January 3, 2010
Introduction
In this paper I intend to (i) summarize the evolution of the Mail Fraud Statute (MFS) and §1346, as construed by US courts during the past decades, (ii) evaluate the compatibility of those provisions and their interpretation by US courts with the requisite of definiteness of crimes, and (iii) argue that the Supreme Court of Justice should find the MFS and §1346 unconstitutional, barring from the federal legal system a terrifying set of indefinite and overbroad set of criminal provisions.
Before developing each of the aforementioned issues, I will make some brief introductory remarks: Since its inception the broad language and construction of the MFS, enhanced by the interpretation of several circuit courts, allowed a strong over criminalization of undefined conducts, in violation of the definiteness requisite (DR) of crimes. Further, after McNally, Congress legislation broadened the reach of the MFS, in defiance of the DR, once again. However, it is also true that the scope of the MFS, and in particular, the notion of some elements of the crime such as scheme to defraud have stretched and contracted cyclically during the past decades. [1]
The construction of the MFS exemplifies the difficulties of the common law to secure the principle of legality. In the United States the government and the courts can charge and convict a person for committing mail fraud, or acquit him/her, depending on the cycle of interpretation of the statute in which the government or courts stand in that particular moment, and on the broad or narrow interpretation of the law that they make at that moment, for that specific case, through law-making ad-hoc decisions.
Whether the MFS should be broadened or narrowed, is, of course, a matter of state policy. The broader the scope of the MFS, the more possibilities to get the bad guys, no matter the cost for disingenuous persons falling in the trap of prosecutorial investigations or outrageous court decisions. The narrower the scope of the MFS, the less possibilities to get the bad guys, no matter what the risk might be for the society to let go major wrongdoers free. However, it is also a matter of justice, and of the possibility of protecting the integrity of constitutional rights and principles, such as the right to due process of individuals that pertain to a community that claims to obtain its strength from its Constitution. Thus, it is important to prevent the MFS from becoming some sort of morals legislation eroding criminal law’s authority, as Herbert Packer and Sanford Kadish were afraid could happen if criminal law were used to enforce economic regulations. [2]
The MFS is one of the most effective weapons used by federal prosecutors in white collar crime cases. Almost thirty years ago Jed Rakoff referred to it, in a somehow “poetic” fashion, as “our Stradivarius, our Colt 45, our Louisville Slugger, our Cousinart-and our true love” and characterized it as “the “first line of defense” [3] against virtually every area of fraud to develop in the United States in the past century”. [4] More recently, scholarship has referred to it (jointly with the wire fraud statute) as the “workhorses of federal white collar crime enforcement” [5] or as the prosecutors’ “secret weapon”. [6]
Therefore, the MFS enacted as part of a recodification of the Postal Act, as far as June 8, 1872 [7], has been and has become, even more, some sort of joker crime, facilitating a prosecution and conviction where the construction of other charges of the government seems to fail. In short, the MFS is the winning ace where other cards seem to fail.
The MFS with the amendments made to it as of December 2009 states:
§ 1341. Frauds and swindles
“Whoever, having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises, or to sell, dispose of, loan, exchange, alter, give away, distribute, supply, or furnish or procure for unlawful use any counterfeit or spurious coin, obligation, security, or other article, or anything represented to be or intimated or held out to be such counterfeit or spurious article, for the purpose of executing such scheme or artifice or attempting so to do, places in any post office or authorized depository for mail matter, any matter or thing whatever to be sent or delivered by the Postal Service, or deposits or causes to be deposited any matter or thing whatever to be sent or delivered by any private or commercial interstate carrier, or takes or receives therefrom, any such matter or thing, or knowingly causes to be delivered by mail or such carrier according to the direction thereon, or at the place at which it is directed to be delivered by the person to whom it is addressed, any such matter or thing, shall be fined under this title or imprisoned not more than 20 years, or both. If the violation occurs in relation to, or involving any benefit authorized, transported, transmitted, transferred, disbursed, or paid in connection with, a presidentially declared major disaster or emergency (as those terms are defined in section 102 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act (42 U.S.C. 5122)), or affects a financial institution, such person shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.”
It is hard to find in the legal system of other countries similar or analogous provisions. Prima facie, the MFS seems to be aimed at penalizing any kind of fraudulent conduct, more than a wrongful use of the postal service. The work I undertake in this work evinces that that initial intuition about the real aim of the statute is correct.
