Court Opinion

ID: 2996606
Source: CourtListenerOpinion
Date Created: 2015-09-24 19:30:10.081631+00
Date Added: 2024-06-11T15:03:12.986005
License: Public Domain

In the
 United States Court of Appeals
              For the Seventh Circuit
                        ____________

Nos. 02-3945 & 02-3946
UNITED STATES OF AMERICA,
                                            Plaintiff-Appellee,
                              v.

CHARLES J. HAUSMANN and
SCOTT P. RISE,
                                   Defendants-Appellants.
                        ____________
          Appeals from the United States District Court
              for the Eastern District of Wisconsin.
         No. 02 CR 10—Charles N. Clevert, Jr., Judge.
                        ____________
       ARGUED APRIL 17, 2003—SEPTEMBER 22, 2003
                     ____________

  Before BAUER, MANION, and WILLIAMS, Circuit Judges.
  BAUER, Circuit Judge. Charles P. Hausmann pleaded
guilty to a charge of conspiracy to commit mail and wire
fraud. A jury convicted Scott J. Rise of the same offense.
Each defendant appeals from the district court’s denial
of his pretrial motion for dismissal of the indictment. Rise
also challenges the district court’s jury instructions and
Hausmann appeals from his sentence based on his chal-
lenge to the district court’s calculation of the loss amount
attributable to the fraud. For the reasons set forth herein,
we affirm the decisions of the district court and, conse-
quently, Hausmann’s sentence and Rise’s conviction.
2                                      Nos. 02-3945 & 02-3946

                       BACKGROUND
  Hausmann, a Milwaukee, Wisconsin, personal injury
lawyer, referred certain of his clients to Rise, a chiroprac-
tor, for chiropractic services paid from insurance settle-
ment proceeds, in return for which Rise made correspond-
ing payments, equal to twenty percent of the fees he col-
lected for those services, to third-party recipients at Haus-
mann’s direction. Recipients included (i) individuals who
had provided miscellaneous personal services to Haus-
mann or his relatives, (ii) a marketing firm providing ser-
vices at Hausmann’s direction, (iii) business entities (or
their agents) in which Hausmann held some interest, and
(iv) charities that Hausmann supported.1 Between October
1999 and June 2001, these payments totaled $77,062.87.
Hausmann did not disclose this kickback arrangement
to his clients, ordinarily victims of automobile accidents.
The typical client signed a retainer agreement providing
that, in exchange for the services of Hausmann’s law firm,
Hausmann-McNally, S.C., he or she would pay the firm one
third of “whatever total sum is collected.” The standard
agreement also provided as follows:
     The client further authorizes his attorney to pay
    medical and other bills incurred as a result of this

1
   For example, Rise paid (i) a total of $31,692.00 to a marketing
firm with whom Hausmann, but not Rise, contracted to market
the services of lawyers and chiropractors as part of a planned
“Accident Care Network”; (ii) at least $2000, nominally to a
charity, but effectively as consideration for landscaping work
performed at Hausmann’s residence; (iii) a total of $14,900 to
a full-time handyman who provided services at Hausmann’s
direction to Hausmann’s firm, Rise’s practice, Hausmann per-
sonally, a business jointly owned by Hausmann and his law
partner in their individual capacities, and Hausmann’s sister;
and (iv) $850 to a company that refinished the wood floors of
a contract employee involved in Hausmann’s marketing project.
Nos. 02-3945 & 02-3946                                        3

     accident directly to the doctors and hospitals. It is
     further understood and agreed that said money to pay
     these bills shall come from the client’s portion of the
     settlement.
(Emphasis in original).
  In January 2002, Hausmann and Rise were indicted on
charges of conspiracy to commit mail and wire fraud, in
violation of 18 U.S.C. §371.2 Both defendants moved for
pretrial dismissal of the indictment, which they argued
failed to allege a criminal offense or the essential elements
thereof. The motions were heard by a magistrate judge,
upon whose recommendation the district court denied
them. Hausmann then entered a conditional plea of guilty
on the conspiracy charge, preserving his right to appeal the
denial of his motion to dismiss.
  A jury convicted Rise of the conspiracy charge. At Rise’s
trial, his former employee testified that Rise used the term
“kickback” to describe the payments. Rise filed unavailing
motions for a judgment of acquittal and for arrest of
judgment. The district court sentenced Hausmann and
Rise each to sixty-day terms of imprisonment (stayed
pending the disposition of this appeal) and twelve-month
terms of supervised release, and ordered them to pay
restitution in the joint and several amount of $77,062.87.
    This appeal ensued.

