Court Opinion

ID: 3017336
Source: CourtListenerOpinion
Date Created: 2015-10-13 22:17:04.026799+00
Date Added: 2024-06-11T11:47:04.494822
License: Public Domain

___________

                                      No. 95-2820
                                      No. 95-3036
                                      ___________

United States of America,           *
                                    *
      Plaintiff - Appellee/         *
      Cross Appellant,              *
                                    * Appeals from the United States
      v.                            * District Court for the
                                    * Western District of Missouri.
Swaran Kumar Jain; Center for       *
Mental Health Services, Inc.,       *
                                    *
      Defendants - Appellants/      *
      Cross Appellees.              *
                               ___________

                        Submitted:    April 11, 1996

                            Filed:    August 8, 1996
                                      ___________

Before BOWMAN, BEAM, and LOKEN, Circuit Judges.
                               ___________

LOKEN, Circuit Judge.

     Psychologist Swaran Kumar Jain and his corporation, the Center for
Mental Health Services, Inc., appeal their convictions for violating the
mail fraud and Medicare anti-kickback statutes by receiving payments from
a psychiatric hospital for referring patients to that hospital.           Defendants
argue that the district court's jury instructions erroneously defined the
term "willfully" in the anti-kickback statute, and that the government
failed to prove mail fraud, that is, a scheme to deprive Dr. Jain's
patients   of   their    intangible    right   to   his   "honest   services."   The
government cross-appeals, contending that the district court erred in
determining the improper benefit conferred by the kickbacks for purposes
of sentencing Dr. Jain under U.S.S.G. § 2B4.1(b)(1).                 We reverse the
convictions for mail fraud but otherwise affirm.
                                 I. Background.

     We must view the evidence in the light most favorable to the jury's
verdict.   The government's key witnesses were two former administrators of
North Hills Hospital ("North Hills"), an acute-care psychiatric hospital
which opened in Kansas City, Missouri, in 1988.                Dr. Jain was then a
psychologist in private practice in Leavenworth, Kansas, operating an
outpatient therapy clinic and supervising as many as fifteen affiliated
psychologists   and   counselors.        The   first   North   Hills   Administrator
testified that his mid-1989 letter promising that North Hills would pay Dr.
Jain $1,000 per month for "marketing" was in fact an agreement to pay money
for patient referrals.      This witness testified that Dr. Jain provided no
documentation   of    any   subsequent    marketing    services;   instead,    their
conversations repeatedly linked the payments to Dr. Jain's substantial
volume of patient referrals:
     Q. Can you compare the nature of these conversations
     with Dr. Jain with your other experience with
     professionals over the years?

     A. Well, it is not unusual for professional people to
     want to affiliate with hospitals. . . . It is
     unusual, though, very unusual for a professional     person
     to make it so clear that they are willing to       exchange
     patients for money.

     Q.    Have you ever had that happen before?

     A.    Not in such an open manner.

     Q. Was there any question in your mind what Dr. Jain was
     offering in exchange for the hospital to pay money?

     A.    There was no question at all.

     Q.    And what was that?

     A.    Money in exchange for patients.

     The next North Hills Administrator testified that Dr. Jain provided
little if any tangible marketing support, demanded

                                         -2-
increased payments, threatened to refer his patients elsewhere if the
payments were not increased, and at one time showed the Administrator a
letter from a competing hospital offering to pay $2500 for each referral.
The payments ceased in October 1990, when a new North Hills Administrator
refused to continue the practice.
     Dr. Jain testified for the defense.         He insisted that North Hills'
first Program Director, who did not testify, agreed that North Hills would
pay Dr. Jain $100 an hour to provide mental health workshops and other
promotional activities in the community.        Thus, the letter from the first
Administrator did not accurately reflect the understanding.            According to
Dr. Jain, North Hills persistently under-compensated him for time devoted
to these marketing activities, which ultimately led him to terminate the
fee arrangement.      Dr. Jain directly contradicted the Administrators'
testimony.     He claimed there was no letter from a competing hospital
offering    $2500   per   patient   referral,   and   he   adamantly   denied   ever
requesting money for patient referrals.          Indeed, he asserted on direct
examination that such conduct would be "stupid," "illegal," "unethical,"
and "wrong."    Nonetheless, the jury obviously believed that he did it.