(i) Evolution of the MFS and §1346
The MFS was created in 1872 as a further development of the so called Lottery Law that under the impulse of two major forces made unlawful to send mails or circulars concerning illegal lotteries, gift concerts or other enterprises offering prizes of any kind. [8] The first force was the dynamic and interconnected economy that grew after the American Civil War. The second force was the increasing number of frauds of various kinds across states, as well as the awareness of the new level of power concentrated by federal authorities and particularly, by the Reconstruction Republicans. [9]
Since then, the MFS has been widely used by the government due to its simplicity of proof, and to the broad range of unlawful conducts that it covers. Chief Justice Berger stated that the MFS was a “stopgap” provision, as it allowed the prosecution and conviction of new kind of frauds, which legislation had not foreseen. [10] Also the fact that the element “scheme to defraud” is so open ended, has enabled the MFS to encompass many types of different fraudulent conducts. [11]
The original language of the MFS explains in part why the gist of the crime has relied historically, at least explicitly, in the misuse of the mails, and not in the fraud itself. Even the original title of the statute suggests that explanation. The title was Misusing the Post-Office Establishment. Since then the reforms made by Congress to the MFS fostered an expansive use of its provisions. [12]
Especially notorious in the expansion of the MFS has been its effectiveness in the prosecution of official and corporate corruption during both the immediate years prior to McNally and after. This effectiveness gave a renewed popularity to the MFS, but at the same time raised alarms about the over criminalization derived from an excessive use of the statute.
Pre-McNally Era
During the pre McNally era US courts developed a broad interpretation of the MFS, and particularly of the deprivation of honest services doctrine that was later overthrown for a short period of time by McNally. [13]
Durland v. United States (1896)
Durland v. United States, 161 U.S. 306 (1896), was the first case in which the Supreme Court had the opportunity to decide a case regarding the MFS. [14] In such decision, contrary to the arguments raised by the defendant, who contended that the common law definition of false pretenses implied that there should be “a misrepresentation as to some existing fact and not a mere promise to the future”, the court refused to adopt a narrow reading of the statute, and undertook the decision to convert the MFS in a generic fraud statute. [15] The Court held that any scheme or artifice to defraud included every conduct designed “to defraud by representations as to the past or present, or suggestions and promises as to the future”. [16] This allowed the Court to detach itself from the fetters that a strict interpretation according to the common law tradition would have entailed. [17]
United States v. Owens: The Strict Constructionist Era
In United States v. Owens, 17 F. 72 (E.D. Mo. 1883), the defendant apparently intended to defraud a distillery with which he was indebted in $163.50, by sending by mail an envelope with only $0.50. [18] The indictment annotated that the defendant intended to defraud the distillery. [19] The court found that the Congress probably never intended the MFS to deal with such petty matters, and, by applying a mail-emphasizing interpretation it concluded that the MFS was not made to supervise the correspondence between creditors and debtors. [20] Thus, the court set forth a substantive qualification on the scheme to defraud concept, as well has been noted by Judge Rakoff. [21]
The court’s interpretation in Owens evinces the initial prudence of the courts in signaling the scope of the MFS, and their awareness of the over criminalization that a broad interpretation of it could trigger. US courts held similar restricted interpretation in several decisions hence. [22] Particularly, Clark v. United States, 289 U.S. 1 (1933), set forth an important bar by providing that the MFS was not applicable to a particular scheme to defraud “unless that fraud could not have been committed but for the use of the mails”. However, many courts preferred to continue using the broader arguments settled in Owens and United States v. Mitchell, 867 F.2d 1232 (9th Cir. 1988) [23], which were not as narrow as those used in Clark. [24]
This led to the 1889 and 1909 amendments of the MFS, whereby the mail-emphazing language was narrowed, thus igniting the expansionist era of MFS-related decisions, and reaffirming the trend followed by a broad constructionist approach to the MFS adopted hence by several courts. In Culp v. United States, 82 F. 990 (3rd Cir. 1897), for example, the court argued that “the purpose of the amendment was not to restrict, but to extend, the operation of the statute.” [25]
It is noteworthy that the 1909 reform eliminated the requirement of the second element of the crime that needed a proof beyond reasonable doubt that the scheme to defraud, as devised by the defendant, was intended to be perpetrated through use of the mails. That elimination was very important, as the former formula required to only to prove the intent to defraud, but also the intent to misuse the mails.
Moreover, other relevant consequence of the 1909 reform, and the attachment of many courts to the mail-emphizising interpretation of the MFS, was the lack of development of the “scheme to defraud” definition [26].