2
   Hausmann was additionally charged with causing securities
(kickback payment checks written by Rise) to be transferred
in interstate commerce in connection with the fraud, in viola-
tion of 18 U.S.C. §§ 2314 & 2, but this count was dismissed pur-
suant to a plea agreement.
4                                   Nos. 02-3945 & 02-3946

                        ANALYSIS
    I.   Sufficiency of the Indictment and
         Evidence of Rise’s Guilt
  Appellants challenge the sufficiency of the indictment,
asserting that it fails adequately to allege the elements
of the underlying mail and wire fraud offense. Rise further
argues that the government failed to prove the aforemen-
tioned elements and that, consequently, the district court
improperly denied his motion for judgment of acquittal
pursuant to Rule 29 of the Federal Rules of Criminal
Procedure.
   We review de novo both the sufficiency of a criminal
indictment, see, e.g., United States v. Irorere, 228 F.3d 814,
830 (7th Cir. 2000), and the denial of a motion for judg-
ment of acquittal, see, e.g., United States v. Jones, 222
F.3d 349, 351 (7th Cir. 2000). A valid indictment must (i)
state each element of the alleged offense, (ii) provide the
defendant with information adequate for the preparation
of his defense, and (iii) provide sufficient basis for a judg-
ment that would bar any subsequent prosecution for the
same offense. See FED. R. CRIM. P. 7(c); United States v.
Allender, 62 F.3d 909, 914 (7th Cir. 1995). “The test for
validity is not whether the indictment could have been
framed in a more satisfactory manner, but whether it
conforms to minimal constitutional standards.” Allender,
62 F.3d at 914. Denial of a motion for judgment of acquit-
tal is appropriate unless “the evidence is insufficient to
sustain a conviction,” FED. R. CRIM. P. 29(a). “In consider-
ing the sufficiency of the evidence, we review it in the
light most favorable to the prosecution, and as long as
any rational jury could have returned a guilty verdict, the
verdict must stand.” Jones, 222 F.3d at 352 (internal
citations omitted).
  Rise’s appeal from the denial of his motion for judgment
of acquittal is duplicative of Appellants’ challenge to the
Nos. 02-3945 & 02-3946                                       5

sufficiency of the indictment. Both theories allege that the
government failed to allege or prove, respectively, the
following purported elements of the mail and wire fraud
offenses underlying the conspiracy charge: (i) actual or
foreseeable harm to Hausmann’s clients; (ii) Hausmann’s
fiduciary duty in excess of that memorialized in the re-
tainer agreements; (iii) that Hausmann’s conflict of inter-
est adversely affected his clients; (iv) intent to defraud;
(v) the materiality of the nondisclosure to clients of the
scheme; and (vi) the scheme’s interstate jurisdictional
nexus.
  Where “two or more persons conspire . . . to commit any
offense” under Title XVIII of the United States Code “one
or more of such persons [who commit] any act to effect
the object of the conspiracy” may be held criminally liable
therefor under 18 U.S.C. § 371. It is a violation of 18
U.S.C. §§ 1341, 1543, and 1346 to use the United States
Postal Service, a private interstate courier, or an interstate
wire communications service in order to implement a
“scheme or artifice to defraud [by depriving] another of
the intangible right of honest services.” 18 U.S.C. § 1346.
Despite our doubts as to the applicability of these
“intangible-rights theory” provisions of the mail and wire
fraud statutes to cases of breach of fiduciary duty with
nothing more, this Court has suggested that liability under
this theory may nonetheless result where a defendant
misuses his fiduciary relationship (or information acquired
therefrom) for personal gain. See United States v. Bloom,
149 F.3d 649, 655-56 (7th Cir. 1999). We have held, more-
over, that an employee’s undisclosed derivation of profits
from business he transacted on his employer’s behalf
amounted to a deprivation of the employer’s intangible
right to honest services in violation of 18 U.S.C. §§ 1341
and 1346. United States v. Montani, 204 F.3d 761, 768-69
(7th Cir. 2000). Accordingly, under the intangible-rights
theory of federal mail or wire fraud liability, a valid indict-
6                                   Nos. 02-3945 & 02-3946

