Court Opinion

ID: 2743934
Source: CourtListenerOpinion
Date Created: 2014-10-20 22:00:59.018102+00
Date Added: 2024-06-11T10:07:01.783609
License: Public Domain

In the

    United States Court of Appeals
                For the Seventh Circuit
                    ____________________
No. 14-1404
UNITED STATES OF AMERICA,
                                                  Plaintiff-Appellee,

                                v.

RAGHUVEER NAYAK,
                                              Defendant-Appellant.
                    ____________________

        Appeal from the United States District Court for the
          Northern District of Illinois, Eastern Division.
          No. 12 CR 447 — Robert W. Gettleman, Judge.
                    ____________________

  ARGUED SEPTEMBER 9, 2014 — DECIDED OCTOBER 20, 2014
                    ____________________

   Before FLAUM, ROVNER, and HAMILTON, Circuit Judges.
   FLAUM, Circuit Judge. Raghuveer Nayak pled guilty to
mail fraud after federal authorities learned that he had been
secretly bribing physicians in exchange for referrals to his
outpatient surgery centers. As permitted by his plea agree-
ment, Nayak now appeals, claiming that his indictment was
legally insufficient because the government did not allege
that his conduct caused or was intended to cause tangible
harm to any of the referring physicians’ patients. Because
2                                                  No. 14-1404

actual or intended tangible harm is not an element of the of-
fense of honest-services mail fraud, we affirm.
                         I. Background
    Nayak owned multiple ambulatory surgery centers—also
known as outpatient surgery centers—including two in Chi-
cago: Rogers Park One-Day Surgery Center and Lakeshore
Surgery Center. To attract business, he made under-the-table
payments to physicians that referred patients to his centers.
These bribes and kickbacks took multiple forms, including
cash payments and payments to cover referring physicians’
advertising expenses. Nayak instructed at least some of his
collaborators not to report these payments on their tax re-
turns.
    After learning of the kickback scheme, the government
indicted Nayak. It later filed a superseding information
charging him with honest-services mail fraud, in violation of
18 U.S.C. §§ 1341 and 1346, and obstruction of the admin-
istration of the tax system under 26 U.S.C. § 7212(a). Alt-
hough both the indictment and the superseding information
alleged that Nayak intended “to defraud and to deprive pa-
tients of their right to honest services of their physicians”
through his scheme, neither alleged that Nayak caused or
intended to cause any sort of tangible harm to the patients in
the form of higher costs or inferior care. In fact, the govern-
ment later represented to the district court that the scheme
did not cause patients any physical or monetary harm.
    In the district court, Nayak filed a motion to dismiss the
mail fraud count, contending that the government needed to
allege some form of actual or intended harm to the referring
No. 14-1404                                                                3

physicians’ patients 1 as an element of the crime. The district
court rejected this argument, finding that the case law in this
circuit imposes no such requirement. Following the denial of
his motion to dismiss, Nayak entered a conditional guilty
plea to both counts of the superseding indictment. Pursuant
to Federal Rule of Criminal Procedure 11(a)(2), Nayak re-
served his right to appeal the district court’s denial of his
motion to dismiss the mail fraud charge. Exercising that
right, he now asks us to hold that tangible harm to a victim
is a necessary element of honest-services mail fraud, at least
in cases not involving fraud by a public official.
                               II. Discussion
    Nayak’s appeal challenges the legal sufficiency of the
government’s indictment and superseding information. In
evaluating this claim, we focus on the government’s allega-
tions, which we must accept as true. United States v. Moore,
563 F.3d 583, 586 (7th Cir. 2009). We review challenges to the
sufficiency of an indictment de novo. United States v. Castaldi,
547 F.3d 699, 703 (7th Cir. 2008). To be sufficient, an indict-

1 The government slightly misstates the issue in this case when it argues
that the mail fraud statute’s harm element was satisfied by the allegation
that Nayak’s scheme deprived patients of his surgery centers of the right to
the honest services of their physicians. Actually, the indictment alleged
that Nayak’s scheme deprived the referring physicians’ patients of their
right to the honest services of their physicians, not that Nayak deprived
his own patients of their right to his honest services. The breach of a fi-
duciary duty is a required element of an honest-services fraud convic-
tion. Skilling v. United States, 561 U.S. 358, 407–08 (2011). In the district
court, Nayak argued that he could not be charged with honest-services
fraud because he did not owe a fiduciary duty to the alleged victims of
his scheme—the patients of the referring doctors—but Nayak does not
raise this issue on appeal.
4                                                   No. 14-1404