Pereira v. United States (1954)
In Pereira v. United States, 347 U.S. 1 (1954), the Supreme Court found that the mail fraud requires the proof of only two elements, namely (i) “a scheme devised or intending to defraud or for obtaining money or property by fraudulent means”, and (ii) “use or causing to use the mails in furtherance of the fraudulent scheme” [27]. It also established that the offense does not require that the mails be an essential aspect of the scheme to defraud. Thus, a mailing “incidental to an essential part of the scheme” suffices.
In this decision, the court moved forward to an interpretation of the use of mail requisite that almost avoids the vision of the use of mail as the gist of the crime. The court held that it was not necessary that the defendant were aware of the possible use of the mail, or that it intended its use, pursuant to the execution of the scheme to defraud, in order to find that the crime had occurred. [28] It also held that it sufficed that the use of the mails took place as an “ordinary course of business” or “where such use can be reasonably foreseen”. [29]
That decision shows an attitude of the court as trying to eliminate the use of the mail as the gist of the crime, broadening once again the reach of the MFS. The position here held by the Supreme Court, however, is not coherent with the requisite that the use of the mail has been done in furtherance of the scheme to defraud. It is awkward to state first that it is not necessary that the defendant be aware of the use of the mails, but then assert that that use has to be in furtherance of the scheme to defraud. If the in furtherance requisite is present, then it is evident that the defendant did foresee the use of the mail in connection with his plan, and thus intended to use it pursuant to its end. Thus, indirectly, the intent element also seems to be required, but all the arguments given by the Court seem to be aimed at arguing the contrary?!
Mc-Nally (1987)
The first limit to the incredible reach of the intangible rights theory came with McNally v. United States, 107 S.Ct. 2875 (1987) [30], in 1987, when the Supreme Court reversed a mail fraud conviction, and applied the lenity principle by applying the less harsh interpretation of the MFS [31], by stating that:
“Rather than construe the statute in a manner that leaves its outer boundaries ambiguous and involves the federal Government in setting standards of disclosure and good government for local and state officials, we read the statute as limited in scope to the protection of property rights. If Congress desires to go further, it must speak more clearly than this. (216).” [32]
In short, in McNally the Court’s reading of §1341 “as limited in scope to the protection of property rights” rejected the entire “honest services” doctrine on the ground that it was beyond the scope of the mail fraud statute. [33] However, one year After McNally, Congress repudiated the Supreme Court’s ruling by means of 18 U.S.C. §1346, whereby the term scheme or artifice to defraud was deemed to include a “scheme or artifice to deprive another of the intangible right of honest services”. Congress, in other words, wanted the courts to enforce the honest services doctrine developed in the years leading up to McNally. [34]
Thus, Congress overturned the McNally interpretation of the intangible rights doctrine to the pre-McNally state. [35] Problematically, this led to a new era of extension of the courts’ interpretation of the honest services doctrine that was never defined by Congress [36], and of the honest services offense, [37] particularly with regard to public and private fiduciary duties, [38] as it is evinced in United States v. Vetger, 198, F.3d 1324, 1327-28 (11th Cir. 1999). [39]
Carpenter v. United States (1987)
A very shocking development of the MFS interpretation, under the sight of a civil law lawyer, took place during the 1970s and 1980s, with the development of the doctrine of intangible rights and honest services. [40] Carpenter v. United States, 484 U.S. 19, 317 (1987), is without doubt one of the watermark cases of the era. In 1987 the Supreme Court affirmed a conviction against R. Foster Winans and others, for engaging in a conduct that supposedly deprived the Wall Street Journal of confidential information, by exchanging information that could impact the stock market, prior to its release by the newspaper. [41]
In a 1988 article, John Coffee suggested that the Supreme Court had overreacted with moral legislation in Carpenter [42]. Coffee argued that the interpretation of confidential information held by the court in such unanimous decision (i) is historically unsound, (ii) is inconsistent with most statutory law dealing with the subject of trade secrets, and (iii) capable of trivializing the court’s previous holdings [43] in McNally. [44]
In Carpenter, the Court relied in Diamond v. Oreamuno, 248 N.E.2d 910, 912 (N.Y.1969), to assert that:
“It is well established, as a general proposition, that a person who acquires special knowledge or information by virtue of a confidential or fiduciary relationship with another is not free to exploit that knowledge or information for his personal benefit but must account to his principle for any profits derived therefrom.” [45]
Further, it added:
“We have little trouble in holding that the conspiracy here to trade on the Journal’s confidential information is not outside the reach of the mail and wire fraud statutes, provided the other elements of the offenses are satisfied. The Journal’s business information that it intended to be kept confidential was its property (…)” [46]
The court had little trouble in making that holding, indeed! John Coffee’s critique was followed by several essays from academia and legal practitioners rejecting Carpenter’s ruling, under the argument that the confidential information interpretation had simply gone too far.
