Opinion ID: 746455
Heading Depth: 3
Heading Rank: 3

Heading: Scheme to Defraud University of Tennessee of Intangible

Text: 73 Right to Honest Services of Frost and Turner 74 Counts Seventeen through Twenty of the Superseding Indictment charged defendants with violating the mail fraud statute by scheming to defraud the University of Tennessee of the honest services of Frost and Turner. Specifically, these counts charged that Frost and Turner abused their positions with the University in order to aid the other defendants, who could benefit FWG through their government positions. Essentially, the scheme alleged is that Turner and Frost defrauded the University by allowing each student defendant to pass off material written by others as their own thesis or dissertation, and likewise concealed from the other members of the oral examination committees that the thesis or dissertation under review was not the student's own work. 75 The mailings upon which Counts Seventeen through Twenty were based were four memoranda of certification, mailed from UTSI to the University of Tennessee at Knoxville, that the student defendants had passed their oral examinations and were eligible to receive their degrees. The Superseding Indictment charged Frost and Turner as principals under all of these counts and charged each student defendant as an aider and abettor under the count pertaining to the particular memorandum of certification for that student. 4 Although the jury acquitted Frost and Turner of Count Eighteen, the count pertaining to Hill, they convicted Frost and Turner of the other counts, and convicted Potter, Faulkner and Congo of the count relating to his or her respective certification mailing.
76 In McNally v. United States, 483 U.S. 350, 107 S.Ct. 2875, 97 L.Ed.2d 292 (1987), the Supreme Court reversed a substantial body of precedent previously developed by the federal circuits by holding that the mail fraud statute protected only property rights and did not criminalize schemes designed to deprive individuals, the people, or the government of intangible rights, such as the right to have public officials perform their duties honestly. Id. at 358, 107 S.Ct. at 2881; see also Carpenter v. United States, 484 U.S. 19, 25, 108 S.Ct. 316, 320, 98 L.Ed.2d 275 (1987)(although, under McNally, mail fraud statute does not protect intangible right to honest and faithful service, statute does protect intangible property rights). The McNally Court based its holding upon the wording of the mail fraud statute, explaining that the phrase any scheme or artifice to defraud was insufficiently clear and definite to justify construing the act so broadly that it would protect an intangible right to honest services. See McNally, 483 U.S. at 358-60, 107 S.Ct. at 2880-82. Emphasizing that it merely was applying principles of statutory interpretation, the McNally Court declared, If Congress desires to go further, it must speak more clearly than it has. Id. at 360, 107 S.Ct. at 2882. 77 In 1988, the year following the decision in McNally, Congress enacted 18 U.S.C. § 1346. That section provides the following: 78 § 1346. Definition of scheme or artifice to defraud. 79 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. 80 Id. 81 Defendants argue that § 1346 failed to express any clear intent to override the holding in McNally and protect intangible rights to honest services under the mail fraud statute. Defendants have relied upon United States v. Brumley, 79 F.3d 1430 (5th Cir.1996), which held that the term another in § 1346 does not include citizens who have been deprived of the honest services of their public officials. Regardless of the fact that defendants were charged with defrauding the University, not the public, of honest services, the Fifth Circuit, sitting en banc, has reversed this holding and ruled that the term another includes government entities, and that the right to honest services includes the right to honest and impartial government. See United States v. Brumley, 116 F.3d 728, 731 (5th Cir.1997)(en banc). 82 The timing and the explicit terms of § 1346 make clear that Congress intended the provision to reinstate the doctrine of intangible rights to honest services. Every court to address the effect of § 1346 has held that it has overruled the holding in McNally. See United States v. Czubinski, 106 F.3d 1069, 1076 (1st Cir.1997); United States v. Waymer, 55 F.3d 564, 568 n. 3 (11th Cir.1995), cert. denied 517 U.S. 1192, 116 S.Ct. 1683, 134 L.Ed.2d 784 (1996); see also United States v. Frega, 933 F.Supp. 1536, 1546-47 (S.D.Cal.1996). Further, other circuits, including our own, have observed in dicta that § 1346 has overridden McNally. See United States v. Bryan, 58 F.3d 933, 940-41 n. 1 (4th Cir.1995); United States v. Catalfo, 64 F.3d 1070, 1077 n. 5 (7th Cir.1995), cert. denied, 517 U.S. 1192, 116 S.Ct. 1683, 134 L.Ed.2d 784 (1996); United States v. DeFries, 43 F.3d 707, 709 n. 1 (D.C.Cir.1995); United States v. Holley, 23 F.3d 902, 910 (5th Cir.1994); United States v. Dischner, 974 F.2d 1502, 1518 n. 16 (9th Cir.1992); United States v. Ames Sintering Co., 927 F.2d 232, 235 (6th Cir.1990); United States v. Granberry, 908 F.2d 278, 281 n. 1 (8th Cir.1990); United States v. Martinez, 905 F.2d 709, 715 (3d Cir.1990); see