ment must state each element of the crimes charged, provide
the defendant with adequate notice of the nature of the
charges so that the accused may prepare a defense, and al-
low the defendant to raise the judgment as a bar to future
prosecutions for the same offense. Id. Nayak argues that the
indictment failed to meet the first of these three require-
ments because it did not allege that the victims of his scheme
suffered tangible harm, which he claims is an element of a
private mail fraud charge.
    The federal mail fraud statute criminalizes the use of the
mails in the service of, inter alia, “any scheme or artifice to
defraud.” 18 U.S.C. § 1341. Prior to the Supreme Court’s de-
cision in McNally v. United States, 483 U.S. 350 (1987), lower
federal courts frequently interpreted this phrase to include
not only schemes that deprived victims of money or proper-
ty, but also those that deprived them only of their intangible
right to honest services. See Skilling v. United States, 561 U.S.
358, 400–01 (2011) (discussing the history of the honest-
services doctrine). In McNally, however, the Court held that
the statute protected only property rights, and thus did not
encompass schemes to defraud people of merely intangible
rights. 483 U.S. at 360.
    Congress quickly superseded the McNally decision by
adding § 1346 to the mail fraud statute, which states that
“the term ‘scheme or artifice to defraud’ includes a scheme
or artifice to deprive another of the intangible right of honest
services.” 18 U.S.C. § 1346. This statutory language specifi-
cally contemplating prosecutions based on the deprivation
of intangible rights would seem to present an insurmountable
roadblock to Nayak’s argument that the government must
prove tangible harm in order to convict him. Although a lit-
No. 14-1404                                                      5

eral reading of the statute would doom his case, Nayak cor-
rectly points out that courts have often imposed limiting
constructions on § 1346 in order to avoid both absurd results
and constitutional issues. See United States v. Sorich, 523 F.3d
702, 707 (7th Cir. 2008) (“[G]iven the amorphous and open-
ended nature of § 1346, … courts have felt the need to find
limiting principles.”). In United States v. Bloom, 149 F.3d 649
(7th Cir. 1998), abrogated in part by Skilling, 561 U.S. at 409, we
acknowledged the need to cabin § 1346 in some way. “Not
every breach of every fiduciary duty,” we said, “works a
criminal fraud.” Id. at 654 (quoting United States v. George,
477 F.2d 508, 512 (7th Cir. 1973)). Reading § 1346 in light of
McNally, the case it superseded, as well as the pre-McNally
intangible rights cases that § 1346 reinstated, we drew the
line “that separates run of the mill violations of state-law fi-
duciary duty … from federal crime” at “[m]isuse of office
(more broadly, misuse of position) for private gain.” Id. at
655. Notably, we said nothing about requiring tangible harm
to the victim; it was tangible benefit to the defendant that trig-
gered federal criminal liability. See United States v. Fernandez,
282 F.3d 500, 507 (7th Cir. 2002) (discussing our holding in
Bloom).
    The scope of § 1346 was further limited by the Supreme
Court in Skilling, a case which dealt with private corruption.
561 U.S. at 369. Faced with an argument that § 1346 was un-
constitutionally vague, the Court “look[ed] to the doctrine
developed in pre-McNally cases” and “pare[d] that body of
precedent down to its core: In the main, the pre-McNally cas-
es involved fraudulent schemes to deprive another of honest
services through bribes or kickbacks supplied by a third par-
ty who had not been deceived.” Id. at 404. Accordingly, the
Court construed § 1346 to reach “only the bribe-and-kickback
6                                                   No. 14-1404

core of the pre-McNally case law.” Id. at 409. It also held that
“the violation of a fiduciary duty” was a prerequisite to an
honest-services fraud conviction. Id. at 407–08.
    Our specific holding in Bloom did not survive Skilling.
Now, “only bribery or kickbacks,” rather than any private
gain whatsoever, “can be used to show honest-services
fraud.” Ryan v. United States, 688 F.3d 845, 847 (7th Cir. 2012).
However, our general approach in Bloom, which focused on
the defendant’s benefit from the fraud rather than any harm
to the victim, was vindicated by the Court’s favorable dis-
cussion of pre-McNally honest-services cases: “the honest-
services theory targeted corruption [in which] … the offend-
er profited [and] the betrayed party suffered no deprivation
of money or property.” Skilling, 561 U.S. at 400.
    Returning to this case: Nayak engaged (via the mails) in a
bribe-and-kickback scheme to drum up business for his sur-
gery centers. His conduct accordingly appears to fall square-
ly within the scope of § 1346 as the Court construed it in Skil-
ling. However, Nayak urges us to create yet another judicial
limitation on the scope of that section: a requirement that the
victims of private honest-services fraud suffer actual or in-
tended tangible harm. Congress, he argues, accidentally
painted with a too-broad brush in § 1346 by stating that all
schemes to deprive another of the intangible right to honest
services are schemes to defraud. According to Nayak, Con-
gress really intended this language to apply only to schemes
by public officials; § 1346, therefore, does not apply to him.
   To support this argument, Nayak points primarily to an
Eighth Circuit case, United States v. Jain, 93 F.3d 436 (8th Cir.
1996), where the court indeed made such a distinction be-
tween private and public corruption cases, albeit in dicta.
No. 14-1404                                                     7