US v. Brown 1: In Pursuit of the McNally Legacy (1996)
In this decision the 11th Circuit Court of Appeals held that the offense of mail fraud required proof of a scheme calculated to deceive a person of ordinary prudence. It also held that no vicarious criminal liability is possible under the mail fraud statute. [47] The decision was broadly attacked under the argument that the MFS did not differentiate between schemes that would only do harm to ordinary prudent investors and those who would affect only those with lesser carefulness. [48]
The court held:
“Language from some of our earlier opinions suggests that the federal statute encompasses almost any situation. In Gregory v. United States, for example, we wrote that fraud is deviation from conduct that is a “reflection of moral uprightness, of fundamental honesty, fair play and right dealing in the general and business life of members of society.” 253 F.2d 104, 109 (5th Cir. 1958). But, not all of the language of the judges in an opinion has the force of binding precedent. (…) Instead, we must closely analyze the statutory language and the facts presented in a particular case; “there are no constructive offenses; and, before one can be punished, it must be shown that his case is plainly within the statute” Fasula v. U.S., 272 U.S. 620, 629, 47 S.Ct. 200, 71 L.Ed. 443 (1926) (interpreting the mail fraud statute). And, the Rule of Lenity commands that where there are alternative readings of a criminal statute we are to choose the harsher only when Congress has spoken in clear and definite language. McNally v. U.S., 483 U.S. 350, 359-60, 107 S.Ct.2875, 2881, 97 L.Ed.2d 292 (1987) (applying narrowing construction to the mail fraud statute). A limitless reading of the mail fraud statute could result in a kind of federal criminal common law, that is, a situation where a person could be convicted of a crime against the United States despite the conduct not violating an express statutory provision. Holzer, 816 F.2d at 309.” [49]
This decision was, however, recently overruled as of February 2009, by the 11th Circuit Court of Appeals, in United States v. Svete, 556 F.3d 1157 (2009), where the issue at stake in the appeal was whether the mail fraud crime required proof that the scheme to defraud be capable of deceiving a reasonably prudent person or whether schemes aimed at the gullible or improvident were also prohibited. [50] The court held that Brown 1 was inconsistent with both the plain language of the MFS, as well as with the precedents of the Supreme Court, and thus affirmed the lower court’s decision not to deliver instructions to the jury, stating that government should prove that Svete and Girardot devised a scheme reasonably made to deceive ordinary prudent persons. [51] I will further refer to this case below.
Neder v. United States (1999)
Neder defined the last stage of evolution of the elements of the mail fraud crime. Notably, and in connection with some of the comments made above in previous pages, the court argued that the elements of the crime were:
“(i) a scheme to defraud that includes a material deception; (ii) with the intent to defraud; (iii) while using the mails, private commercial carriers, and/or wires in furtherance of that scheme, (iv) that did result or would have resulted in the loss of money or property or the deprivation of honest services.” [52]
Noteworthy in Neder was its interpretation of scheme to defraud, in the sense that it did require the government that the deception was material. What should we understand from that is still not clear, as the reference that the court did to the Restatement (Second) of Torts of materiality seems unclear. The direct relation of this decision with the ambiguous construction of the materiality notion, as well as of the notion and standard of “ordinary prudence of reasonable persons” leads us nowhere. [53]
Further, it is relevant to say that the third element of the mail fraud crime requires two additional elements, namely that “(i) the defendant used or caused to be used, the U.S. mail, any private or commercial interstate carrier, and/or interstate or intrastate wire, (ii) in furtherance of, or for the purpose of executing the scheme to defraud”. [54]
United States v. Rybicki (2003)
In United States v. Rybicki, 354 F.3d 124, 125 (2nd Cir. 2003), the defendants were convicted of multiple counts of mail and wire fraud conspiracy, in connection with payments made to insurance adjusters with the aim of expediting settlement of personal injury claims. [55] The 2nd Circuit Court of Appeals heard the case on appeal in banc, with the purpose of considering whether 18 U.S.C. §1346, which provides that “for the purposes of the chapter… the term “scheme or artifice to defraud” includes a scheme or artifice to deprive another of the intangible right of honest services,” was unconstitutionally vague. [56]
In its decision the court held:
