Opinion ID: 427194
Heading Depth: 2
Heading Rank: 1

Heading: The Scope of Criminal Fraud

Text: 15 The elements of wire fraud are (1) formation of a scheme to defraud, 6 and (2) use of interstate wire communication to further that scheme. 7 See United States v. Pollack, 534 F.2d 964, 971 (D.C.Cir.),cert. denied, 429 U.S. 924, 97 S.Ct. 324, 50 L.Ed.2d 292 (1976); cf. Pereira v. United States, 347 U.S. 1, 8, 74 S.Ct. 358, 362, 98 L.Ed. 435 (1954) (elements of mail fraud); United States v. Diggs, 613 F.2d 988, 997 (D.C.Cir.1979) (same); United States v. George, 477 F.2d 508, 511 (7th Cir.) (same), cert. denied, 414 U.S. 827, 94 S.Ct. 155, 38 L.Ed.2d 61 (1973). Congress did not define scheme or artifice to defraud when it first coined that phrase, nor has it since. See United States v. Reid, 533 F.2d 1255, 1264 (D.C.Cir.1976); United States v. Von Barta, 635 F.2d 999, 1005 (2d Cir.1980), cert. denied, 450 U.S. 998, 101 S.Ct. 1703, 68 L.Ed.2d 199 (1981). 8 Instead that expression has taken on its present meaning from 111 years of case law. 9 See Von Barta, 635 F.2d at 1005 (legislative history helpful); United States v. McNeive, 536 F.2d 1245, 1247 n. 3 (8th Cir.1976) (same). 16 At the core of the judicially defined scheme to defraud is the notion of a trust owed to another and a subsequent breach of that trust. But [n]ot every breach of a fiduciary duty works a criminal fraud. George, 477 F.2d at 508. In their attempts to delineate which breaches of duty rise to the level of criminal fraud, courts have used various limiting doctrines. Some, including this court, have required that the fraud be active--that the fiduciary utilize his trusted position to obtain a benefit for himself at the expense of the person whose trust he breaches. See Post v. United States, 407 F.2d 319, 329 (D.C.Cir.1968), cert. denied, 393 U.S. 1092, 89 S.Ct. 863, 21 L.Ed.2d 784 (1969); Epstein v. United States, 174 F.2d 754, 766 (6th Cir.1949). Other courts have required that the breach be accompanied by some material non-disclosure or misrepresentation to the party owed the duty. See, e.g., United States v. Ballard, 663 F.2d 534 (5th Cir. Unit B 1981), modified in part and reh'g denied, 680 F.2d 352 (5th Cir. Unit B 1982); Von Barta, 635 F.2d at 1006. The crux of these requirements is that the wire fraud statute makes criminal only breaches of duty that are accompanied by a misrepresentation or non-disclosure that is intended or is contemplated to deprive the person to whom the duty is owed of some legally significant benefit. See Diggs, 613 F.2d at 997 (proof of fraudulent intent is critical); Ballard, 663 F.2d at 541 n. 17 (relating materiality to active fraud). 17 Although critical ambiguities about the scope of the wire fraud statute remain, there is judicial consensus about certain requisite elements of a scheme to defraud. The duty breached need not arise from state or federal law; in particular, it may stem from an employment relationship of the sort that imposes discretion and consequently obligations of loyalty and fidelity on the employee. See, e.g., Ballard, 663 F.2d at 541; Von Barta, 635 F.2d at 999; United States v. Bohonus, 628 F.2d 1167, 1172 (9th Cir.), cert. denied, 447 U.S. 928, 100 S.Ct. 3026, 65 L.Ed.2d 1122 (1980); United States v. Reece, 614 F.2d 1259, 1261 (10th Cir.1980); United States v. Bryza, 522 F.2d 414, 422 (7th Cir.1975), cert. denied, 426 U.S. 912, 96 S.Ct. 2237, 48 L.Ed.2d 837 (1976). And although the scheme to defraud must threaten some cognizable harm to its target, that harm need not be a deprivation of tangible property or money; criminal fraud encompasses schemes to defraud persons of significant intangibles as well. See, e.g., United States v. Condolon, 600 F.2d 7, 8 (7th Cir.1979) (scheme to obtain sexual favors by false promises of modelling or acting job); United States v. Louderman, 576 F.2d 1383, 1387-88 (9th Cir.) (scheme to invade privacy by obtaining confidential information from telephone company), cert. denied, 439 U.S. 896, 99 S.Ct. 257, 58 L.Ed.2d 243 (1978). With the broadening of the scope of the statute to cover intangible harms, however, has come a certain amount of confusion and controversy over the outer boundaries of wire fraud. In particular, premising a felony solely on a scheme to defraud an employer of the loyal services of his employee has spawned a fierce debate about potential over-criminalization of employer-employee breakdowns, better handled in the civil courts. 10 Carried to its logical extreme, such a theory would criminalize any intentional undisclosed breach of duty to an employer. The government appears to be arguing just such a theory here, but we are not inclined to accept it for the following reasons. 