Opinion ID: 3001508
Heading Depth: 4
Heading Rank: 1

Heading: Background and history

Text: The mail fraud statute, 18 U.S.C. § 1341, criminalizes the use of the mails for carrying out a “scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises.” The courts had long interpreted this statute as encompassing schemes to defraud another not just of money and property, but also “intangible rights,” chief among them the right of citizens to the honest discharge of public duties by public servants. The Supreme Court put an end to this theory in McNally v. United States, 483 U.S. 350, 360 (1987), holding: Rather than construe the statute in a manner that leaves its outer boundaries ambiguous and in- volves the Federal Government in setting stan- dards of disclosure and good government for local and state officials, we read § 1341 as limited in scope to the protection of property rights. If Congress desires to go further, it must speak more clearly than it has. Nos. 06-4251, 06-4252, 06-4253 & 06-4254 7 Congress then spoke. The year after the McNally decision it passed 18 U.S.C. § 1346, which reads in its entirety: “For the purposes of this chapter, the term ‘scheme or artifice to defraud’ includes a scheme or artifice to deprive another of the intangible right of honest services.” The statute superseded McNally and reinstated the line of cases preceding it. See United States v. Rybicki, 354 F.3d 124, 13637 (2d Cir. 2003) (en banc). Broadly speaking, honest services fraud cases come in two types. In the first, an employer is defrauded of its employee’s honest services by the employee or by another. In United States v. George, 477 F.2d 508, 509-10 (7th Cir. 1973), for example, an employee of television manufacturer Zenith granted a contract to another company to supply television cabinets in exchange for kickbacks. The Zenith employee, the worker at the cabinet factory, and a middleman all were convicted of depriving Zenith of its employee’s honest services. In the second and more common type of case, the citizenry is defrauded of its right to the honest services of a public servant, again, by that servant or by someone else. For instance, in United States v. Warner, 498 F.3d 666 (7th Cir. 2007), the Illinois Secretary of State channeled state contracts and leases to a friend in return for paid vacations. In both examples above, and in most honest services cases, the defendant violates a fiduciary duty in return for cash—kickbacks, bribes, or other payments. Not all fraud cases follow this precise pattern, as we shall see, but given the amorphous and open-ended nature of § 1346, see United States v. Brown, 459 F.3d 509, 520-21 (5th Cir. 2006), courts have felt the need to find limiting principles, and ours has been that the “[m]isuse of office (more broadly, misuse of position) for private gain is the line that separates 8 Nos. 06-4251, 06-4252, 06-4253 & 06-4254 run-of-the-mill violations of state-law fiduciary duty . . . from federal crime.” United States v. Bloom, 149 F.3d 649, 655 (7th Cir. 1998) (emphasis added). We took our language from McNally, which summed up the existing law and characterized honest services mail fraud in this way. See 483 U.S. at 355. The limitation not only cabins zealous prosecutors by insuring that not every violation of a fiduciary duty becomes a federal crime, but also reduces the risk of creating federal common law crimes, which are not permitted. Bloom, 149 F.3d at 654-55. Other courts have crafted their own limiting principles to keep § 1346 from becoming too unwieldy. The Third and the Fifth Circuits have adopted “a state law limiting principle,” meaning that ordinarily, honest services mail fraud only occurs when the defendant’s scheme to defraud involves a violation of state law. See United States v. Murphy, 323 F.3d 102, 116-17 (3d Cir. 2003); United States v. Brumley, 116 F.3d 728, 734-35 (5th Cir. 1997) (en banc). Courts have also crafted special requirements in the limited context of honest services fraud in the private sector. See generally Kristen Kate Orr, Note, Fencing in the Frontier: A Look into the Limits of Mail Fraud, 95 Ky. L.J. 789, 797-99 (2007). Our misuse-of-position-for-private-gain limitation has not been adopted by other circuits, and in fact has come in for its share of criticism. The Tenth Circuit, in rejecting the limitation, characterized it as an effort “to judicially legislate by adding an element to honest services fraud which the text and structure of the fraud statutes do not justify.” United States v. Welch, 327 F.3d 1081, 1107 (10th Cir. 2003). And the Third Circuit stated that the requirement “adds little clarity to the scope of § 1346” and is, among other things “under-inclusive” because it would not cover Nos. 06-4251, 06-4252, 06-4253 & 06-4254 9 a situation—such as an undisclosed conflict of interest—that does not actually yield a benefit. United States v. Panarella, 277 F.3d 678, 691-92 (3d Cir. 2002). The Tenth Circuit expresses a legitimate concern, for the only elements of mail fraud are (1) a scheme to defraud (en- tailing a material misrepresentation), (2) an intent to defraud, and (3) the use of the mails. See 18 U.S.C. § 1341; United States v. Henningsen, 387 F.3d 585, 589 (7th Cir. 2004). Nevertheless, in setting out the private gain requirement we have taken our cue from the Supreme Court’s own characterization of honest services fraud in McNally, and to that extent consider ourselves in good company. But we also fear that both the Tenth and Third Circuits may have misunderstood our position to some extent. Showing misuse for private gain means showing an intent to reap private gain; it is well established that a fraudulent scheme that does not actually cause harm is still actionable. See Durland v. United States, 161 U.S. 306, 313-14 (1896); United States v. Tadros, 310 F.3d 999, 1006 (7th Cir. 2002).