“The void-for-vagueness doctrine requires that a penal statute define the criminal offense with sufficient definiteness that ordinary people can understand what conduct is prohibited and in a manner that does not encourage arbitrary and discriminatory enforcement”! [57]
However, paradoxically, it also held:
“…Statute which extended the coverage of the wire and mail fraud statutes, to include deprivation of the intangible right of honest services, defined the offense with sufficient definiteness and in a manner that did not encourage arbitrary and discriminatory enforcement, and therefore was not unconstitutionally vague as applied to attorneys who used the mail and wires to induce insurance adjusters, in return for payments and materially against the interest of their employers, secretly to expedite insurance claims in favor of the attorneys’ clients”. [58]
The court concluded that §1346 was not unconstitutionally vague as applied to the facts of that case, and thus, that the statute is not unconstitutional on its face. [59] However, after reading Rybicki the same questions still remain: What is, after all, an intangible right of honest services? To whom are they owed? By who? How is the duty to render honest services breached? [60]
The conclusions of the court seem even more absurd if we take into account that in that same case the Rybicki panel that had reviewed the case before the Court of Appeals did so in banc, struggled fiercely with the difficulty of defining honest services and of curtailing the depth and reach of the MFS, by stating:
“(…) because the statute does not define honest services, the potential reach of §1346 is virtually limitless”! [61]
Subsequently, the court undertook the task of setting some limits to the honest services meaning, and did so by requiring that the scheme to defraud create a foreseeable risk of economic or pecuniary harm to the victim that should be more than de minimis! [62] This doesn’t seem to give much additional clarity to the statute. At least not under the Handakas standard that will be addressed some pages below.
But even worse, in Rybicki the court of appeals held that the scheme to defraud of honest services occurs whenever the scheme is directed:
“to enable an officer or employee of a private entity (or a person in a relationship that gives rise to a duty of loyalty comparable to that owed by employees to employers) purporting to act for and in the interests of his or her employer (or of the other person to whom the duty of loyalty is owed) secretly to act in his or her or the defendant’s own interests instead, accompanied by a material misrepresentation made or omission of information disclosed to the employer or other person.” [63]
Just as I mentioned above, this doesn’t seem to be a crystal clear definition of the criminalized conduct.
Finally, very importantly the court concluded that the elements needed to prove the honest services fraud, pursuant to 18 U.S.C. §1346 were:
“(1) a scheme or artifice to defraud; (2) for the purpose of depriving another of the intangible right of honest services; (3) where it is reasonably foreseeable that the scheme could cause some economic or pecuniary harm to the victim that is more than di minimis; and (4) use of the mail or wires in furtherance of the scheme.” [64]
Unfortunately, nor the court or the statute provide light on key issues, such as, just to mention one, the reach of the honest services doctrine to the private sector. [65]
US v. Brown 2: In Pursuit of the McNally Legacy (2006)
United States v. Brown, 459 F.3d 509, (5th Cir. 2006), is a very peculiar decision. In contains both arguments for and against the vagueness of the MFS, and particularly, of the honest services concept. On the one side, the Fifth Circuit placed one of the few certain curtailments to the honest services crime in the private sector [66]. The court held that an individual cannot be convicted for depriving an employer of his honest services, under the MFS, if the employer created an understanding that his own interests would be reached by a breach of the duties of the employee. [67] It also held that “not every breach of fiduciary duty owed by an employee to an employer constitutes an illegal fraud”. [68]
In Brown we have a glimpse of the court’s intention to constrain the growth of the interpretation of the MFS. [69] For example, in one of the most interesting statements of the decision, where the court intends to define the honest services wire fraud in which the scheme or artifice to defraud deprives another of the intangible right of honest services, it is argued that provision 18 U.S.C. §1346 can be understood only in the light of the long history of the mail-and wire-fraud statutes, that initially were written broadly with the intention of protecting the mail, and later, the wires, from a use directed to the execution of fraudulent and deceptive schemes. [70] This assertion of the court reinforces the argument that I will try to make below, in the sense that the MFS and §1346 are unconstitutional.