     Between July 1989 and October 1990, North Hills made nineteen
payments totaling $40,500 to Dr. Jain, with the payments increasing in
amount and frequency during 1990.      He referred forty-nine patients to North
Hills in 1989 and 1990.        One was a Medicare beneficiary.         Thirty were
insured by the Civilian Health and Medical Program of the Uniformed
Services ("CHAMPUS"), a Defense Department program that provides medical
benefits to the spouses and unmarried children of living and deceased
members of the military services.       The rest were privately insured.

     Though the government had strong evidence of a patient referral
"kickback" scheme, it had no evidence of tangible harm to Dr. Jain's
patients.    The government conceded that each patient

                                        -3-
referred to North Hills was appropriately hospitalized.   Several government
witnesses testified that North Hills was likely the best acute-care
psychiatric hospital in the region.    One of Dr. Jain's colleagues, who had
no knowledge of the North Hills fee arrangement, testified that he referred
patients to North Hills because it was the closest psychiatric hospital to
their practice in Leavenworth, because North Hills had a very good staff
and program, and because Dr. Jain's clinic had good relations with the
staff and easy access to the facility.      This psychologist also testified
that Dr. Jain "was very professional in his interactions with patients,
very caring.   He put the patient's well-being as his highest priority."
These views were echoed by another government witness, a psychiatrist on
the North Hills staff who was also unaware of the fee arrangement.       In
addition, no witness claimed that any patient received unnecessary care or
excessive hospitalization.   Thus, there was no proof that any government
insurance program suffered a financial loss.

     After the jury convicted defendants on all nineteen counts of the
indictment, they filed post-trial motions to set aside those convictions.
Count One charged a conspiracy to defraud the United States by soliciting
kickbacks for referring Medicare and CHAMPUS patients to North Hills.   The
district court vacated this conviction on the authority of United States
v. Porter, 591 F.2d 1048 (5th Cir. 1979), and the government does not
appeal.   Count Three charged Dr. Jain with bribing North Hills officials.
The district court vacated this conviction because defendants paid no
bribes, and again the government does not appeal.     However, the district
court upheld the convictions under Count Two, which charged violations of
the Medicare anti-kickback statute, 42 U.S.C. § 1320a-7b(b)(1)(A), and
counts Four through Nineteen, which alleged a scheme to deprive Dr. Jain's
patients of his honest services as a psychologist in violation of the mail
fraud statutes, 18 U.S.C. §§ 1341, 1346.    The district court sentenced Dr.
Jain to five years probation, including six months of home detention, and

                                      -4-
a $10,000 fine.       It imposed special assessments of $850 on Dr. Jain and
$3400 on the corporate defendant.        Defendants appeal the convictions; the
government cross-appeals Dr. Jain's sentence.

                   II. The Medicare Anti-Kickback Convictions.

     Defendants argue that the district court's instructions incorrectly
defined the term "willfully" in the Medicare anti-kickback statute.1                  We
will uphold an instruction on the mens rea element of a federal crime if
it "fairly and adequately" sets forth the statutory requirement.                United
States v. Otto, 64 F.3d 367, 370 (8th Cir. 1995), cert. denied, 116 S. Ct.
956 (1996).

     The parties assert radically different positions on this issue of
statutory    construction.      Based    upon       the   traditional   principle    that
ignorance of the law is no defense, the government urges us to apply the
general     rule    that   "willfully"   in     a     criminal   statute   "refers     to
consciousness of the act but not to consciousness that the act is
unlawful."    Cheek v. United States, 498 U.S. 192, 209 (1991) (Scalia, J.,
concurring).       Defendants urge us to adopt the exception to that general
rule that has long been applied in criminal tax cases -- willfulness in a
criminal tax statute means

     1
      42 U.S.C. § 1320a-7b provides in relevant part:

     (b)      Illegal remunerations

          (1) whoever knowingly and willfully solicits or
     receives any remuneration (including any kickback, bribe,
     or rebate) directly or indirectly, overtly or covertly,
     in cash or in kind--

                  (A) in return for referring an individual
              to a person for the furnishing of any item or
              service for which payment may be made in whole
              or in part under [Medicare] . . .

     shall be guilty of a felony and upon conviction thereof,
     shall be fined not more than $25,000 or imprisoned for
     not more than five years, or both.