also West Virginia Univ. Hosps., Inc. v. Casey, 499 U.S. 83, 114-15, 111 S.Ct. 1138, 1155-56, 113 L.Ed.2d 68 (1991)(Stevens, J., dissenting)(noting that Congress quickly corrected the holding in McNally ). We therefore hold that § 1346 has restored the mail fraud statute to its pre-McNally scope, according to previous opinions interpreting the intangible right to honest services. See, e.g., Czubinski, 106 F.3d at 1076; see also 134 Cong. Rec. H11,108-01 (daily ed. Oct. 21, 1988)(statement of Rep. Conyers)(commenting that § 1346 is intended merely to overturn the McNally decision. No other change in the law is intended); 134 Cong. Rec. S17,360-02 (daily ed. Nov. 10, 1988)(statement of Sen. Biden)(declaring that the intent [of § 1346] is to reinstate all of the pre-McNally case law pertaining to the mail and wire fraud statutes without change).2. Application of Doctrine to Non-Public Officials 83 Frost and Turner next argue that § 1346 does not apply to them because they are not public servants. We reject this argument. 84 The classic application of the intangible right to honest services doctrine has been to a corrupt public servant who has deprived the public of his honest services. Cf. United States v. Paradies, 98 F.3d 1266, 1283 n. 30 (11th Cir.1996)(collecting cases for support of declaration that courts uniformly have construed mail fraud statute as protecting intangible right of citizenry to good and honest government), cert. denied, --- U.S. ----, 117 S.Ct. 2483, 138 L.Ed.2d 992 (1997). The prosecution, however, has charged defendants with depriving the University of Tennessee of its intangible right to the honest services of its employees. Although the University of Tennessee is a public institution, the indictment did not allege that Frost and Turner, acting as public or quasi-public officials, deprived the public of any intangible rights. Likewise, the jury instructions did not refer to Frost or Turner as public officials, but only as employees of the University. 5 The liability of defendants therefore depends upon whether § 1346 may apply when a private person breaches a fiduciary duty to his employer. 85 The wording of § 1346 is very broad: it defines scheme or artifice to defraud as including a scheme or artifice to deprive another of the intangible right of honest services. 18 U.S.C. § 1346 (italics added). Commenting upon this breadth, the Eighth Circuit has stated that [i]t is certainly true that the literal language of § 1346 extends to private sector schemes to defraud another of the right to 'honest services.'  United States v. Jain, 93 F.3d 436, 441 (8th Cir.1996), cert. denied, --- U.S. ----, 117 S.Ct. 2452, 138 L.Ed.2d 210 (1997). However, the Jain court also noted that application of the right to honest services doctrine to the private sector is problematic. The right of the public to the honest services of its officials derives at least in part from the concept that corruption and denigration of the common good violates the essence of the political contract. See id. at 442. Enforcement of an intangible right to honest services in the private sector, however, has a much weaker justification because relationships in the private sector generally rest upon concerns and expectations less ethereal and more economic than the abstract satisfaction of receiving honest services for their own sake. See id. 86 The Jain court declined to answer the questions which it had raised regarding the scope of the intangible right to honest services and instead reversed the mail fraud convictions at issue on other grounds. See id. The Sixth Circuit does not appear to have defined the scope of the intangible right to honest services since the passage of § 1346. Accordingly, we must review Sixth Circuit precedent issued before McNally in order to discover the precise contours of the right in this circuit. 87 In United States v. Gray, 790 F.2d 1290 (6th Cir.1986), rev'd, McNally v. United States, 483 U.S. 350, 107 S.Ct. 2875, 97 L.Ed.2d 292 (1987), the Sixth Circuit suggested a limited interpretation of the intangible right to honest services doctrine. The Gray court explained: 88 [T]he intangible rights theory is anchored upon the defendant's misuse of his public office for personal profit. This doctrine of the deprivation of honest and faithful service has developed to fit the situation in which a public official avails himself of his public position to enhance his private advantage.... United States v. Dixon, 536 F.2d 1388, 1400 (2d Cir.1976). Conversely, misconduct of a fiduciary in the administration of exclusively private matters in his capacity as a private individual which does not involve the misuse of public office or public trust, is not actionable as a violation of the mail fraud statute under an intangible rights theory. United States v. Rabbitt, 583 F.2d 1014, 1024 (8th Cir.1978), cert. denied, 439 U.S. 1116, 99 S.Ct. 1022, 59 L.Ed.2d 75 (1979). 