Opinion ID: 503427
Heading Depth: 1
Heading Rank: 3

Heading: THE EFFECT OF McNALLY v. UNITED STATES

Text: 21 The Supreme Court's decision in McNally v. United States, --- U.S. ----, 107 S.Ct. 2875, 97 L.Ed.2d 292 (1987), has been variously described as blockbusting, as a total surprise and as a wholly unexpected explication of the law of mail fraud. United States v. Piccolo, 835 F.2d 517, 521 (3d Cir.1987) (Aldisert, J., dissenting) (blockbusting); United States v. Slay, 673 F.Supp. 336, 343 (E.D.Mo.1987) (a total surprise); United States v. Doherty, 675 F.Supp. 726, 728 (D.Mass.1987) (wholly unexpected explication of the law of mail fraud). It was, without a doubt, a departure from the law of every court of appeals--including this one--to consider the issue of intangible rights mail fraud prosecutions. See, e.g., United States v. Silvano, 812 F.2d 754 (1st Cir.1987); McNally, 107 S.Ct. at 2882-83 & ns. 1-3 (Steven, J., dissenting) (collecting cases). McNally has thus called into question numerous jury instructions delivered in accordance with the prior governing law. This is one such case. 22 The alleged fraud in McNally was a scheme run by three individuals active in Democratic Party politics in Kentucky during the 1970's: Gray, Hunt, and McNally. Gray was a member of the then Democratic governor's cabinet and Hunt was state Democratic Party chairman. Through his party position, Hunt maintained de facto control over the selection of insurance companies from which the state purchased its policies. Hunt arranged a deal with an insurance company whereby, in return for being selected as an agent for securing a workmen's compensation policy, the company agreed to share commissions with entities identified by Hunt. One such entity was Seton Investments, Inc., a company set up by Hunt, Gray and McNally solely for collecting commissions. Over four years, some $200,000 in commissions was paid by the insurance company to Seton. Additional commissions were paid to a second agency, and then passed on to McNally. 23 On account of this scheme, Hunt was charged with and plead guilty to tax and mail fraud. Gray and McNally, petitioners before the Supreme Court, were criminally indicted for mail fraud and conspiracy to commit mail and tax fraud. As Justice White described it, the mail fraud count of the indictment 24 alleged that petitioners had devised a scheme (1) to defraud the citizens and government of Kentucky of their right to have the Commonwealth's affairs conducted honestly, and (2) to obtain, directly and indirectly, money and other things of value by means of false pretenses and the concealment of material facts. The conspiracy count alleged that petitioners had (1) conspired to violate the mail fraud statute through the scheme just described and (2) conspired to defraud the United States by obstructing the collection of federal taxes. 25 After informing the jury of the charges in the indictment, the District Court instructed that the scheme to defraud the citizens of Kentucky and to obtain money by false or fraudulent pretenses and concealment could be made out by either of two sets of findings: (1) that Hunt had de facto control over the award of the workmen's compensation insurance contract ...; that he directed payments of commissions from this contract to Seton, an entity in which he had an ownership interest, without disclosing that interest to persons in state government whose actions or deliberations could have been affected by the disclosure; and that petitioners, or either of them, aided and abetted Hunt in that scheme; or (2) that Gray, in either of his appointed positions, had supervisory authority regarding the Commonwealth's workmen's compensation insurance at a time when Seton received commissions; that Gray had an ownership interest in Seton and did not disclose that interest to persons in state government whose actions or deliberations could have been affected by that disclosure; and that McNally aided and abetted Gray (the latter finding going only to McNally's guilt). 26 107 S.Ct. at 2878-79 (footnotes omitted). 27 Gray and McNally were convicted on both counts and their convictions affirmed by the United States Court of Appeals for the Sixth Circuit. United States v. Gray, 790 F.2d 1290 (6th Cir.1986). The Sixth Circuit relied on the long line of court of appeals cases holding that public officials owe a fiduciary duty to the public and that misuse of their office (through concealing material facts) for private gain is a fraud proscribed by the federal mail fraud statute. Gray, 790 F.2d at 1295 (citing United States v. Mandel, 591 F.2d 1347, 1364 (4th Cir.1979), cert. denied, 445 U.S. 961, 100 S.Ct. 1647, 64 L.Ed.2d 236 (1980)); McNally, 107 S.Ct. at 2879. Under these cases, individuals without a formal public office may also be held to be public fiduciaries if they have a special relationship to the government and in fact make governmental decisions. Gray, 790 F.2d at 1296 (citing United States v. Margiotta, 688 F.2d 108, 122 (2d Cir.1982), cert. denied, 461 U.S. 913, 103 S.Ct. 1891, 77 L.Ed.2d 282 (1983)); McNally, 107 S.Ct. at 2879. Hunt was such a fiduciary, the court of appeals said, because of his control over the awarding of insurance contracts. 