Court Opinion

ID: 4120442
Source: CourtListenerOpinion
Date Created: 2017-01-27 22:47:37.266671+00
Date Added: 2024-06-11T14:37:32.209352
License: Public Domain

January 19, 1978

78-2      MEMORANDUM OPINION FOR THE
          ASSISTANT ATTORNEY GENERAL, CRIMINAL
          DIVISION

          Rebates in Violation of Shipping Act— Applicability
          of Conspiracy Statute (18 U.S.C. § 371)

   This responds to your inquiry concerning a group o f cases involving ocean
freight rebating. The question is whether the 1972 amendment to § 16 of the
Shipping Act of 1916 precludes conspiracy prosecutions under 18 U .S.C . § 371
in these cases. The Fraud Section of the Criminal Division has taken the
position that the cases may be prosecuted under the conspiracy statute; the
Government Regulations and Labor Sections disagree.
  Our conclusions may be summarized as follows:
       As a general matter, a statutory prohibition the violation of which
    is subject only to a civil penalty may be an “ offense against the
    United States” for purposes of the conspiracy statute. The 1972
    amendment to § 16 does not rule out the possibility o f prosecuting a
    corporate shipper and a corporate carrier for conspiring to violate
    paragraph Second of § 16. Congress’ action, as well as principles
    analogous to those underlying the Wharton rule, indicate, however,
    that any such prosecution must be based upon more than a minimal or
    ordinary violation o f the provisions of the Shipping Act. That is, the
    prosecution must be able to show, that because of its nature or extent,
    the conduct contemplated by the conspiracy agreement involved
    harm to society beyond that ordinarily presented by the substantive
    offense itself. Similarly, depending upon the particular circumstances,
    cases of the present type may constitute a conspiracy to defraud the
    Federal M aritime Commission.
  We are, however, not familiar enough with the facts of the present cases to
make specific recommendations.

                                Background
   1.   Section 16 of the Shipping Act of 1916, as amended, 46 U .S.C . § 815
(1975 Supp.), reads as follows:

                                      5
       It shall be unlawful for any shipper, consignor, consignee, for­
    warder, broker, or other person, or any officer, agent, or employee
    thereof, knowingly and willfully, directly or indirectly, by means of
    false billing, false classification, false weighing, false report of
    weight, or by any other unjust or unfair device or means to obtain or
    attempt to obtain transportation by water for property at less than the
    rates or charges which would otherwise be applicable.
       It shall be unlawful fo r any common carrier by wafer, or other
    person subject to this chapter, either alone or in conjunction with any
     other person, directly or indirectly —
        First. To make or give any undue or unreasonable preference or
     advantage to any particular person, locality, or description o f traffic
     in any respect whatsoever, or to subject any particular person,
     locality, or description of traffic to any undue or unreasonable
     prejudice or disadvantage in any respect whatsoever . . . .
        Second. To allow any person to obtain transportation fo r property
     at less than the regular rates or charges then established and
     enforced on the line o f such carrier by means o f fa lse billing, false
     classification, fa lse weighing, fa lse report o f weight, or by any other
     unjust or unfair device or means.
        Third. To induce, persuade, or otherwise influence any marine
     insurance company or underw riter, or agent thereof, not to give a
     competing carrier by water as favorable a rate of insurance on vessel
     or cargo, as is granted to such carrier or other person subject to this
     chapter.
        Whoever violates any provision o f this section other than paragraphs
     First and Third h ereo f shall be subject to a civil penalty of not more
     than $5,000 for each such violation.
        W hoever violates paragraphs First and Third hereof shall be guilty
     of a misdem eanor punishable by a fine of not more than $5,000 for
    each offense. [Emphasis added.]
The principal provision discussed herein is paragraph Second.
   2. Investigations of ocean freight rebate practices are being conducted by the
U.S. Attorneys (regarding several carriers, including United States Lines and
Sealand Services, Inc. and Seatrain Lines, Inc.). As a result o f one of these
investigations, Sealand has made extensive disclosures to the Federal Maritime
Commission concerning rebates amounting to some $19 million and has agreed
to pay a civil penalty of almost $5 million. The U .S. Attorney in Newark has
forwarded to some 53 other U.S. Attorneys cases involving more than 300
shippers that received the rebates.
  Your memorandum indicates that:
        The investigations have disclosed that employees of the carriers
     would obtain freight business by agreeing with employees or officers
     of the shippers to pay freight rate rebates. Books and records of the
     carriers were falsified by identifying rebate payments as, inter alia,

                                        6
       “ promotional expenses.” Rebate payments were made by laundering
       the funds through both domestic and overseas subsidiaries of the
       carriers, obviously with the assistance and knowledge of employees
       of the subsidiaries.