89 Id. at 1295. The Gray court then adopted the flexible test enunciated in United States v. Margiotta, 688 F.2d 108 (2d Cir.1982), for whether a defendant is capable of violating the mail fraud act by breaching a fiduciary duty to the public. Gray, 790 F.2d at 1296. Applying this test, the Gray court held that the Kentucky Democratic Party Chairman was a public fiduciary because he substantially participated in governmental affairs and exercised significant control over the annual awarding by Kentucky of its workmen's compensation insurance contract. See id. 90 Subsequent to Gray and the decision by the Supreme Court in McNally, however, a three-judge panel of the Sixth Circuit decided United States v. Runnels, 833 F.2d 1183 (6th Cir.1987)(Runnels I ). The government prosecuted the defendant in Runnels I in part for having deprived the members of the local union of which he was president of his fair and honest services. See id. at 1184. The Runnels I court described the intangible right to honest services doctrine before explaining that the recent ruling in McNally had invalidated that doctrine. See id. at 1185-86. When describing the doctrine, the Runnels I court stated that the doctrine not only referred to the intangible right of citizens to fair and honest government, see id. at 1185, but also that [c]ourts have ... applied the intangible rights doctrine in corporate and labor cases. Id. at 1186. The Runnels I court then provided a string of citations to cases from other circuits in support. See id. This dicta suggests that the Runnels I court believed that the right to honest services doctrine existing before McNally was broader than the language in Gray had suggested and generally included deprivations of honest services by private fiduciaries. 91 The Sixth Circuit later vacated the opinion in Runnels I for a rehearing en banc and eventually reversed. See United States v. Runnels, 877 F.2d 481 (6th Cir.1989)(en banc)(Runnels II ). Although the precise issue before the Runnels II court was whether the government had indicted and prosecuted the defendant on a theory other than the intangible right to honest services doctrine, the majority in Runnels II first discussed the claim asserted by the defendant at trial that the right to honest services theory was not applicable to this kind of case. See id. at 483. Reciting some of the language from Gray quoted supra, the Runnels II majority acknowledged that the language used in Gray appeared to give support to Runnels' theory of defense. Id. Nonetheless, the Runnels II majority commented upon the denial of the defendant's motions for new trial and judgment of acquittal by stating that [t]he trial judge, correctly in our opinion, read Gray to have no effect on the doctrine that the intangible rights theory was 'applicable to non-public officials where a fiduciary duty is involved.'  See id. at 483-84. Given the fact that Runnels was merely the president of a local union, this statement by the en banc court, although dicta, strongly indicates that a private person may violate the mail fraud act by defrauding private parties of their right to his honest services if he owes them a fiduciary duty. Likewise, Runnels II indicates that the standard recited in Gray is not exclusive, but rather operates only as a test for determining whether an individual owes a fiduciary duty to the public. 92 We therefore hold that private individuals, such as Frost and Turner, may commit mail fraud by breaching a fiduciary duty and thereby depriving the person or entity to which the duty is owed of the intangible right to the honest services of that individual. 93 3. Whether Frost and Turner were Fiduciaries of the University 94 Federal law governs the existence of fiduciary duty under the mail fraud statute. See Morda v. Klein, 865 F.2d 782, 785 (6th Cir.1989). It is axiomatic that an employee has a fiduciary duty to protect the property of his employer. See, e.g., Carpenter, 484 U.S. at 27, 108 S.Ct. at 321 (employee has fiduciary duty to protect and not exploit confidential business information of employer); see generally RESTATEMENT (SECOND) OF AGENCY § 1 (1958)(defining agency as the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act). A professor therefore owes a fiduciary duty to protect the property of his employer university, just like any other employee. See Cahn v. Antioch Univ., 482 A.2d 120, 131-32 (D.C.1984)(deans owed fiduciary duty to university when managing university funds). 95 Frost and Turner had considerable influence, although not complete control, over whether one of their students received an advanced degree from UTSI. The department of engineering, of which Frost was the Chairman, has only a limited number of graduate students. Further, the major professor of a student has tremendous influence over the direction and ultimate success of that student's dissertation or thesis, the completion of which is integral to the attainment of an advanced degree. Indeed, Berlinrut testified that he did not graduate from UTSI because Frost gave him a no progress for his dissertation research during his last quarter, and because he failed his comprehensive final examination, which Frost prepared by taking the unusual step of not telling Berlinrut beforehand that the exam would include an additional math problem. 