790 F.2d at 1296. 28 The Supreme Court reversed, holding in essence that the mail fraud statute was intended to protect property rights but not the intangible right of the citizenry to good government. 107 S.Ct. at 2879. Relying on the scant legislative history of section 1341 and early cases interpreting it, the Court held that Congress's purpose in enacting the section was to safeguard property interests. Thus, said the Court, the statute's reference to schemes to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises should not be read disjunctively, as the courts of appeals had done; rather, the word defraud itself also refers to wronging one in his property rights. Id. at 2880-81 (quoting Hammerschmidt v. United States, 265 U.S. 182, 188, 44 S.Ct. 511, 512, 68 L.Ed. 968 (1924)). Because the charge in McNally did not require the jury to find that the Commonwealth of Kentucky was defrauded of or suffered a loss to any of its money or property interests, the Court held that the convictions must be reversed. 29 Five months after McNally, the Supreme Court clarified its McNally holding in Carpenter v. United States, --- U.S. ----, 108 S.Ct. 316, 98 L.Ed.2d 275 (1987). Although confirming that the mail fraud statute pertains to property interests and not intangible political or civil rights, the Carpenter Court gave a broad reading to protected property interests by affirming the convictions of individuals who misappropriated confidential news information from the Wall Street Journal. As Justice White wrote for the Court: 30 Here, the object of the scheme was to take the Journal's confidential business information--the publication schedule and contents of the Heard [On The Street] column--and its intangible nature does not make it any less property protected by the mail and wire fraud statutes. McNally did not limit the scope of Sec. 1341 to tangible as distinguished from intangible property rights. 31 108 S.Ct. at 320. 32 Given the state of the law before McNally, it was common practice for prosecutors to request and receive intangible rights instructions in mail fraud cases, even where there was an alleged loss of property. In a number of recent post-McNally cases, in which individuals convicted pursuant to such instructions had their convictions on direct appeal at the time McNally was decided, the courts of appeals have confronted the question--also posed by this case--of whether improper intangible rights instructions so polluted the jury's deliberations as to render the conviction invalid after McNally. Some courts have upheld the convictions: United States v. Piccolo, 835 F.2d 517 (3d Cir.1987); 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). Others have reversed in light of McNally: United States v. Gordon, 836 F.2d 1312 (11th 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. Gimbel, 830 F.2d 621 (7th Cir.1987); United States v. Herron, 825 F.2d 50 (5th Cir.1987). Consistent with McNally, the guiding principle behind these cases has generally been that convictions must be reversed unless the jury was required to base its conviction on conduct proscribed by the mail fraud statute, and not just on a violation of intangible rights. See, e.g., United States v. Cooke, 833 F.2d 109 (7th Cir.1987) (affirming convictions on counts which required a finding of loss to property, but reversing convictions on counts based on intangible rights violations). 33 Some of the cases affirming mail fraud convictions after McNally have thus been relatively straightforward applications of McNally, involving situations where, despite some intangible rights language in the jury instructions, the jury was in fact explicitly required to find that the fraudulent scheme was also intended to cause monetary harm. See, e.g., Piccolo, 835 F.2d at 520 (jury charge required finding that defendant devised scheme to defraud [certain companies] of money); Wellman, 830 F.2d at 1463 (jury required to find that defendant devised scheme to defraud another of something of value). In other cases, however, courts have stretched to find more ingenious theories of property loss which purportedly satisfy McNally, and then affirmed on the basis of these theories even though they were not put before the jury. In Runnels, for instance, the Sixth Circuit affirmed the mail fraud conviction of a union official who, in return for a monthly fee, referred worker's compensation cases to a particular attorney. 