                                         -5-
the "voluntary, intentional violation of a known legal duty."                 Cheek, 498
U.S. at 201.         Defendants rely most heavily upon Ratzlaf v. United States,
114 S. Ct. 655, 663 (1994), which extended the standard applied in tax
cases       to    criminal   prosecutions   for    "willfully    violating"      the   anti-
structuring provisions of the Money Laundering Control Act of 1986, 31
U.S.C. § 5322(a) (1993).

        The district court adopted a middle ground.              The court declined to
instruct the jury that Jain must have intentionally violated a known legal
duty    because the anti-kickback statute prohibits willful conduct --
receiving remuneration for referring patients to a Medicare provider --
rather than the willful violation of a statute, as in Ratzlaf.                     But the
court also concluded that a mens rea instruction more rigorous than the
traditional rule was appropriate because the literal language of this
statute          might   otherwise   encompass    some   types   of   innocent    conduct.
Accordingly, modifying language found in 2 Edward J. Devitt, Charles B.
Blackmar & Kevin F. O'Malley, Federal Jury Practice and Instructions ¶
30.05 (4th ed. 1990), the court instructed the jury that "the word
'willfully' means unjustifiably and wrongfully, known to be such by the
defendant Swaran Jain."          It also instructed that "good faith" was a defense
to this charge, explaining that Dr. Jain acted in good faith if he believed
he was being paid for promoting North Hills, not for referring patients.

        We agree with the district court's resolution of this issue.                     The
word "willful" has many meanings and must be construed in light of its
statutory context.            Ratzlaf, 114 S. Ct. at 659.             Here, the elements
"knowingly and willfully" were added to the statute in 19802 to reflect
congressional concern "that criminal penalties may be imposed under current
law to an individual whose conduct, while improper, was inadvertent."                   H.R.
Rep. No. 1167, 96th Cong., 2d

        2
      See Omnibus Reconciliation Act of 1980, Pub. L. No. 96-499,
tit. IX, § 917, 94 Stat. 2599, 2625.

                                            -6-
Sess. 59 (1980), reprinted in 1980 U.S.C.C.A.N. 5526, 5572.                The reference
to "inadvertent" is rather ambiguous in this context, since the traditional
definition    of   "willfully"     --   consciousness    of   the    act   --   might    be
sufficient to weed out inadvertent violators.              But the statute also has
elaborate "safe harbor" provisions, see § 1320a-7b(b)(3), provisions which
have prompted pages of administrative agency explication, see 42 C.F.R.
§ 1001.952.   This confirms that a broad "illegal remunerations" statute is
like the statute at issue in Ratzlaf in that it potentially includes
conduct   that     is   not   "inevitably    nefarious."      Only   conduct     that    is
inevitably nefarious, that is, "obviously 'evil' or inherently 'bad,'"
warrants the traditional presumption that anyone consciously engaging in
it has fair warning of a criminal violation.            Ratzlaf, 114 S. Ct. at 661-
62.   Thus, we agree with the district court's decision to instruct the jury
that the government must meet a heightened mens rea burden.                See Liparota
v. United States, 471 U.S. 419, 423-33 (1985) (knowingly using food stamp
cards in an unauthorized manner requires proof that defendant knew his
conduct was unauthorized); United States v. Curran, 20 F.3d 560, 569 (3d
Cir. 1994); United States v. Hern, 926 F.2d 764, 767 & n.6 (8th Cir. 1991).

      But that does not mean that the specific instruction adopted in
Ratzlaf and the criminal tax cases is appropriate in this case.                         The
statute at issue in Ratzlaf made criminal a willful violation of another
anti-structuring statute.        Because one cannot willfully violate a statute
without knowing what the statute prohibits, the Supreme Court required
proof that defendant intentionally violated a "known legal duty."                See 114
S. Ct. at 658-59.       By contrast, in the Medicare anti-kickback statute, the
word "willfully" modifies a series of prohibited acts.                 Both the plain
language of that statute, and respect for the traditional principle that
ignorance of the law is no defense, suggest that a heightened mens rea
standard should only require proof that Dr. Jain knew that his conduct was
wrongful, rather than proof that he knew it violated "a

                                            -7-
known    legal     duty."      Therefore,   the   district    court's   definition      of
"willfully"      correctly     construed    the   1980    amendment   to    §   1320a-7b.
Hanlester Network v. Shalala, 51 F.3d 1390, 1399-1400 (9th Cir. 1995), does
not     persuade    us   to    adopt   defendants'       position.      That     case   is
distinguishable because it involved an administrative debarment proceeding.
In addition, the court adopted Ratzlaf's heightened mens rea standard
without considering other alternatives to the general rule.                Accord United
States v. Neufeld, 908 F. Supp. 491, 497 (S.D. Ohio 1995).