96 Accordingly, Frost and Turner owed a fiduciary duty to the University when determining whether a student would graduate if the University has a property right in a degree which it has not issued yet. In general, the concept of property refers to a bundle of rights which includes the rights to possess, use, exclude, profit, and dispose. See Brotherton v. Cleveland, 923 F.2d 477, 481 (6th Cir.1991). Although we have recognized that a degree is a property interest of the graduate, see Crook v. Baker, 813 F.2d 88, 98-99 (6th Cir.1987), we also have held that the government does not have a property right in a license which it has not issued yet for the purposes of the mail fraud statute. See Murphy, 836 F.2d at 253-54; see also United States v. Kato, 878 F.2d 267, 269 (9th Cir.1989)(under mail fraud statute, unissued pilot license is not property of government); but see United States v. Salvatore, 110 F.3d 1131, 1139-43 (5th Cir.1997)(unissued video poker license is property of government for purposes of mail fraud). We believe that an unissued university degree differs from an unissued regulatory license. Ultimately, a university is a business: in return for tuition money and scholarly effort, it agrees to provide an education and a degree. The number of degrees which a university may award is finite, and the decision to award a degree is in part a business decision. Awarding degrees to inept students, or to students who have not earned them, will decrease the value of degrees in general. More specifically, it will hurt the reputation of the school and thereby impair its ability to attract other students willing to pay tuition, as well as its ability to raise money. The University of Tennessee therefore has a property right in its unissued degrees, and Frost and Turner had a fiduciary duty to the University when exerting their considerable influence over whether the school would give a degree to a student. 97 4. When Breach by Private Fiduciary Violates Mail Fraud Act 98 The District Court instructed the jury that they could find that Frost and Turner deprived the University of the intangible right to their honest services under the following circumstances: 99 What the government must prove is that there was a failure by Walter Frost and Robert Turner to disclose something which in their knowledge or contemplation posed a business risk of harm or loss to their employer, the University of Tennessee. If you find that the nondisclosure of a conflict of interest by Walter Frost and Robert Turner furthered a scheme by them to abuse the trust of their employer in a manner that made an identifiable harm to the University of Tennessee reasonably foreseeable, then you may find that Walter Frost and Robert Turner had the intent to defraud under Section 1341. The key determination is whether you can find from the evidence presented in this case that Walter Frost and Robert Turner might reasonably have contemplated or understood that the University of Tennessee would suffer some harm to its business arising out of or resulting from their failure to disclose their alleged conduct and conflict of interest to the University of Tennessee. However, the government is not required to prove that the intended victim, the University of Tennessee, actually suffered a loss of money or property. 100 We believe that the above instructions captured the proper standard for determining whether an employee has committed mail fraud by depriving his employer of honest services. The prosecution must prove that the employee intended to breach a fiduciary duty, and that the employee foresaw or reasonably should have foreseen that his employer might suffer an economic harm as a result of the breach. We therefore adopt the standard employed by the District of Columbia Circuit, which holds that an employee deprives his employer of honest services when 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. United States v. Lemire, 720 F.2d 1327, 1337 (D.C.Cir.1983). Proof that the employer simply suffered only the loss of the loyalty and fidelity of the defendant is insufficient to convict. See id. 101 We recognize that the literal terms of the intangible right to honest services doctrine do not indicate that the prosecution must prove that a fiduciary breach has created a risk of economic harm to the employer. Rather, the literal terms suggest that dishonesty by an employee, standing alone, is a crime. Courts, however, have refused to interpret the doctrine so broadly. For example, the Tenth Circuit has commented that, [a]ssuming without deciding that § 1346 has application where a private actor or quasi-private actor is deprived of honest services in the context of a commercial transaction, it would give us great pause if a right to honest services is violated by every breach of contract or every misstatement made in the course of dealing. United States v. Cochran, 109 F.3d 660, 667 (10th Cir.1997); see also Czubinski, 106 F.3d at 1077 (when holding that IRS employee who performed unauthorized searches of confidential files did not commit wire fraud, explaining that Congress did not enact § 1346 to create what amounts to a draconian personnel regulation, and cautioning against interpreting § 1346 so as to transform[ ] governmental workplace violations into felonies); Jain, 93 F.3d at 442 (stating that prior intangible rights convictions involving private sector relationships have almost invariably included proof of actual harm to the victims' tangible interests). This refusal to carry the intangible rights doctrine to its logical extreme stems from a need to avoid the over-criminalization of private relationships: [I]f merely depriving the victim of the loyalty and faithful service of his fiduciary constitutes mail fraud, the ends/means distinction is lost. Once the ends/means distinction is abolished and disloyalty alone becomes the crime, little remains before every civil wrong is potentially indictable. Lemire, 720 F.2d at 1336 n. 11 (quoting John C. Coffee, Jr., From Tort to Crime: Some Reflections on the Criminalization of Fiduciary Breaches and the Problematic Line Between Law and Ethics, 19 AM.CRIM.L.REV. 117, 167 (1981)). 