833 F.2d at 1184-85. The jury in Runnels was instructed that the official could be found guilty of mail fraud if he defrauded union members of their intangible right to fair and honest union representation. Nevertheless, relying primarily on the theory set forth in a footnote in Justice Stevens's dissent in McNally, the court held that the conviction could stand even after McNally. It said that, in order to convict, the jury must have found that a bribe was paid and, under established law, such a payment to a fiduciary properly belongs to the principal. 833 F.2d at 1186-92; see McNally, 107 S.Ct. at 2890-91 n. 10 (Stevens, J., dissenting). The official's failure to turn over the bribe to the union, therefore, was a property deprivation satisfying McNally. 34 In Richerson, the Fifth Circuit went even farther. Relying explicitly on Justice Stevens's dissent, the court held that whenever an employee conceals material information from his employer, he causes a property harm to his employer because the employer does not receive the services for which he paid. 833 F.2d at 1157 (quoting McNally, 107 S.Ct. at 2890 n. 10 (Stevens, J., dissenting)). The Richerson court thus affirmed the convictions of employees who concealed an illicit deal from their employer, even though the jury had been given an intangible rights instruction and not told it was necessary to find any property loss. 833 F.2d at 1156-58. See also Fagan, 821 F.2d at 1010-11 n. 6 (affirming mail fraud conviction on the basis of Justice Stevens's dissent where the jury charge was not before the court). 35 Relying heavily upon Runnels, Richerson and Fagan, the government in this case urges that Ochs's and Dray's convictions be affirmed under a similar theory of property loss. The government suggests the following framework for analyzing this case. Even if the jury wanted to convict Ochs and Dray under an intangible rights theory, the jury must have believed at least one of the theories of wrongdoing put forth by the government: (1) the lowballing of construction cost estimates, (2) the double billing for legal services, or (3) the payment of a bribe to Robinson. 8 Under any of these theories, there is a deprivation of property satisfying McNally. In the case of lowballing, the City of Boston was deprived of construction permit fees. In the case of double billing, TPA was overcharged for legal services. The theory of the city's loss from the bribe is a replay of Runnels; Robinson was a city employee and therefore his bribe money properly belonged to, but was not paid to, the city. The government, therefore, argues that, no matter what evidence it relied upon, the jury must have found a property deprivation in order to convict and, under the Jacobs/Alexander exception already discussed, the convictions should stand. 36 Although superficially attractive, our analysis requires that this argument be rejected. In the first place, the government's attempt to favorably reconstruct the jury deliberations on appeal is completely refuted by the actual jury charge it requested and received. Paralleling paragraph fourteen of the indictment, which charged a violation of intangible rights as a separate and independent theory of liability, Government's Requested Instruction No. 8 reads: 37 SCHEME NEED NOT FINANCIALLY HARM THE CITY OF BOSTON 38 With respect to that portion of the scheme which alleges that the City of Boston and its citizens were defrauded of their right to the honest and faithful services of its employees, you do not have to find that the City actually lost money because of the scheme. It is sufficient if you find that the scheme did deprive or defraud the public of an intangible political or civil right such as he [sic] right to honest government and to the honest and faithful services of government employees. Hence, if you find that, as a result of the scheme, the public was deprived or defrauded of the right to the honest and faithful services of Douglas Robinson, as an employee of the City's Inspectional Services Department, then it is irrelevant whether the City lost any money as a result of the scheme to defraud. 39 (Emphasis added). 