18 An employer values the loyalty of his employees and prohibits conflicts of interest primarily because such conflicts create an incentive for the employee to act in a manner detrimental to the employer's tangible monetary interests. Employee loyalty is not an end in itself, it is a means to obtain and preserve pecuniary benefits for the employer. An employee's undisclosed conflict of interest does not by itself necessarily pose the threat of economic harm to the employer. Therefore it does not alone constitute a sufficient indicium that the employee intended any criminally cognizable harm to the employer. 11 Other surrounding circumstances may of course provide the necessary proof that the employee intended such harm. 12 We hold today, however, that an intentional failure to disclose a conflict of interest, without more, is not sufficient evidence of the intent to defraud an employer necessary under the wire fraud statute. 13 See United States v. Feldman, 711 F.2d 758, 763 (7th Cir.1983). There must be a failure to disclose something which in the knowledge or contemplation of the employee poses an independent business risk to the employer. Other courts have so held. Von Barta, 635 F.2d at 1005 n. 14; United States v. Dixon, 536 F.2d 1388, 1400-01 (2d Cir.1976). 19 At the same time, we are not unaware that undisclosed conflicts of interest create fertile ground for subsequent misuse of the employee's position. The vice against which [courts] seek to guard ... is that the adverse interest of the individuals may overcome [their] duty [as] officials, and induce agreements and transactions detrimental to the [employer] and unduly beneficial to the individuals. Epstein, 174 F.2d at 764, (quoting Wyman v. Bowman, 127 F. 257, 273 (8th Cir.1904)). Accordingly, our holding does not remove from the ambit of wire fraud undisclosed conflicts that, accompanied by activity on the part of the employee, carry a significant risk of identifiable harm to the employer apart from the loss of his employee's loyalty and fidelity. So long as the jury finds the non-disclosure furthers a scheme to abuse the trust of an employer in a manner that makes an identifiable harm to him, apart from the breach itself, reasonably foreseeable, it may convict the employee of wire fraud. The crucial determination must be whether the jury could infer that the defendant might reasonably have contemplated some concrete business harm to his employer stemming from his failure to disclose the conflict along with any other information relevant to the transaction. See Von Barta, 635 F.2d at 1005 n. 14; Dixon, 536 F.2d at 1399 n. 11. 20 Although this formulation may differ in some respects from that of other courts, we believe it only makes more explicit what they meant by a material non-disclosure or misrepresentation. 14 The leading case defining material non-disclosure is Ballard, 663 F.2d 534, which involved a scheme to channel oil through a chain of oil companies in order to generate commissions. The scheme's mastermind, Mr. Granlund, was hired by the Florida Power Company to obtain oil during the 1973 oil shortage. The Florida Power Company paid him for this and also allowed him to receive commissions from the oil companies. By channelling the purchases through five companies, Granlund received five commissions on each sale; channelling in turn was arranged by giving kickbacks to employees of the intermediary companies responsible for purchases and sales of oil. The intermediaries were subject to price controls which limited the profit they could make on sales of oil. The Ballard court held that in light of these price controls the employees of the intermediaries did not intend to defraud their employers because the employers already received the maximum profits on each sale. The court reasoned that the failure of the employees to disclose the scheme to the intermediary employers would therefore not have altered their business conduct, so the non-disclosure was not material. 15 21 In Ballard, the Fifth Circuit stated that a non-disclosure is material only if the employee has reason to believe that the information would lead a reasonable employer to change its business conduct. 663 F.2d at 541; see also Feldman, 711 F.2d at 763 (simple concealment of conflict of interest in customer's accounts immaterial because it would not itself have enabled defendant to trade without advancing sufficient collateral); United States v. Bethea, 672 F.2d 407 (5th Cir. Unit B 1982) (procurement officer's ordering storage for servicemen who did not request it, thereby giving business to cosigner of defendant's loan, not fraud unless activities were not in furtherance of servicemen's best interest). Since an employer presumably would change its business conduct only if, upon disclosure of the conflict and any other relevant information, it saw new opportunities for profit or savings, or dangers of economic harm, the notion of materiality of non-disclosure or misrepresentation in the wire fraud context must logically focus on the reasonable foreseeability by the employee of potential economic harm to his employer stemming from the employer's ignorance of information relevant to the conflict.