Furthermore, the court makes other astounding assertion, when answering to some of the defendant’s arguments. Particularly, it is shocking the argument of the court were it states, citing United States v. Brumley, 116 F.3d 728, 733 (5th Cir. 1997), that “the boundaries of ‘intangible rights’ may be difficult to discern, but that does not mean that it is difficult to determine whether Brumley in particular violated them”! [71]
We may say for now that the 1996 Brown 1 decision and the 2006 Brown 2 decision coincide in their aim to fetter a broader reach of the MFS. However, in many respects in this decision the court did not go far from the precedents set forth by the courts during the expansionist era. [72]
US v. Black (2008)
Conrad Black was charged for defrauding his own company, Hollinger International. Black and other defendants were senior corporate executives who supposedly abused their positions as employees of Hollinger International, in order to increase their patrimony with phony management fees that were disguised as compensation for covenants not to compete. [73]
The 7th Circuit Court of Appeals found that defendants’ unauthorized appropriation of 5.5 million that belonged to a subsidiary of Hollinger, was a misuse of their positions for private gain, which was the kind of conduct that was the essence of the fraud of honest services, and thus affirmed the convictions. [74]
Moreover, the 7th Circuit did not have any trouble in deciding Black. The Court simply and plainly stated that “The application of this principle (meaning the lack of applicability of the argument of harmlessness raised by defendants) to honest services mail and wire fraud is straightforward”, and added, almost cynically that “even if our analysis of honest services fraud is wrong, the defendants cannot prevail.” [75]
This means something like “even if we are wrong, we still are going to convict you, no matter how wrong we are”. This should be a serious concern as Black will probably become a watermark case for the honest services doctrine in the near future, as the Supreme Court will shortly make a decision after having granted certiorari during the last weeks of 2009, and having heard the defense arguments as of December 2, 2009.
United States v. Svete (2009)
In United States v. Svete, 556 F.3d 1157 (2009), Svete, Girardot, and their agents, were involved in an allegedly scheme to defraud investors in furtherance of a business whereby defendants sold financial interests in viatical settlements, which are financial products based on agreements with persons denominated viators, who are terminally ill, and sell their life insurance policies to third parties for a price lower to the maturity price, with the intention of receiving the money during their remaining life-time. The investors testified that the viators were not terminally ill, as had been represented by the defendants. [76]
The court argued, citing a Blachly v. United States, 380 F.2d 665, 672 n.13 (5th Cir. 1967), dicta that “the monumental credulity of the victim is no shield for the accused”. [77] It further argued that in this case the rule of lenity that the defendants had invoked in their favor, was inapplicable, because the “The language of the mail fraud statute prohibits “any scheme or artifice to defraud,” 18 U.S.C. §1341, and the word “any” conveys the broad and unambiguous reach of the statue.” [78]! This argument is simply ridiculous. With a three line explanation, the court intended to put an end to a battle of several decades surrounding the reach of the MFS. But the battle is not over.
Whether the interpretation with regard to the subjective elements that should be or should not be present in the victims of the scheme to defraud, is not of our central concern here. The point I want to signal, however, is the court’s interpretation that the MFS had a plain language, against Brown’s 1 argument that it did not, by simply stating that “the word “any” conveys the broad and unambiguous reach of the statute.”!
(ii) Compatibility of the Mail Fraud Statute and its interpretation by US courts with the Sufficient Definiteness Doctrine
The quick overview we have just made of the history and evolution of the MFS and of §1346 raises the issue whether it is desirable that the long standing practice of the government “when in doubt, charge mail fraud” [79] should be allowed to continue, or if courts should reverse their huge negligence in applying an incredibly vague statute, retrieving thus the practice of convicting individuals under a quasi-inquisitorial statute.
Against the latter option Peter Henning has argued, for example, that the malleability of the MFS affords prosecutors too much discretion, [80] and that the Supreme Court should provide additional guidance to lower courts in curtailing the MFS. [81] Gregory Jones has also argued that while the MFS gives the government a powerful tool that serves as a “catchball” of non regulated frauds, it “fails to give adequate notice about what type of conduct the statute covers”. [82]
Voices have been raised by academia and legal practitioners about the necessity to define some rational frontiers to the reach of the MFS. [83] Kristen Kate has argued that that necessity has also led court to limit the reach of the MFS through different decisions, such as United States v. Akpan, 407 F.3d 360, 370 (5th Cir. 2005) [84], United States v. Holmes, 406 F.3d 337, 353-54 (5th Cir.2005) [85], Miller v. Yokohama Tire Corp., 358 F.3d 616, 620 (9th Cir. 2004) [86], Fountain v. United States, 357 F.3d 250, 255 (2nd Cir. 2004) [87], and United States v. Sawyer, 85 F.3d 713, 723 (1st Cir. 1996) [88]. However, none of these decisions seem to solve the uncertainty of the lack of determinacy of the scheme to defraud element, nor of the reach of concepts such as honest services and fiduciary duties.