        Alternatively, we conclude that the district court's refusal to give
an instruction using the Ratzlaf definition of willfully was harmless
error.    Dr. Jain's defense was that he did not take money from North Hills
for referring patients.        On direct examination, he testified that payments
for patient referrals are not only "unethical" and "wrong," they are
"illegal."    That testimony effectively took mens rea out of the case, for
Dr. Jain acknowledged that, if the jury disbelieved his denials, he would
be guilty under his own requested instruction as well as the instruction
given by the district court.

                            III. The Mail Fraud Convictions.

        The mail fraud statute prohibits use of the mails to execute "any
scheme or artifice to defraud."        18 U.S.C. § 1341.       "Essential to a scheme
to defraud is fraudulent intent. . . . The scheme to defraud need not have
been successful or complete.        Therefore, the victims of the scheme need not
have been injured.       However, the government must show that some actual harm
or injury was contemplated by the schemer."              United States v. D'Amato, 39
F.3d 1249, 1257 (2d Cir. 1994) (citations and quotation omitted).                  Accord
United States v. Sawyer, 85 F.3d 713, 725 (1st Cir. 1996).                      Defendants
argue that the government failed to prove a scheme to defraud.                   We agree.

                                            -8-
     The government alleged that Dr. Jain's patients were the victims of
a fraudulent referral fees scheme.             But there was no evidence that any
patient suffered tangible harm.         So far as the trial record reflects, Dr.
Jain provided quality psychological services.            Each hospitalized patient
required hospitalization.            North Hills was as good or better than any
alternative facility and provided his patients with proper care.                 And no
patient was financially harmed by Dr. Jain's fee arrangement with North
Hills.
     The government argues that tangible harm is irrelevant because it
proved a scheme to defraud under 18 U.S.C. § 1346, which defines "scheme
or artifice to defraud" to include a scheme "to deprive another of the
intangible right of honest services."          Section 1346 was enacted in 1988 to
overrule the Supreme Court's decision in McNally v. United States, 483 U.S.
350 (1987).      Though McNally and the vast majority of earlier "intangible
rights" mail fraud cases involved corrupt public officials, the government
argues    that    §   1346   encompasses    unethical    violations    of   a    private
professional's fiduciary duty to provide "honest services" to his clients.

     It is certainly true that the literal language of § 1346 extends to
private     sector    schemes   to   defraud   another   of   the   right   to   "honest
services."       But the transition from public to private sector in this
context raises troublesome issues.         In a democracy, citizens elect public
officials to act for the common good.            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
violated.    For example, what "honest services" do we expect from a used car
salesman, beyond a truthful description of the car being sold?              Thus, prior
intangible rights convictions involving private sector relationships have
almost invariably included proof of actual harm to the victims' tangible
interests.     In United States v. Garfinkel,

                                           -9-
29 F.3d 1253, 1258 (8th Cir. 1994), for example, defendant was a University
of Minnesota psychiatrist whose scheme deprived a financial sponsor of the
valuable benefits of legitimate pharmaceutical research.

       Of course, the government limits its argument to undisclosed breaches
of a health care professional's fiduciary duty to his clients.3          But when
the client was not harmed because the breach did not affect the services
rendered, how has the client's right to "honest services" been violated?
Even   in   pre-McNally   cases   involving   public    official   misfeasance   --
decisions whose vitality was restored by § 1346 -- we cautioned that
"[e]very case of breach of public trust and misfeasance in office in
connection with which some mailing has occurred does not and cannot fall
within the confines of the mail fraud statute."        United States v. Rabbitt,
583 F.2d 1014, 1024 (8th Cir. 1978), cert. denied, 439 U.S. 1116 (1979);
see also United States v. McNeive, 536 F.2d 1245, 1249 (8th Cir. 1976).

