriving Local 22 of his fair and honest services. After he had been convicted, Runnels appealed his conviction, arguing that it could not stand in light of McNally. 32 In affirming Runnels' conviction, the Sixth Circuit relied on principles of agency law, reasoning that, because Runnels received a bribe in his role as Local 22's president, that money rightfully belonged to the Local, of which he was an agent. The court stated that: 33 [t]he existence of ... a bribe or kickback makes it unnecessary to invoke intangible rights doctrine. The fiduciary's acquisition of an economic benefit which properly belongs to the principal, through an intentional breach of a fiduciary duty owed to the principal, is in itself sufficient to support a finding of guilt under 18 U.S.C. Sec. 1341. 34 Runnels, 833 F.2d at 1187. The court, relying primarily on the constructive trust argument made in Justice Stevens' dissent in McNally, 15 supported its conclusion on the ground that the financial benefit obtained by fiduciary in the form of a bribe belongs to the entity to whom he has a duty, and by accepting the bribe, the fiduciary has deprived that entity of property or money in which it has an ownership interest. Id. Thus, the court affirmed Runnels' conviction, concluding that the economic deprivation to the principal which occurs when the fiduciary knowingly breaches his duty by accepting a bribe, the value of which properly belongs to the principal, is itself sufficient to support a finding of taking of value. Id. 16 35 In two subsequent cases, the Fifth Circuit used an analysis somewhat similar to the analysis used by the Sixth Circuit in Runnels, in affirming post-McNally mail fraud convictions dependent in part on the presence of an intangible right. See U.S. v. Richerson, 833 F.2d 1147 (5th Cir.1987); United States v. Fagan, 821 F.2d 1002 (5th Cir.1987), cert. denied, --- U.S. ----, 108 S.Ct. 697, 98 L.Ed.2d 649 (1988). Unlike the Local union in Runnels however, the employers in both Fagan and Richerson suffered direct monetary losses in addition to being deprived of intangible rights. 36 Fagan involved a kickback scheme in which Ralph Fagan, the owner of two companies engaged in the leasing of work boats to offshore oil companies, would pay kickbacks to Donald Riley, the drilling manager for an offshore company, in exchange for a promise that Riley's employer would lease boats from Fagan's companies. In finding that Riley's employer had been economically disadvantaged by Fagan's scheme because it might have received some of the economic benefits being kept by Riley, the Fifth Circuit was able to comply with the requirements of McNally and to affirm Fagan's conviction, despite the arguably intangible (breach of duty of loyalty) nature of the losses to Riley's employer. See Fagan, 821 F.2d at 1011 n. 6. 37 Similarly, in Richerson, an employee (Richerson) of an offshore oil drilling contractor accepted kickbacks from oil rig parts vendors in exchange for steering business to those vendors. The kickbacks were financed by money received from false invoices submitted to Richerson's employer by the vendors. Thus, Richerson's employer was deprived of Richerson's honest services and unknowingly financed the kickbacks. At Richerson's trial, the jury was instructed, inter alia, that ... the object of a fraudulent scheme need not be the deprivation of a tangible interest. Artifices designed to cause losses of an intangible nature also violate the statute. Richerson, 833 F.2d at 1156. Despite this jury instruction, which allowed for a conviction without a finding of monetary or property loss by the employer, see id. at 1156-57, the Fifth Circuit upheld Richerson's conviction citing to Justice Stevens' footnote. In doing so, the Fifth Circuit stated that [t]he McNally majority did not disagree with Justice Stevens' comments regarding employee's breaches of loyalty. Id. at 1157. 38 The Richerson court's primary reliance was on the Supreme Court's decision in Carpenter. The Fifth Circuit stated that Richerson's concealment of material information from his employer is analogous to the Carpenter defendant's disclosure of his employer's material information. Id. Noting that the overriding and predominant theory of the Government's case involved [the employer's] loss of money and property, the Richerson court minimized the intangible rights language in the challenged jury instruction and affirmed. Id. 39 Unlike the Fifth Circuit's interpretation of McNally in Richerson and Fagan, each of which relied at least in part on Justice Stevens' McNally dissent, the Seventh Circuit has upheld a pre-McNally conviction on a somewhat broader theory. It held that a conviction may be affirmed where an evaluation of the indictment, jury instructions, and proof in the case leads to the conclusion that monetary or property losses underlay the fraudulent scheme at issue. United States v. Wellman, 830 F.2d 1453 (7th Cir.1987). 40 In Wellman, Glenn Wellman, the chief executive officer of a shipping tank manufacturer, sold a number of refurbished shipping tanks to M-Chem Chemical Company after having assured M-Chem that the tanks met government specifications. After the government discovered that Wellman had made a series of fraudulent misrepresentations about the tanks' specifications, Wellman was indicted on charges that he had engaged in a scheme to defraud M-Chem of its right to have tanks which complied with government regulations. The indictment specifically charged that Wellman's scheme had defrauded M-Chem of its right to have safe and authorized equipment for the storage and shipment of hazardous chemicals and of its right to know that equipment it purchased was in full compliance with D.O.T. regulations.... Id. at 1462. 41 Notwithstanding the intangible character of this part of the indictment, the Seventh Circuit affirmed Wellman's conviction. The Court emphasized that the district court's instructions had required the jury to find that Wellman had intended to deprive another of something of value, id. at 1463, and that the harm to M-Chem, i.e., the money it paid Wellman for the substandard tanks, was anything but 'intangible.'  Id. The court further noted that Wellman's scheme clearly involved 'wronging [M-Chem] in [its] property rights by dishonest methods or schemes.'  Id. (brackets in original) (quoting McNally, 107 S.Ct. at 2881). Thus, the Seventh Circuit looked beyond portions of the language in the indictment and jury instructions that referred to intangible rights, and instead focused on the ultimate monetary losses that were clearly part of Wellman's fraudulent scheme. Id. 42 The District of Columbia Circuit was presented with an opportunity to analyze and apply McNally in United States v. Perholtz, 836 F.2d 554 (D.C.Cir.1987) (per curiam) but in a bail pending appeal context rather than on a direct appeal of a mail fraud conviction. In Perholtz, the appellants developed a computerized payroll system and data communications system for use by various federal agencies. They were convicted by a jury of mail fraud committed in furtherance of a kickback scheme whereby they received unearned commissions from subcontractors of one of the systems. On appeal of the district court's denial of appellants' motion for release on bail pending appeal, the D.C.Circuit affirmed the district court on the ground that the McNally issue did not raise a substantial question on appeal. The Court's analysis--which focused on bottom-line monetary losses in much the same way as did the Seventh Circuit's analysis in Wellman--was predicated on the theory that the scheme, 43 ensured that the 'negotiated' cost of the subcontracts was higher than the price at which the subcontractors would have been willing to contract, and ensured that this higher cost was passed through to the [government] in its cost-plus contract with the prime contractor. The defendants' scheme caused the [government] to pay more than it need have, so it cannot be said that the cost would necessarily have been paid to some company in the sense that this was true in McNally. In fact, a lesser cost could have been paid to the prime contractor if the defendants had negotiated subcontracts that did not include the cost of bogus marketing agreements and other kickbacks. 44 Id. at 558. 45 Thus, despite the fact that the indictment and the jury charge included classic intangible rights language, see Perholtz, 836 F.2d at 559, the D.C.Circuit concluded that, when taken together and in their respective totalities, the jury charge and the indictment required that the jury find a tangible property loss by the government in order to convict. Id.