102 Some courts have attempted to define the reach of the intangible right to honest services doctrine by stating that the misrepresentation or omission at issue must be material. See, e.g., Cochran, 109 F.3d at 667; United States v. Gray, 96 F.3d 769, 775 (5th Cir.1996), cert. denied, --- U.S. ----, 117 S.Ct. 1275, 137 L.Ed.2d 351 (1997); Jain, 93 F.3d at 442; Waymer, 55 F.3d at 571-72; United States v. Von Barta, 635 F.2d 999, 1006-07 (2d Cir.1980). These courts generally define materiality in the context of private activity as existing whenever 'an employee has reason to believe the information would lead a reasonable employer to change its business conduct.'  Gray, 96 F.3d at 775 (quoting United States v. Ballard, 663 F.2d 534, 540 (5th Cir.1981), modified on other grounds, 680 F.2d 352 (5th Cir.1982 Unit B)). Although the difference between the two standards may be slight, we believe that the reasonable foreseeability by the employee of potential economic harm to his employer standard is superior to the materiality standard. The standard we adopt for this circuit properly focuses on the intent of the employee, and explicitly acknowledges the implicit assumption of the materiality standard: an employer presumably would 'change its business conduct' [under the materiality standard] only if, upon disclosure of the conflict and any other relevant information, it saw new opportunities for profit or savings, or danger of economic harm.... Lemire, 720 F.2d at 1338; 6 see generally John E. Gagliardi, Comment, Back to the Future: Federal Mail and Wire Fraud Under 18 U.S.C. § 1346, 68 WASH. L.REV. 901, 919-20 (1993)(advocating adoption of reasonable foreseeability of economic harm test). Further, if a change in business conduct occurs under the materiality standard when a business alters its behavior merely to avoid the appearance of impropriety, rather than a potential economic loss, the intangible right to honest services doctrine may lack substantive limits in the private sector. 103 Despite the literal terms of § 1346, we therefore have construed the intangible right to honest services in the private sector as ultimately dependent upon the property rights of the victim. Nonetheless, the right to honest services doctrine still applies to a broad range of private conduct. Unlike a defendant accused of scheming to defraud another of money or property, see infra Section II.A, a defendant accused of scheming to deprive another of honest services does not have to intend to inflict an economic harm upon the victim. Rather, the prosecution must prove only that the defendant intended to breach his fiduciary duty, and reasonably should have foreseen that the breach would create an identifiable economic risk to the victim. We do not believe that this standard imposes an especially rigorous evidentiary burden upon the prosecution. Further, we stress that we are not reviewing the standard applicable to defendants accused of depriving the public of the honest services of public officials. See Lemire, 720 F.2d at 1337 n. 13 (noting that court was addressing only private fiduciaries, and suggesting that [p]ublic officials may be held to a higher standard of public trust; and conflicts of interest may harm the public merely by giving the illusion of unfairness). 5. Sufficiency of the Evidence 104 Potter and Congo declare that, even if they plagiarized, they never intended to deprive the University of the honest services of Frost and Turner. As previously explained, however, the record contains considerable evidence that Frost and Turner entered into an intentional scheme with each student defendant in which the professors enabled the student to submit a thesis or dissertation secretly based on plagiarism. Further, the scheme required its participants to deceive the members of the academic committee during the oral defense of the illegitimate paper. The inescapable conclusion is that defendants intended for Frost and Turner to breach the trust which the University had placed in them. Further, the evidence indicates that all defendants intended, much less reasonably contemplated, that the University would suffer a concrete business harm by unwittingly conferring an undeserved advanced degree on each student defendant. Although defendants may not have known that the legal description of their activity would be scheming to deprive the University of its intangible right to the honest services of its employees, there is sufficient evidence that all defendants committed or aided and abetted in that crime. 105 We therefore affirm the convictions of each defendant convicted of Counts Seventeen, Nineteen, and Twenty.