None of them seems to satisfy the holding of Kolender v. Lawson, 461 U.S. 352, 357, 103 S. Ct. 1855, 75 L. Ed. 2d 903 (1983), where the Supreme Court stated that a federal criminal statute must define the crime “with sufficient definiteness that ordinary people can understand what conduct is prohibited and in a manner that does not encourage arbitrary and discriminatory enforcement.” [89]
Arguments have been raised against the MFS for being unconstitutionally vague, even after the 1988 definition of scheme or artifice to defraud introduced by means of §1346. However, some courts have rejected such possibility, and on the contrary, have adopted several interpretations that seem to over reach the natural language of the MFS, in contradiction with the definiteness requisite. The arguments made by the Supreme Court in McNally against such trend were eloquent. In that decision the Supreme Court held:
“Courts are not free to expand criminal liability for fraud beyond the clear statement of Congress”. [90]
On the flip side, the broad interpretation of the MFS of the pre McNally era and of the post McNally era [91] render it to abusive and irresponsible applications of it, in the hands of prosecutors questing for glory, fame and power. The rational thing to do seems to be to reach a reasonable balance between a narrow and a broad definition, or as Jed Rakoff suggested 30 years ago, if it is possible to eliminate the irrational elements of the MFS without reducing its effectiveness [92], or if not, declare the unconstitutionality of the MFS.
Jed Rakoff stated that:
“In short, the format of the mail fraud statute in comparison with that of most other criminal federal statutes is idiosyncratic. Moreover, the oddity of its design has had numerous repercussions on its interpretation and application. For example, it has led courts, as noted, to describe the element of mailing as the gist, essence, gravamen, and substance of the crime of mail fraud, even though it is obvious that the prime concern of those who commit mail fraud, those who legislate against it, those who prosecute it, and those who judge it, is the fraud and not the mailing.” [93]
From this we can derive that the conviction and sentence of a person engaged in other white collar crime conducts cannot measure or take into account very important elements surrounding the criminal conduct, such as the scope of the harm, its duration, the number of victims, etc., and rather should only focus on the repetitive use of the mail, and on the importance of keeping the mail “free of taint and misuse”. [94] This clearly doesn’t make sense.
Further, the additional problem that has been signaled throughout the paper remains, namely, the lack of certainty and vagueness of the MFS and particularly of the concept scheme to defraud [95] pursuant to its legislative and judicial history. [96] Whether a lack of certainty of such concept violates the definiteness requisite or not is not entirely clear, but my guess is that it does, contrary to Rybicki. [97]
The Void for Vagueness Doctrine
As explained above, in Rybicki the only issue reviewed by the court of appeals was whether the ordinance was unconstitutionally vague on its face, or as applied, in contradiction of the Due Process Clause of the 14th Amendment of the American Constitution. [98] The 2nd Circuit Court held that the MFS did not fail the test set forth by the Void for Vagueness Doctrine. I do not share the arguments made by the majority decision, and find the dissent arguments of Judge Jacobs far more convincing. [99] In his view the so called honest services amendment of §1346 fails the test for facial vagueness that was set forth in City of Chicago v. Morales, 527 U.S. 56, 119 S.Ct. 1849, 144 L.Ed.2d 67 (1999) [100], where the Supreme Court held:
“Vagueness may invalidate a criminal law for either of two independent reasons. First, it may fail to provide the kind of notice that will enable ordinary people to understand what conduct it prohibits; second, it may authorize and even encourage arbitrary and discriminatory enforcement”. [101]
Judge Jacob argues that the majority mistakenly preferred to apply the standard for facial challenges for vagueness that was set forth under United States v. Salerno, 481 U.S. 739, 107 S.Ct. 2095, 95 L.Ed.2d 697 (1987), which states that “a statute is facially invalid only if there is “no set of circumstances” in which it would be valid” [102], while it must have applied the Morales standard. He further argues that in his view there is no set of circumstances, at all, under which §1346 is clear enough to be applicable. [103]
In building his argument he asserts that (i) pursuant to Morales, a criminal statute that reaches a substantial amount of innocent conduct and thereby fails to establish minimal guidelines to govern law enforcement, is unconstitutionally vague, on its face, (ii) in Rybicki the Morales standard should have been applied, with the necessary consequence that §1346 imposes insufficient constraint on prosecutors, “gives insufficient guidance to judges, and affords insufficient notice to defendants”, (iii) the majority opinion (in Rybicki) proves that judges cannot understand what conduct the MFS criminalizes, and (iv) the Circuit’s experience with §1346 is that most lawyers, judges, lay people, and prospective defendants “cannot be expected to understand the statute”. [104]
Judge Jacob argues in his dissent in Rybicki that circuits are at least fractured on five basic issues of the crime, namely, “(1) the requisite mens rea to commit the crime, (2) whether the defendant must cause actual tangible harm, (3) the duty that must be breached, (4) the source of that duty, and (5) which body of law informs us of the statute’s meaning.” [105]
Hence, several courts have considered the argument that 18 U.S.C. § 1346 is unconstitutionally vague as applied or on its face or. But no court has accepted the proposition that 18 U.S.C. § 1346 is unconstitutionally vague. However, this seems to be a generalized mistake.