ment need only allege, and a finder of fact need only be-
lieve, that a defendant used the interstate mails or wire
communications system in furtherance of a scheme to
misuse his fiduciary relationship for gain at the expense
of the party to whom the fiduciary duty was owed.
  Here, the indictment clearly and correctly stated the
fiduciary relationship between Hausmann and his clients:
    During the time period of the scheme, Hausmann-
    McNally, S.C., including defendant Hausmann and
    other agents and employees under his direction, owed
    a fiduciary duty to the clients of the law firm, . . .
    [including] the obligation of Haussman-McNally to
    disclose to the client any financial interest that the
    law firm may have involving the representation; to
    advise the client in a conflict-free manner; . . . to
    negotiate in the best interest of the client[; and] to
    provide accurate and complete information to the
    clients regarding the financial terms of personal injury
    case settlements, as well as the amount of compensa-
    tion taken by the lawyers involved in the case.
(Emphasis added). Furthermore, at Rise’s trial, the gov-
ernment presented the testimony of Hausmann’s law
partner, John McNally, describing the clients’ dependence
upon legal representation by the firm in order to settle
their claims, as well as testimony from several clients
describing Hausmann’s written representations regarding
their settlements and the firm’s compensation and the
reliance they placed thereupon.
  The Wisconsin Supreme Court Rules of Professional
Conduct for Attorneys provide that “[a] lawyer may not
allow related business interests to affect representation, for
example, by referring clients to an enterprise in which
the lawyer has an undisclosed interest.” Comment to WIS.
SUP. CT. R. 20:1.7(b). Thus, the indictment’s statement that
“[t]he kickback arrangement was concealed from the clients
Nos. 02-3945 & 02-3946                                      7

of Hausmann-McNally in violation of the fiduciary duty
described above” clearly alleges Hausmann’s misuse of the
fiduciary relationship. Testimony of clients that were
unaware of the kickback scheme served as evidence at
Rise’s trial of the misuse of the fiduciary relationship.
  The indictment also clearly alleged, and the government
demonstrated at Rise’s trial, that Hausmann gained over
$70,000 in kickback payments made to third parties for
his personal benefit or entities in which he had some
interest, including, for example, “at least $2000 in land-
scaping improvements performed at Hausmann’s personal
residence,” and that such concealed payments deprived
clients of the intangible right of honest services. At trial,
for example, the government produced evidence that Rise
signed a check in the amount of $1000 as a direct payment
for such landscaping work.
  Appellants contend that Rise’s third-party payments
were not kickbacks, but rather constituted the legitimate
spending of income derived from use of fees to which Rise
was legally entitled. They maintain that Hausmann’s
clients had no right to the settlement funds paid to Rise
nor, consequently, to the allocation of twenty percent of
those funds to expenditures designated by Hausmann. In
this sense, reason Appellants, no harm resulted to Haus-
mann’s clients, who were deprived of nothing to which they
were entitled. This reasoning ignores the reality that
Hausmann deprived his clients of their right to know the
truth about his compensation: In addition to one third
of any settlement proceeds he negotiated on their behalf,
every dollar of Rise’s effective twenty percent fee discount
went to Hausmann’s benefit. Insofar as Hausmann mis-
represented this compensation, that discount should have
inured to the benefit of his clients. It is of no consequence,
despite Appellants’ arguments to the contrary, that Rise’s
fees (absent his discount) were competitive, or that clients
received the same net benefit as they would have absent
8                                   Nos. 02-3945 & 02-3946

the kickback scheme. The scheme itself converted Haus-
mann’s representations to his clients into misrepresenta-
tions, 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.
  Appellants also contend that the indictment did not
properly allege their use of the interstate mails or wire
communications systems in furtherance of the kickback
scheme. However, the indictment plainly states that
Appellants,
    and others acting on their behalf, for the purpose of
    executing and attempting to execute a scheme to
    defraud: (a) did cause and intend to cause matter to
    be delivered by the United States Postal Service and
    commercial interstate carrier according to the direc-
    tions thereon . . . ; and (b) did cause or intend to cause
    sounds to be transmitted in interstate commerce by
    means of wire communications . . . . The matter in-
    cluded: (a) solicitations and communications from
    Hausmann-McNally to clients; (b) communications
    between Hausmann-McNally lawyers and [Rise’s clinic]
    regarding billings; and (c) communications between
    Hausmann and certain recipients of the kickback
    checks. The interstate wire communications included
    telephone calls, facsimiles and emails between Haus-
    mann and certain recipients of the kickback checks;
    and telephone calls from Hausmann to others regard-
    ing the flow of kickback payments.
The indictment thus sufficiently alleges the interstate
element of Appellants’ conspiracy to commit mail and
wire fraud.
  Finally, Rise challenges his culpability based on his lack
of awareness that Hausmann was defrauding his clients.
However, the knowing payer of an illegal kickback is
Nos. 02-3945 & 02-3946                                    9