       Fortunately, this case does not require us to define the outer limits
of the private sector rights to "honest services" that are now protected
by § 1346.   That statute does not stand alone -- it modifies the definition
of "scheme or artifice to defraud" in § 1341.          The essence of a scheme to
defraud is an intent to harm the victim.        When there has been no actual
harm, "the government must produce evidence independent of the alleged
scheme to show the defendant's fraudulent intent."           D'Amato, 39 F.3d at
1257; see United States v. Pintar, 630 F.2d 1270, 1279-80 (8th Cir. 1980).
Here, all the evidence suggests that Dr. Jain intended to provide

       3
     The regulations of the Kansas Behavioral Sciences Regulatory
Board define unprofessional conduct by a licensed psychologist to
include receiving fees for the referral of clients or patients.
See Kan. Admin. Regs. 102-1-10(b)(20); see also American
Psychological Ass'n, Ethical Principles of Psychologists and Code
of Conduct, Ethical Std. 1.27 (1992).

                                      -10-
and did in fact provide his patients with the highest quality psychological
services.    While he also extracted undisclosed, unethical referral fees
from an interested third party provider, there is no independent evidence
proving that he thereby intended to defraud his patients.            True, Dr. Jain
did not disclose the referral fees, but a fiduciary's nondisclosure must
be material to constitute a criminal scheme to defraud.           See United States
v. Bronston, 658 F.2d 920, 927 (2d Cir. 1981), cert. denied, 456 U.S. 915
(1982); United States v. Brown, 540 F.2d 364, 375 (8th Cir. 1976).             There
is simply no evidence that any patient would have considered Dr. Jain's
relationship with North Hills material if it did not affect the quality or
cost of his services to that patient.
     For these reasons, we conclude the mail fraud convictions must be
reversed.    The government's theory and proof bring to mind our conclusion
in an early intangible rights case involving a greedy but uncorrupted
public official, McNeive, 536 F.2d at 1252:

     The Government here is attempting to criminalize cupidity and
     we do not believe that § 1341 can be extended to that extreme
     . . . . [T]here must be, at a minimum, a cognizable scheme to
     defraud. While we do not place our imprimatur upon McNieve's
     avariciousness, we fail to find from the Government's proof
     that McNeive engaged in a scheme to defraud the City of St.
     Louis of any tangible or intangible right so as to fall within
     the broad reaches of the mail fraud statute.

                       IV. The Sentencing Cross-Appeal.

     The district court sentenced Dr. Jain for his Medicare anti-kickback
offense under U.S.S.G. § 2B4.1, which governs commercial bribery and
kickback offenses.    That guideline mandates an increase in the base offense
level if an improper benefit exceeding $2000 was conferred upon the
defendant.      See   U.S.S.G.   §§   2B4.1(a),   (b)(1),   and    2C1.1,   comment.
(backg'd).   The amount of the increase is determined by a cross-reference
to the table in § 2F1.1.     The

                                       -11-
district court declined to impose an increase because it found that Dr.
Jain received less than $2,000 for referring one Medicare patient to North
Hills.     On appeal, the government argues that all of the $40,500 in
referral payments should have been counted as relevant conduct because
there was one common scheme or plan.

     The district court's factual determination of relevant conduct is
reviewed under the clearly erroneous standard.              See United States v.
Sheahan, 31 F.3d 595, 599 (8th Cir. 1994).        Relevant conduct for sentencing
purposes must be criminal conduct.            Id. at 600.        The district court
acquitted Dr. Jain of the bribery charge, and we have acquitted him of the
mail fraud charges.   At the time in question, Medicare did not reimburse
payments for psychologist services, so there is no factual basis to presume
that the Jain/North Hills fee arrangement targeted Medicare patients.               In
these circumstances, while a sentencing court may consider conduct for
which the defendant has been acquitted, see United States v. Galloway, 976
F.2d 414, 424 n.6 (8th Cir. 1992) (en banc), cert. denied, 507 U.S. 974
(1993), we conclude that the district court's findings regarding relevant
conduct are not clearly erroneous.          See United States v. Balano, 8 F.3d
629, 631 (8th Cir. 1993).

     The    convictions   of   Dr.   Jain   and   the   Center   for   Mental   Health
Services, Inc., for violating the Medicare anti-kickback statute, 42 U.S.C.
§ 1320a-7(b), are affirmed.     The district court's determination of relevant
conduct for purposes of sentencing Dr. Jain for that offense is affirmed.
Defendants' convictions for violating the federal mail fraud statute are
reversed and the cases are therefore remanded for resentencing.

     A true copy.

            Attest:

                  CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.

                                       -12-