Court Opinion

ID: 9471167
Source: CourtListenerOpinion
Date Created: 2023-08-05 03:26:10.774867+00
Date Added: 2024-06-11T17:42:17.659000
License: Public Domain

WINTER, Circuit Judge,
dissenting in part and concurring in part:
Once again sailing against the wind in mail or wire fraud cases (or so they are called), I dissent.
In United States v. Margiotta, 688 F.2d 108 (2d Cir.1982), cert. denied, — U.S. —, 103 S.Ct. 1891, 77 L.Ed.2d 282 (1983), we read the mail fraud statute to create a regulatory code subjecting public officials, candidates and party leaders to criminal prosecution for allegedly deceptive political speech. Today we read the wire fraud statute to create a federal law of fiduciary obligations imposed on corporate directors and officers, thereby setting the stage for the development of an expandable body of criminal law regulating intracorporate affairs.
The majority’s legal theory is that wire fraud occurred because some of Mego’s funds were diverted “for noncorporate purposes in breach of [the defendants’] fiduciary duties to act in the best interest of the corporation and to disclose material information to Mego and its stockholders.” The evidence is that Mego, a corporation with sales ranging between $30 million and $109 million, during the relevant period, had off-book transactions engineered by the defendants averaging slightly over $11,000 per year. There is no evidence — none—that any of the money was diverted to the personal use of either Siegel or Abrams. The government’s prima facie case is thus made out solely by a showing of improper corporate record keeping.
I
State corporate laws universally impose upon corporate directors and officers certain obligations labelled fiduciary duties which are implied from the corporate relationship. These duties are of a contractual nature. However, because of the high transaction costs of organizing numerous parties and the difficulty of spelling out precise rules to govern future transactions, fiduciary obligations are developed and applied on a case by case basis by state courts. Easterbrook & Fischel, Corporate Control Transactions, 91 Yale L.J. 698, 700-702 (1982).
There is nothing in the language or legislative history of the wire fraud statute remotely suggesting that it was intended as a vehicle for the enforcement of fiduciary duties imposed upon corporate directors or officers by state law. To allow it to be so used would thus be a grave error. However, what the majority does is infinitely worse, for it holds that the wire fraud statute creates a federal law of fiduciary obligations. There is no pretense that the source of the fiduciary duty at issue in this case was anything but federal law. There is no reference in the majority opinion to state law or even to Mego’s state of incorporation. The jury simply was told that it was up to it to decide whether, as part of the obligation “to act in the best interest of the corporation,” the defendants were under a duty to disclose the off-book transactions to shareholders.
The creation of this federal fiduciary duty is no minor step. The relationship of federal and state law in the governance of corporations is a matter of great debate, see generally An In-Depth Analysis of the Federal and State Roles in Regulating Corporate Management, 31 Bus.Law. 863-1213 (1976); Fischel, The Corporate Governance Movement, 35 Vand.L.Rev. 1259 (1982); Corporate Rights and Responsibilities: Hearings Before the Comm, on Commerce United States Senate, 94th Cong., 2d Sess. (1976), in which the proponents of federal regulation have strenuously argued that state law governing the conduct of corpo*24rate directors and officers is too lax. E.g., Cary, Federalism and Corporate Law: Reflections upon Delaware, 88 Yale L.J. 663 (1974). Over the years, Congress has responded by mandating disclosure through the various securities laws, 15 U.S.C. §§ 77a-78kk (1976), but has generally declined to enact substantive regulation of corporate transactions. See generally Santa Fe Industries v. Green, 430 U.S. 462, 97 S.Ct. 1292, 51 L.Ed.2d 480 (1977).
Notwithstanding the lack of even a hint of relevant Congressional intent in enacting the wire fraud laws, notwithstanding Congress’ repeated rejection of pleas to strengthen the fiduciary obligations imposed on corporate directors and officers by state law, and notwithstanding the existence of precise federal legislation requiring disclosure of particular corporate matters, we read the wire fraud statute to embody a federal law of fiduciary obligations, including an undefined duty of yet further disclosure, enforceable by the sanctions of the criminal law. Compare United States v. Chiarella, 588 F.2d 1358 (2d Cir.1978), rev’d, 445 U.S. 222, 100 S.Ct. 1108, 63 L.Ed.2d 348 (1980).
It will be up to later juries and later panels to define what actions by corporate directors and officers are or are not “in the best interest of the corporation.” The elasticity of the concept and the potential for infinite expansion, however, are foreshadowed by the facts of the present case. The “material” information not disclosed to shareholders in the instant case is a series of transactions of roughly $11,000 annually over nine years, a wholly trivial sum in light of Mego’s sales. In holding that these transactions “would be important to a Mego stockholder,” the majority simply closes its eyes to investment realities, for there is not a shred of evidence that such a sum would affect share price in the slightest. It requires little imagination to foresee future application of the theory of this case to the use of corporate airplanes, the size of executive salaries, expense accounts, etc.
Moreover, there is no evidence — again, none — that the transactions in question harmed the corporation. By allowing an inference of diversion to personal use to be drawn solely from the lack of proper records, the majority has in effect dropped the element of a scheme to defraud from the offense. Courts long ago eliminated the need to show a substantial connection between the scheme to defraud and the use of the mails or wires. Now we are eliminating the need.to show fraud. In effect, a new crime — corporate improprieties — which entails neither fraud nor even a victim, has been created.
II
Other aspects of the majority decision also trouble me. Adequate notice to those affected by such elastic concepts is simply not possible, for even the wisest counsel cannot foresee what corporate acts may after the fact attract a prosecutor’s suspicion (or ire) and a judicial stamp of impropriety. The key act of the defendants here was the arousal of prosecutorial suspicions. The government’s argument brims with innuendo of other crimes: embezzlement, bribery of a union official, commercial bribery, tax evasion, and securities law violations, all of which go to prove only that the criminal charges in issue are a surrogate for ones which the prosecutor lacked either evidence or jurisdiction to make. The overtones of the majority opinion suggest that the defendants here have been convicted essentially of stealing or embezzling funds from Mego. Had those been the crimes actually charged, however, verdicts would likely have been directed in their favor, for there is no evidence that the cash in question was diverted to any purpose other than increasing the profits of the corporation.
Finally, as in Margiotta, a crime is created which by its nature will be prosecuted infrequently and in a highly selective manner. If judges perceive a need for a catchall federal common law crime, the issue should be addressed explicitly with some recognition of the dangers, rather than continue an inexorable expansion of the mail and wire fraud statutes under the pretense of merely discharging Congress’ will.
*25Quite apart from the self-evident danger in creating vast areas of discretion for prosecutors to single out individuals for improper reasons, there is a real question as to whether the costs in resources equal the benefits achieved. The trial here, involving five defendants, each with his own counsel, lasted seven weeks, consuming substantial prosecutorial, private and judicial resources. Only two of the five defendants were convicted, and total jail sentences amounted to only seven months. In truth, the law enforcement results from society’s point of view are as trivial as the off-book transactions were to Mego. Even had the government been more successful, however, there is reason to doubt that much would have been gained. Ill-defined crimes which are necessarily prosecuted on an infrequent and selective basis probably have little deterrent value. Were we to restrict the mail and wire fraud statutes to swindling and fraud, as originally intended, rather than extend them to perceived political or corporate improprieties, we would not only perform the judicial function correctly but probably also make a sensible policy judgment in terms of costs and benefits.
III
I concur in the reversal of Abrams’ conviction on count sixteen.