                                              Discussion
  1. This inquiry relates to the possibility o f prosecution under the general
conspiracy statute. That statute, 18 U .S.C . § 371, provides as follows:
          If two or more persons conspire either to commit any offense
       against the United States, or to defraud the United States, or any
       agency thereof in any manner or for any purpose, and one or more of
       such persons do any act to effect the object o f the conspiracy, each
       shall be fined not more than $10,000 or imprisoned not more than
       five years, or both.
          If, however, the offense, the commission of which is the object of
       the conspiracy, is a misdemeanor only, the punishment for such
       conspiracy shall not exceed the maximum punishment provided for
       such misdemeanor.
   It is established that, for purposes o f 18 U .S.C . § 371, the term “ offense
against the United States” , is not limited to crim es.1 It also encompasses
conduct prohibited by a Federal statute and “ made punishable only by a civil
suit for a statutory penalty.” Hunsaker v. United States, infra, at 112. Thus, it
may follow that violation of paragraph Second of § 16 as amended, which is
punishable by civil penalty, is an “ offense” within the meaning o f 18 U .S.C .
§ 371.2 The first issue is whether that result is foreclosed, because of the 1972
amendment to § 16.
   2. Section 16 o f the Shipping Act prohibits several types of practices by
shippers, common carriers by water, and others. Before the 1972 amendment
of § 16, violation o f any o f those prohibitions was a misdemeanor punishable
by a fine of not more than $5,000.3 The principal effect of the 1972 legislation
is to provide, with respect to paragraph Second and all other provisions except
paragraphs First and Third, that a violation thereof is no longer a crime, but is
subject to a civil penalty.4
   The legislative history of the 1972 amendment is brief and contains no

   1See U nited States v. H utto, 256 U .S. 524, 529 (1921) (offense o f Federal official’s having
financial interest in Indian trade); H unsaker v. United Slates, 279 F. (2d) 111, 112 (9th Cir. I960),
cert, denied, 464 U.S. 819 (1960) (Gold Reserve Act); United Stales v. W eisner, 216 F. (2d) 739,
742 (2d Cir. 1954) (Gold Reserve Act). In W eisner, the court rejected the argum ent that 18 U .S .C .
§ 1, which deals with the classification o f criminal offenses, governed the m eaning of " o ffe n se ”
for purposes o f 18 U .S .C . § 371.
   2It should be noted that § 16, as am ended, refers to a civil penalty for each "v io latio n ” of
paragraph Second. In contrast, with regard to paragraph First and Third, the statute refers to a fine
for each " o ffe n se .” There is no reason, how ever, to treat this difference in term inology as decisive
regarding the applicability o f 18 U .S .C . I 371.
   3See 46 U .S .C . § 815 (1970).
   ‘See Pub. L. No. 92-416 (1972), § 1(b).

                                                    7
 mention of the possibility o f prosecutions under the conspiracy statute. Thus,
 an effort must be made to infer Congress’ intent.
   The bill which was ultimately enacted differed in certain respects from the
version introduced and initially passed by the House of Representatives. As
enacted, the law provides that the civil penalties for violation of the Shipping
Act “ may be compromised by the Federal Maritime Commission, or may be
recovered by the United States in a civil action.” 5 The original House bill
contained the change from criminal to civil sanctions, but under that bill 6 the
Federal Maritime Commission would have been empowered to assess the civil
penalties, subject to review of its action in the courts of appeals.
   The purpose o f the House bill was to strengthen the ability of the
Commission to carry out its regulatory functions under the Shipping Act, in
part by amending the penalty provisions in the “ areas that give the Commission
most o f its enforcement problems in day-to-day operations.” 7 The House report
stated that the then-existing situation (i.e ., investigation of matters by the
Commission and referral to the Department of Justice for prosecution) was
unsatisfactory because it involved delay and also overlapping of effort on the
part of the Commission and the D epartm ent.8 Another disadvantage cited in the
House report was that frequently (because o f the time elapsed between the
occurrence o f the infraction and the criminal trial) the sentence imposed by the
courts was too light and was insufficient to defer future violations.9
   Although the House report stressed that the amendments would mean m ore.
effective regulation by the Comm ission, it also said that the proposed procedure
(assessment o f penalties by the Com m ission, with review in the courts of
appeals) “ would, in most instances, reduce the total litigation expenses to both
the Government and private parties [and] relieve the overburdened Federal
courts . . . . ” 10
   The Senate, however, amended the bill so as to restrict the authority of the
Commission to seeking to compromise a civil penalty. Thus, under the Senate
bill (which was enacted), absent such a compromise, the Commission may
refer the matter to the Department of Justice for the bringing of a civil action to
recover a penalty.
   Evidently, the basis for the Senate amendment to the House bill was industry
opposition to granting the Commission authority to assess civil penalties.11 The
Senate report referred to “ contentions” that such a procedure would be
contrary to due process, because the “ nature of the administrative agency
process necessarily makes the agency . . . ill-suited for the imposition of
punitive sanctions.” 12