40 In argument before the district court, defense counsel objected strenuously to this instruction on the ground that the alleged intangible rights violation should not be viewed as a separate and independently sufficient charge: 41 I suggest that there's no way one can view this case as having two elements standing separate and apart. Depriving the citizens of the City of Boston of the honest and faithful services of an employee, to wit Douglas Robinson, cannot occur if the jury find [sic], if the jury finds that Mr. Robinson was not paid off. 9 42 But the court disagreed. Describing intangible rights as a separate branch of the alleged fraud involving benefits not capable of quantification, the district court said: 43 [L]et's assume that the jury finds and agrees with your theory, which is that [the construction permit application fee] was a fair fee and that Walkey and the Mirabassi group really weren't sophisticated enough to know that a million two would be a fair fee. The City of Boston is not defrauded of $12,000, but it is defrauded of the faithful services of its employee when monies are given to that employee in the fashion that they are given here. It's a violation of, minimally a violation of conflict of interest. 44 In a final effort to persuade the court, defense counsel characterized the government's strategy as an attempt 45 to put a little more space between the dominoes so that when the first one falls, the next one doesn't fall with it. And I suggest that that is inappropriate ... in effect, by giving an instruction such as this, the Court would say that even if I'm able to convince the jury that, A, there was no low-balling, and/or B, there was no payoff, that nonetheless there's some ethereal concept out there such as depriving the City of Boston of faithful service, apart from those concepts, that would permit conviction here. That isn't what the indictment says.... [The fraud] is alleged to have been done a certain way and I object strenuously to the separating of those ways. They are tied together. And if you take one of them out, they all collapse. And the Government is asking the Court to take one or more of them out and leave the third one standing by itself. And I don't think that it is a fair approach to the case, both from the point of view of what is alleged and from the point of view of what has been proved. 46 The district court rejected this argument and delivered Requested Instruction No. 8 virtually verbatim. Thus, despite the government's ingenious arguments on appeal, we are left in this case with an intangible rights jury instruction expressly stating that financial harm is irrelevant. It is difficult to conceive of an instruction more at odds with McNally. We recognize the general validity of the policy underlying the Jacobs/Alexander exception invoked by the government: upholding a conviction based on a sufficient charge that was clearly found by the jury even though a related insufficient charge was also put before them. But the government has cited no case--and we have found none--where the exception has been applied in an extreme case like this where the trial court explicitly instructed the jury that it was proper to rely solely on the invalid theory of criminal liability. 47 When the government requested the intangible rights instruction in this case, it must have believed that the jury could convict for a violation of intangible rights alone--otherwise the instruction is meaningless and absurd. Likewise, when the district court delivered the instruction, it must also have envisioned that a conviction could be properly returned even if no financial harm were involved. The colloquy between the court and defense counsel quoted above reinforces this. The effect of the instruction, which repeated twice the idea it was not necessary to find harm, was twofold: the jury was told that the central element of mail fraud identified in McNally was irrelevant, and the jury was told that it was possible, on the evidence before them, to convict even if there was no financial harm. Under these circumstances, we are unwilling to engage in speculation about whether, despite the instruction, the jury actually found some financial harm. Even if the government is right that, as a logical matter, the jury should have found some form of financial harm in order to convict, we believe that the court's instruction--saying exactly the contrary--would have so confused the jury's deliberations on the financial harm issue as to render the conviction invalid. 