The defendant in that case was a doctor who participated in
a patient-referral scheme much like Nayak’s. Id. at 438–39.
The court stated that he could not be convicted of honest-
services mail fraud without a showing that his patients suf-
fered tangible harm. Id. at 441–42. Most of the pre-McNally
honest-services cases, the court observed, involved only pub-
lic corruption: bribes and kickbacks involving elected or ap-
pointed public officials. Id. at 441. And while the court ob-
served 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,’” it also felt that “the transi-
tion from public to private sector in this context raises trou-
blesome issues.” 93 F.3d at 441–42.
       When official action is corrupted by secret
       bribes or kickbacks, the essence of the political
       contract is violated. But in the private sector,
       most relationships are limited to more concrete
       matters. When there is no tangible harm to the
       victim of a private scheme, it is hard to discern
       what intangible “rights” have been violat-
       ed… . Thus, prior intangible rights convictions
       involving private sector relationships have al-
       most invariably included proof of actual harm
       to the victims’ tangible interests.
Id. at 442.
    The Eighth Circuit ultimately concluded that it did not
need to define the scope of the right to honest services in
private sector cases, and instead reversed Dr. Jain’s convic-
tion because it found no evidence to suggest that Jain had
fraudulent intent. Id. Because Jain had caused no actual
harm, the government was required to show that Jain had
8                                                       No. 14-1404

intended to defraud his victims. Id. The evidence, according
to the court, showed only that Jain “intended to provide and
did in fact provide his patients with the highest quality psy-
chological services,” and thus intended no tangible harm. Id.
And, though the court acknowledged that Jain’s failure to
disclose the kickback he received from third-party providers
could constitute criminal fraud if this nondisclosure was ma-
terial, the court held that there was no evidence that any pa-
tient would consider this information material “if it did not
affect the quality or cost of [Jain’s] services to that patient.”
Id. 2
    We find this analysis unpersuasive, most notably because
the proposed distinction between private and public corrup-
tion has no textual basis in § 1346. But even if Jain was con-
vincing at the time it was decided, its holding is no longer
good law, as Skilling clearly states that private fraud schemes
fall under § 1346: “§ 1346[] appli[es] to state and local cor-
ruption and to private-sector fraud.” 561 U.S. at 413 n.45
(emphasis added). Nayak’s entire argument—as well as the
Jain decision—is based on the premise that § 1346 does not
apply to private corruption, and thus that the government
must show tangible harm in a private corruption case. But
because Skilling tells us that § 1346 applies to this case, the
rest is clear: § 1346 applies exclusively to the intangible right
of honest services, so tangible harm need not be shown. Why
would Congress specify (via § 1346) that § 1341 reaches
schemes causing intangible harm if Congress also meant to
limit § 1341 only to schemes that result in tangible harm?

2 Nayak does not dispute that the bribes he paid were material to the
referring physicians and their patients.
No. 14-1404                                                  9

    The Skilling Court, Nayak argues, did not explicitly de-
termine what elements are required to prove a violation of
§ 1346 by a private actor. True, but it did not need to: it is
contradictory to require the government to show actual or
intended tangible harm when the crime being prosecuted is
defined as causing or intending to cause intangible harm.
Nayak’s proposed construction would not only be contrary
to the plain language of the statute but would also mean that
§ 1346 is superfluous, as fraudulent schemes causing tangi-
ble harm are covered under § 1341.
    Furthermore, because Jain’s distinction between public
and private fraud is no longer supported by law, the Eighth
Circuit’s holding regarding Jain’s lack of fraudulent intent is
also unsupported. The Eighth Circuit found no fraudulent
intent in Jain because the defendant did not intend to de-
prive his victims of anything tangible. He clearly did, how-
ever, intend to deprive his patients of their intangible right
to honest services. And since we now know that private mail
fraud cases are not limited to schemes that cause tangible
harm, it must be the case that intent to cause intangible harm
is sufficient to support the fraudulent intent element of the
mail fraud statute. In this case, the indictment alleges that
Nayak’s bribes were intended to be material to the recipient
physicians’ referral decisions. Therefore, the indictment ade-
quately alleges that Nayak intended to deprive his victims of
their intangible right to honest services.
   Even without the Supreme Court’s holding in Skilling,
our precedent demonstrates that the government does not
need to show tangible harm to a victim in an honest-services
fraud case. In United States v. Fernandez, we rejected the de-
fendant’s reliance on Jain and another out-of-circuit case as
10                                                  No. 14-1404