  sId., § 3;  46 U .S .C . 814 note (1975 Supp.).
  6See 117 Cong. Rec. 32415 (1971).
  7H. Rept. No. 92-478, 92d C o n g ., 1st sess. (1971), p. 1.
  ald., p. 2.
  Vd„ p. 3.
  '°ld., p. 4.
  11See S. Rept. No. 92-1014, 92d C ong., 2d sess. (1972), p. 3.
  nld., p. 2.

                                             8
   In explaining the shift from criminal sanctions to civil, the Senate report
noted, as did the House report, the unsatisfactory, time-consuming nature of
the then-existing means of enforcem ent.13 Furthermore, the Senate report
stated:
         To change the penalties for violations of these provisions from
      criminal to civil should make the documentation of violations
      simpler, thereby expediting final consideration by the Commission,
      or the Department of Justice and the courts. Since proving a violation
      would be easier, the threat of imposition of the prescribed penalty
      should act as a more effective deterrent to further violations.
Continuing, the Senate report stated14 that enactment o f the bill
      . . . should provide the Federal Maritime Commission with needed
      additional authority to more effectively discharge its statutory •
      responsibilities, encourage compromised settlements for violations of
      the shipping statutes, and help to avoid needless litigation in our
      over-crowed [sic] Federal courts.
   The legislative history indicates that C ongress’ main purpose in substituting
civil sanctions was to enhance enforcement by the Commission. The possibility
of bringing conspiracy prosecutions seems consistent with the main purpose of
the 1972 amendments. Such prosecutions need not interfere with enforcement
by the Commission and, indeed, could be a useful supplement. Still, consideration
must be given to other objectives mentioned in the congressional reports.
   ThesHouse report and, to a lesser extent, the Senate report expressed concern
regarding duplication of effort by the Commission and the Department. This
problem could be exacerbated if, for example, there should be a conspiracy
prosecution in regard to a matter that had already been the subject of a
Commission investigation and a civil action for recovery o f a penalty.
   Both of the reports indicated a desire to avoid increasing the backlog of cases
in the Federal courts. This may be some evidence that, except for the means
provided in § 16, Congress did not contemplate Federal enforcement in this
area.
   As the Fifth Circuit has pointed o u t,15 the 1972 amendments were clearly
not based upon a belief that criminal punishment was too severe. Both
committee reports stressed the need for a more effective deterrent. Nonetheless,
Congress was also concerned with fairness to the regulated firms and, in
particular, with reducing their litigation expense (as well as that of the
Government). This is another aspect o f congressional intent that casts doubt on
the availability o f conspiracy prosecutions.
   Finally, it must be noted that Congress could have provided for both civil and

    l3S. R ept., p. 2.
    14I d p. 3.
    15United States v. B lue Sea Line. 553 F. (2d) 445, 450 (5th Cir. 1977) (upholding the dismissal
o f indictm ents charging pre-1972 rebates in violation of 8 16. paragraph Second).

                                                 9
 criminal sanctions for violation of the provisions in question, but did not do
 s o .16
     The basic conclusion we draw from the legislative history is that there is no
 absolute conflict between Congress’ intent in amending § 16 and the bringing
 o f conspiracy prosecutions in this area. On the other hand, the concerns
 expressed by the congressional committees with regard to avoiding overlap
 between the Commission and the Department, fairness to regulated entities,
 and reducing the burden on the courts are entitled to some weight. Those
 concerns suggest that if there are to be conspiracy prosecutions related to
 violations o f § 16 great care must be used in selecting the cases. For reasons
 discussed below, the same conclusions are suggested by principles analogous to
 those underlying the W harton rule.
    .3. The nature o f the W harton rule was thoroughly considered by the
 Supreme Court in lannelli v. United States, 420 U .S. 770 (1975).17 The Court
 described the rule by quoting from its original source, W harton’s treatise on
 criminal law :18
          When to the idea of an offense \e.g ., dueling] plurality of agents is
       logically necessary, conspiracy, which assumes the voluntary accession
       of a person to a crime of such a character that it is aggravated by a
       plurality o f agents, cannot be maintained . . . .
Had the present issues arisen before the 1972 amendment of § 16— that is,
when criminal sanctions were prescribed for conduct such as rebating— it
would have been necessary to determine the applicability of the Wharton rule.
In our opinion, however, because the substantive violations are no longer
crim es, the W harton rule as such does not app ly.19
   Nonetheless, since the substantive violations are “ offenses” for the purpose
of 18 U .S.C . § 371, it should be proper to consider principles similar to those
underlying the W harton rule. In lannelli, the Court stated, 420 U .S ., at 782,
that the W harton rule does not rest on principles o f double jeopardy,20 but is
merely a “ judicial presum ption, to be applied in the absence of legislative
intent to the contrary.” The rule was explained as follows (420 U .S. at
785-86, footnotes omitted):