criminally liable for conspiracy to commit mail or wire
fraud to the same extent as the recipient of such a pay-
ment. See, e.g., United States v. Alexander, 741 F.2d 962,
964 (7th Cir. 1984), overruled on other grounds by United
States v. Ginsberg, 773 F.2d 798, 802 (7th Cir. 1985).
Insofar as Rise knowingly signed checks payable to third-
party recipients (in order to conceal the scheme) equal in
total amount to twenty percent of the fees he collected in
connection with referrals from Hausmann, Rise acted in
furtherance of the conspiracy to defraud the clients. His
guilt as a co-conspirator is clear.
  For all of these reasons, the indictment sufficiently al-
leges the elements of the mail and wire fraud offenses
underlying the conspiracy charge against Appellants: that
Hausmann used the required interstate means in order
to misuse his fiduciary relationship for his gain and at his
clients’ expense. Furthermore, we find that a rational jury
could have found Rise guilty based upon the evidence
produced at his trial.

    II. Constitutionality of the Application of the
        Mail and Wire Fraud States to Appellants’
        Conduct
  Appellants further challenge the constitutionality of the
application of 18 U.S.C. §§ 1341, 1343, and 1346 as void
for vagueness and based on principles of federalism. The
constitutionality of a federal statute is an issue of law
subject to de novo review.
  “Vagueness may invalidate a criminal law for either of
two independent reasons. First, it may fail to provide the
kind of ordinary notice that will enable ordinary people
to understand what conduct it prohibits; second, it may
authorize and even encourage arbitrary and discrimina-
tory enforcement.” City of Chicago v. Morales, 527 U.S. 41,
56 (1999) (citing Kolender v. Lawson, 461 U.S. 352, 357
10                                   Nos. 02-3945 & 02-3946

(1983)). Appellants claim both, that the mail and wire fraud
statutes did not provide them with adequate notice of
the criminality of their kickback scheme, and that ap-
plication of the mail and wire fraud statutes to the facts
of this case invites the government arbitrarily to police
the fairness of private business transactions through
enforcement of criminal statutes. With respect to the first
of these two arguments, this Court’s decision in Bloom,3
placed Appellants on notice that criminal liability under
the mail and wire fraud statutes—particularly under an
intangible-rights theory—attaches to the misuse of one’s
fiduciary position for personal gain. See 149 F.3d at 655-56.
With respect to the second, the existence of Hausmann’s
fiduciary duty owed to his clients distinguishes this case
from one where the government arbitrarily and imper-
missibly relies upon the mail and wire fraud statutes to
enforce merely the terms of a private contract. Cf. United
States v. Handakas, 286 F.3d 92, 107 (2d Cir. 2002) (refus-
ing to expand the application of 18 U.S.C. § 1346 and
thereby render “[e]very breach of a contract or state law . . .
punishable as a felony in federal court”). We therefore
find that the mail and wire fraud statutes, 18 U.S.C.
§§ 1341, 1343, and 1346, are not unconstitutionally vague,
as applied under the intangible-rights theory to a kick-
back scheme enabled by the offender’s misuse of his fidu-
ciary position gain.
  Appellants further contend that the indictment violates
principles of federalism because it “overreaches” the scope
of the federal criminal law by criminalizing conduct
which is regulated by state law. Unlike the cases that
Appellants cite for this proposition, such as Handakas, 286
F.3d 92 (misrepresentations by defendant contractor vi-
olated state wage laws); Cleveland v. United States, 531

3
  Bloom was decided in July 1998, more than one year prior to
the alleged commencement of the kickback scheme.
Nos. 02-3945 & 02-3946                                         11

U.S. 12 (2000) (defendants made false statements in state
gaming license applications); and United States v. Lopez,
514 U.S. 549 (1995) (invalidating Gun-Free School Zones
Act of 1990 as insufficiently related to regulation of inter-
state commerce); in which federalization of state laws or
state regulated conduct was held unconstitutional, this case
casts no meaningful doubt on Congress’s authority to
regulate use of the interstate mails and wire communica-
tions systems in furtherance of fraudulent conduct.4 The
indictment alleged such use of the interstate mail and wire
communications systems, including an allegation that
kickback payment checks were mailed out of state.5 More-
over, as the magistrate judge aptly noted in his recommen-
dation to deny Appellants’ motions to dismiss the indict-
ment, “[w]ithout some showing that either the statutes
in question or the prosecution of this case contravene
some specific rule of constitutional or statutory law, the
mere fact that the conduct in question is of a sort tradi-
tionally dealt with through state law cannot serve as a
basis for dismissing [the] indictment.” Appellants have
made no such showing, and we are unpersuaded by the
argument.