48 A second fatal flaw in the government's argument is its reliance on the secret profits theory suggested in Justice Stevens's McNally dissent, and subsequently adopted by Fifth and Sixth Circuits in Fagan, Runnels and Richerson. With due respect to those courts, we believe that such an expansive view of property protected by the mail fraud statute is irreconcilable with the basic holding of McNally. Like this case, McNally involved a scheme by public officials to obtain an illicit profit in connection with performing official duties. See McNally, 107 S.Ct. at 2881 (For purposes of this action, we assume that Hunt, as well as Gray, was a state officer.). As Justice White framed it, 49 [t]he issue is thus whether a state officer violates the mail fraud statute if he chooses an insurance agent to provide insurance for the State but specifies that the agent must share its commissions with other named insurance agencies, in one of which the officer has an ownership interest and hence profits when his agency receives part of the commissions. 50 Id. at 2881-82. The Court's answer was a resounding no. With the issue squarely before it, the Court held that the mere fact a fiduciary profits from a breach of duty is not a sufficient property deprivation to satisfy the requirements of the mail fraud statute if the profit was not, directly or indirectly, at the principal's expense. Thus, although we are aware of the established rule that a principal may institute a lawsuit to claim the illicit profits of an agent or fiduciary, see Runnels, 833 F.2d at 1186-88; Restatement (Second) of Agency Sec. 403 (1958), we cannot ignore the holding of the Supreme Court that such an abstract property loss is not enough to support a conviction. See McNally, 107 S.Ct. at 2882 (Hunt and Gray received part of the [insurance] commissions but those commissions were not the commonwealth's money.). 10 51 Carpenter v. United States, --- U.S. ----, 108 S.Ct. 316, 98 L.Ed.2d 275 (1987), is not to the contrary. Carpenter holds that certain forms of intangible property, like confidential news information or trade secrets, are protected by the mail fraud statute. But Carpenter does not extend the mail fraud statute to every breach of fiduciary duty simply because such a breach might give rise to a state law cause of action by the principal against the fiduciary. See id. at 320 (describing the right to honest and faithful service as an interest too ethereal in itself to fall within the protection of the mail fraud statute). Carpenter involved theft from the Wall Street Journal of news information, a commodity which is the newspaper's stock-in-trade. No one has alleged, and we do not believe it accurate to suggest, that bribe money paid to city officials plays the same role in the City of Boston. 52 In Runnels, the Sixth Circuit tried to distinguish McNally on the ground that the insurance premium in McNally would have been paid to some agency even without the alleged fraud, 107 S.Ct. at 2881, and so the commissions paid to Hunt and Gray were not state money. Runnels, 833 F.2d at 1192. The court's analysis is confused. Whether premium money ceases to be the state's once it is paid out is not the point of the secret profits cases on which Runnels relies. Rather, the point is that, when a fiduciary receives money in violation of a duty, the money becomes the state's. See Runnels, 833 F.2d at 1192 (Even though Runnels argues that [attorney's] fees would have been paid in any event, the bribes would not have been.). In McNally, Runnels and this case, a fiduciary did receive money in violation of a duty owed to his principal. Yet in McNally, in contrast to Runnels, the Court held that receipt of such money is not a cognizable loss for purposes of the mail fraud statute. 53 Richerson and Fagan place primary emphasis on a footnote in Justice Stevens's McNally dissent, with which, says the Fifth Circuit, the McNally majority did not disagree. Richerson, 833 F.2d at 1157 & n. 25; Fagan, 821 F.2d at 1010-11 n. 6. We believe the contrary, that if Justice Stevens's views were shared by the majority of the Court, his would have been a majority opinion and not a dissent. Not a single other Justice was willing to join the portion of Justice Stevens's dissent on which Richerson and Fagan rely. Moreover, the majority did effectively reject Justice Stevens's analysis in a footnote, which stated that, although Justice Stevens would affirm the convictions on the basis that shar[ing] commissions violated state law, we should assume that it did not. 107 S.Ct. at 2882 n. 9. Justice Stevens noted only that the duty of a fiduciary to deliver secret profits to his principal may fulfill the Court's money or property requirement. 107 S.Ct. at 2890 n. 10 (Stevens, J., dissenting) (emphasis added). 54 We understand that the intangible rights doctrine has become firmly entrenched in the federal courts and that old habits die hard. But we do not think courts are free simply to recharacterize every breach of fiduciary duty as a financial harm, and thereby to let in through the back door the very prosecution theory that the Supreme Court tossed out the front. Ochs's and Dray's convictions are reversed. 11