     l6For exam ple, w illful violations m ight have been made subject to criminal sanctions.
    The D epartm ent o f Justice sent a report on the House bill to both the House and the Senate
com m ittees. See H. R ept., p. 10; S. R ept., p. 6. The Departm ent stated that it had no objection to
enactm ent o f the bill. Its report did not suggest the need to retain criminal sanctions and did not
m ention the possibility o f prosecutions under 18 U .S .C . § 371.
    l7In la n nelli, the C ourt, in a five-to-four decision, sustained convictions for violation o f 18
U .S .C . § 1955, prohibiting large-scale gam bling activities, and for conspiring to com m it that
offense.
    I8420 U .S . at 773. quoting 2 F. W harton, C rim inal L aw § 1604 (12th e d ., 1932) p. 1862.
    lvO ne indication that the rule applies only when the substantive offense is a crim e is the
discussion in la n n elli o f the procedural effect o f the rule. The Court stated, 420 U .S. at 786,
footnote 18, that in cases covered by the rule dism issal of the conspiracy charge is not required. The
Court added, “ W hen both charges are considered at a single trial, the real problem is the avoidance
o f dual punishm ent. T his problem is analogous to that presented by the threat o f conviction for a
greater and a lesser included offense, and should be treated in a sim ilar m anner.”
    20Bui see footnote 19, supra.

                                                  10
         W harton’s Rule applies only to offenses that require concerted
      criminal activity, a plurality of criminal agents. In such cases, a
      closer relationship exists between the conspiracy and the substantive
      offense because both require collective criminal activity. The substantive
      offense therefore presents some of the same threats that the law of
      conspiracy normally is thought to guard against, and it cannot
      automatically be assumed that the Legislature intended the conspiracy
      and the substantive offense to remain as discrete crimes upon
      consummation of the latter. Thus, absent legislative intent to the
      contrary, the Rule supports a presumption that the two merge when
      the substantive offense is proved. [Emphasis as in original.]
Here, the question raised is whether violation of § 16, paragraph Second,
requires concerted activity. If so, it could be argued, by analogy to the Wharton
rule, that Congress did not intend any separate sanction for a two-party
conspiracy to commit that offense.21
   Under paragraph Second, it is “ unlawful for any common carrier by
w ater . . . alone or in conjunction with any other person, directly or
indirectly . . . [to] allow any person to obtain transportation for property at less
than the regular rates . . . by means of false billing . . . [or] any other
unjust . . . m eans.” If this provision is read literally, the minimum number
required for violation is one— the carrier.22 (A shipper who knowingly and
willfully obtains or attempts to obtain below-standard rates by such false means
violates another provision, the initial paragraph of § 16.) In our opinion,
however, such analysis is not entirely satisfactory.
   Logically, it is possible that a carrier could provide transportation at less than
the regular rate without the shipper’s realizing that any false or unfair means
had been used. Still, it seems reasonable to assume that often the violation
would involve concerted action, e .g ., an agreement that the carrier will pay a
rebate to the shipper. If so, it may be asserted that the mere existence of some
concerted action is not a basis for going beyond the civil penalties prescribed by
Congress; this supports our conclusion (derived from the legislative history)
that special care should be used in selecting cases to be prosecuted under 18
U.S.C . § 371.
   4. Our recommendation is that a distinction be drawn between what might