    III.   Jury Instructions
  As an alternative basis for appealing his conviction, Rise
claims that the district court failed to instruct the jury
that, in order to convict him, it must find that (i) Rise
reasonably contemplated harm to Hausmann’s clients and

4
   This authority is established in the Postal Power of Article I,
Section 8, Clause 7 of the Constitution. See also United States
v. Elliot, 89 F.3d 1360, 1363-64 (8th Cir. 1996).
5
  Although this allegation related to a charge that was dismissed
pursuant to Hausmann’s plea agreement, evidence that checks
were mailed out of state was presented at Rise’s trial.
12                                  Nos. 02-3945 & 02-3946

(ii) the scheme was intended not only as a gain to Haus-
mann, but also a loss to his clients. Here, Rise alleges an
error of law in the jury instructions, which we review de
novo.
  The district court instructed the jury, in relevant part,
as follows:
       To find that there existed a scheme to deprive one or
     more clients of the Hausmann-McNally law firm of
     his or her right to the honest services of that firm you
     must find beyond a reasonable doubt, first, that a
     fiduciary relationship existed between one or more
     of the clients of the Hausmann-McNally firm. Second,
     that Scott Rise and Charles Hausmann knowingly
     engaged in a scheme to deprive one or more clients
     of the Hausmann-McNally law firm of the right to
     honest services of the Hausmann-McNally law firm
     as charged in Count 1. And, third, that through such
     scheme, Charles Hausmann misused his fiduciary
     relationship with one or more clients of the Hausmann-
     McNally law firm for personal gain.
This instruction adequately and accurately communicates
the elements of Rise’s offense. There is no requirement
under the law as articulated in Bloom and reiterated
today that a co-conspirator to a wire and mail fraud scheme
contemplate actual or foreseeable harm to the victim.
Also, though the law does not require the court to in-
struct a jury that the scheme is intended to cause a loss
to the victims as well as a gain to the offender, the loss
element is implicit in the district court’s references both
to a deprivation of one or more clients’ right to honest
services—a type of loss in and of itself—and to Hausmann’s
gain. As discussed above, once Rise opted to discount
his fees for chiropractic services, Hausmann’s clients
shared Rise’s economic loss—a corollary to their entitlement
to a portion of Hausmann’s gain. Finding no error in the
Nos. 02-3945 & 02-3946                                   13

district court’s instruction of the jury that convicted him,
we reject Rise’s jury instruction claim.

    IV. Loss Amount
  Lastly, Hausmann challenges the district court’s cal-
culation of the amount of loss caused to the victims of
Appellants’ scheme. Specifically, he argues that the court
erred in refusing to reduce the value of the loss by the
amount of “valuable free services” and fee reductions that
Hausmann-McNally provided to clients. He asserts that
these services and reductions totaled $238,993.66, a figure
exceeding the district court’s calculated loss amount of
$77,062.87, based upon the aggregate value of the kick-
backs, and insists, therefore, that his clients received a
net benefit as a result of his representation.
   The United States Sentencing Guidelines provide that
any amount of loss “shall be reduced by the money re-
turned, and the fair market value of the property re-
turned and the services rendered by the defendant or
other persons acting jointly with the defendant, to the
victim before the offense was detected.” U.S.S.G. § 2B1.1,
Application Note 2(A)(i). Hausmann correctly notes that
this Circuit has adopted a “credit against loss” approach
to the calculation of fraud victim loss amounts for sentenc-
ing guideline purposes. See, e.g., United States v. Jackson,
95 F.3d 500, 506 (7th Cir. 2000) (Sentencing Guidelines
“call for the court to determine the net detriment to the
victim, rather than the gross amount of money that
changes hands”). However, that approach is inapplicable
to these facts. The free services and reductions that the
firm provided to the victims were services routinely pro-
vided to all Hausmann-McNally clients, not just those
who were defrauded. Thus, the relevant inquiry is wheth-
er those services and reductions lessened the net detri-
ment to victims of the fraud relative to other clients of
14                                Nos. 02-3945 & 02-3946

the firm who were not victims. They did not, for which
reason the district court properly declined to credit their
value against the total amount of the kickback payments.
                                                AFFIRMED.

A true Copy:
      Teste:

                       ________________________________
                       Clerk of the United States Court of
                         Appeals for the Seventh Circuit

                  USCA-02-C-0072—9-22-03