“misplaced,” and declared that “[t]his Circuit has never re-
quired the government to establish a ‘contemplated harm to
the victim’” in mail fraud cases. 282 F.3d at 507. Nayak
points out that Fernandez was a public corruption case. But
Fernandez’s blanket statement was not limited to public cor-
ruption cases—it said that we have never required contem-
plated harm, period. Our statements in other public corrup-
tion cases have been similarly broad. See, e.g., Bloom, 149 F.3d
at 655 (noting that “misuse of position” for private gain, not
just “misuse of office,” violates § 1346 (emphasis added)); see
also United States v. Segal, 644 F.3d 364, 367 (7th Cir. 2011)
(“Loss is not required to prove fraud, whether monetary or
otherwise.”); United States v. Leahy, 464 F.3d 773, 786–97 (7th
Cir. 2006) (the mail and wire fraud statutes “do not require
the government to prove either contemplated harm to the
victim or any loss”).
    Nayak argues, however, that the language in our private
corruption cases requires tangible harm to a victim. For ex-
ample, United States v. Hausmann, 345 F.3d 952 (7th Cir. 2003),
dealt with a kickback scheme similar to this one. The de-
fendant in that case, a personal injury lawyer, frequently re-
ferred his clients to a chiropractor named Rise. Id. at 954. In
return, Rise agreed to direct 20% of his medical fees to third
parties that Hausmann would select. Id. Hausmann’s retainer
agreement with his clients provided that Hausmann would
receive 1/3 of any settlement and that Hausmann would pay
the client’s medical bills from the client’s portion of the set-
tlement. Id. Hausmann’s referrals earned him over $70,000 in
kickbacks made to the third parties for his personal benefit
or entities in which he had some interest. Id. at 956.
No. 14-1404                                                                  11

    “[U]nder the intangible-rights theory,” we explained, “a
valid indictment need only allege … that a defendant used
the interstate mails or wire communications system in fur-
therance of a scheme to misuse his fiduciary relationship for
gain at the expense of the party to whom the fiduciary duty
was owed.” Id. Nayak seizes on the language requiring that
the scheme must be “at the expense” of the defendant’s vic-
tims, arguing that this requires a showing of tangible harm
in private corruption cases. But Hausmann did not say that
the “expense” to the victim had to be a tangible one. Indeed,
later on in the case we said that “[i]t is of no conse-
quence … that clients received the same net benefit as they
would have absent the kickback scheme.” Id. at 957. Rather,
what we found objectionable was the intangible harm that
Hausmann’s clients suffered when their lawyer violated his
fiduciary duty and deprived them of his honest services:
“The scheme itself converted Hausmann’s representations to
his clients into misrepresentations, and Hausmann illegally
profited at the expense of his clients, who were entitled to
his honest services as well as their contractually bargained-
for portion of Rise’s discount.” Id. (emphasis added). 3

3 Similarly, in United States v. Montani, 204 F.3d 761 (7th Cir. 2000), we
affirmed the honest-services conviction of a defendant in charge of liqui-
dating old furniture for Sears, Roebuck & Company. The defendant had
sold furniture to his collaborator at 10 cents on the dollar, knowing that
his partner would turn around and sell it for 30 cents; the two split the
profits. Id. at 764. We upheld the conviction, noting that “[t]he transac-
tion was fraudulent in that it deprived Sears of both property—the 20
cents on the dollar it lost—and the honest services of its employee.” Id. at 769
(emphasis added). Although there was a pecuniary impact on the victim
in Montani, we did not hold that a pecuniary loss was necessary for a
conviction under § 1341.
12                                                   No. 14-1404

    Nayak’s Hausmann argument conflates harm with tangi-
bility. But it is clear that Congress thought that the victims of
fraud could be harmed even if the harm was only intangi-
ble—that was the purpose behind enacting § 1346. Although
the schemes in many of our private corruption precedents
had a pecuniary impact on the person to whom a fiduciary
duty was owed, we have never said that tangible harm is re-
quired in such a case. Indeed, the intangible harm from a
fraud can often be quite substantial, especially in the context
of the doctor–patient relationship, where patients depend on
their doctor—more or less completely—to provide them
with honest medical services in their best interest. Even
where a less important fiduciary interest is at play, though,
the mail fraud statutes are clear: no showing of tangible
harm to a victim is necessary. Therefore, the mail fraud
charge in this case was sufficiently alleged.
                         III. Conclusion
     We AFFIRM the judgment of the district court.