    2lThe W harton rule is subject to several exceptions. One is that a conspiracy prosecution is
perm issible when the num ber o f conspirators exceeded the minim um num ber o f persons required
for com m ission o f the substantive offense. See. lannelli v. United States, supra, 420 U .S ., at 782,
footnote 15.
   22The phrase "alo n e or in conjunction with any other person" does not alter our conclusion
regarding the m inimum .
   Cf. M ay v. United States. 175 F. (2d) 994, 1003 (D .C . C ir., 1949), cert, denied, 338 U .S. 830
( 1949) (conspiracy to com m it offense o f Congressm an’s accepting paym ent for services regarding a
claim against the Governm ent); E x parte O 'L eary, 53 F. (2d) 956, 957 (7th C ir., 1931), cert,
denied, 283 U .S. 830 (1931) (conspiracy to com m it offense of Federal officer’s receiving a bribe).
These cases applied an exception to the W harton rule; this exception perm its a conspiracy
prosecution where the substantive offense (e .g .. accepting a bribe) is such that only one o f the
parties could com m it it.

                                                  11
  be called “ ordinary” violations of § 16, paragraph Second, and aggravated
  cases. Such determinations depend o f course upon the particular facts.
     Particular care must be given to the bases for treating a conspiracy and a
  completed substantive offense as separate, that is, the “ distinct kinds of threats
  to society that the law of conspiracy seeks to av ert.” 23
     Factors to be considered include the nature and extent of the conspiracy and
 the num ber o f parties. For exam ple, whether the agreement relates to an
  isolated transaction or to a long-continuing series o f transactions.
     There is no violation of paragraph Second unless false billing or some other
 unfair means is used. Thus, ordinarily, some concealment will be involved.
 W hen, however, the parties go to unusual lengths to conceal their conduct
 (e.g ., the use o f foreign subsidiaries24), there may be special risks to society.
 Moreover, where such a scheme is agreed upon, there may also be a sound
 basis for charging a conspiracy to defraud the Federal Maritime Commission.25
     Because Congress gave primary responsibility for enforcement to the
 Commission, consideration should be given to the action (or the position) taken
 by the Commission. For example, if the question of defrauding the Commission is
 raised, what is its view regarding the matter?
     In terms of fairness, it may be more difficult to justify proceeding with a
 conspiracy charge if, with regard to the underlying conduct, a civil penalty has
 been paid.
     O ur approach may be illustrated by the following hypothetical cases:
     a. In the first hypothetical situation, a carrier and a shipper agree, with
 respect to a particular shipment or a series o f shipments, that the carrier will pay
 a rebate to the shipper. It is understood that the rebate will be paid in cash and
 that the carrier’s books will not disclose the true nature of the payment. The
 amounts involved are relatively small, and there is no history o f such practices
 on the part of the parties involved.
        We question whether a conspiracy prosecution would be appropriate in a
 case o f this type. The parties could argue, with some force, that their conduct is
 at most an ordinary violation o f § 16 and that Congress intended use of the
 sanction o f civil penalties and nothing more.
    b. In the second hypothetical situation, the Federal Maritime Commission
 obtains evidence that a carrier may be engaged in paying improper rebates. It
 warns the carrier that such practices are illegal. Then, the carrier and the
 shipper enter into a secret agreement for the payment o f rebates. The agreement
 includes use of an elaborate scheme for making the payments— that is, several
 stages of laundering are effected, in part, by foreign subsidiaries of the carrier.

   23la nnelli v. U nited States, supra, 420 U .S ., at 783 (footnote om itted).
   “ Because o f our basic conclusion, it is not necessary to discuss the question w hether a carrier
can conspire with one (or m ore) o f its subsidiaries. S e e , P erm a L ife M ufflers, Inc. v. International
P arts C orp., 392 U .S . 134 (1968) (treble-dam age action under Sherm an Act may be based on a
conspiracy between corporate entities with com m on ow nership); Note, Developm ents in the
Law-C rim inal C onspiracy, 72 Harv. L. Rev. 920, 1000 (1959). See also Departm ent o f Justice,
“ Antitrust G uide for International O perations,’’ (January 26, 1977), p. 12.
   25See, H unsaker v. U nited States, supra, 279 F. (2d), at 114.

                                                     12
     Concerted action of this type would seem to pose special risks of harm to
society, e .g ., the risk that the laundering scheme will be used to effect
violations of other Federal laws. The action of the shipper and the carrier could
properly be regarded as a conspiracy (1) to violate § 16, paragraph Second, and
(2) to defraud the Commission.
   We do not have detailed information regarding the present cases and,
accordingly, are unable to make specific recommendations concerning them.
We hope that the above discussion will assist you in determining how to
proceed.

                                               John M . H arm on
                                           Assistant Attorney General
                                                      Office o f Legal Counsel

                                      13