Does the MFS define the criminal offense with definiteness as to allow ordinary people to understand what conduct is prohibited?
Invoking United States v. Handakas, 286 F.3d (2nd Cir. 2002), a decision issued by a panel of the same Court of Appeals only one year prior to Rybicki, the dissent in Rybicki argued that the criminal offense did not provide a definition that would allow ordinary people to understand the conduct prohibited by the statute. [106] In Handakas, the panel of the court had held that §1346 was unconstitutionally vague as applied to a contractor who willfully breached a contractual requirement that obliged him to pay the prevailing wage to his employees, and who misrepresented the wages on some disclosure forms that were required to him by state law. [107]
The 2-1 decision of the panel in Handakas seemed to bring hope over the possibility of closing a horrifying chapter of American criminal law, as it overthrew the possibility of federal criminalization of contract breaches. [108] Unfortunately, Rybicki seemed to reopen that door. In an article published in 2002, shortly after the decision of the panel of the 2nd circuit that decided Rybicki (prior to the in banc decision of 2003), Richard Strassberg and Roberto Braceras eloquently said that “these decisions raise almost as many questions as they answer regarding the scope of honest services fraud under §1346.” [109]
Commenting Handakas, Strassberg and Braceras stated that under state law, for §1346 to be unconstitutionally vague, it would be needed that (i) the statute did not give a person of ordinary intelligence the possibility to know that the conduct of the statute was prohibited, and (ii) the statute did not give explicit standards for those who apply it. [110] Both elements were proved to be present in Handakas. In arguing in favor of its decision in Handakas, whereby §1346 was found to be unconstitutionally vague, the panel of the 2nd Circuit stated that “the plain meaning of “honest services” in the text of §1346 simply provides no clue to the public or the courts as to what conduct is prohibited under the statute.” [111]
The arguments made by the panel of the 2nd Circuit in Handakas, the dissenting opinion of the 2nd Circuit Court in Rybicki, and Strassberg and Braceras, also support the conclusion that it would be ironic to suggest that those constitutional vagueness concerns could be satisfied by simply assuming that a person of ordinary intelligence can master the task of determining whether the duty of honest services was tort based or contractual, and thus, whether the conduct falls or not under the crime portrayed by the MFS, [112] not to name the legal difficulties arising from the malleability of the distinction between tort and contractual duties. [113]
Unfortunately, the arguments made by those brave souls have not been heard by many courts, or at least by the majority of them. Fortunately, with the latest developments of the Supreme Court this last December of 2009, which I will describe below, this sad situation seems to be about to come to an end. However, other courts have adopted prudent but revealing positions. In Brown 2, reviewed above, the Court argued strikingly:
“This opinion should not be read to suggest that no dishonest, fraudulent, wrongful, or criminal act has occurred. We hold that the alleged conduct is not a federal crime under the honest-services theory of fraud specifically. Given our repeated exhortation against expanding federal criminal jurisdiction beyond specific federal statutes to the defining of common law crimes, we resist the incremental expansion of a statute that is vague and amorphous on its face and depends for its constitutionality on the clarity divined from a jumble of disparate cases. Instead, we apply the rule of lenity and opt for the narrower, reasonable interpretation that here excludes Defendants’ conduct.” [114]
However, it was DeMoss, other brave soul, who in a concurring in part and dissenting in part argumentation of Brown 2 called the attention upon the need of examining thoroughly the constitutionality of the MFS and §1346. [115] DeMoss argued that the cumulative effect of a vague criminal statute, added to a broad and troublesome conception of conspiracy to commit honest services fraud, and an unprecedented theory of harm that connected the ultimate demise of Enron to a single transaction was a very grave threat, of eventual dramatic levels, to the development of legitimate and lawful business relationships, and to the negotiations held pursuant to the creation of such relationships. [116]
Other strong assertions were made by DeMoss in his concurring in part section against the constitutionality of the MFS and §1346. For instance, he contended that several years of review of the application of §1346 has led him to realize that the constitutionality of §1346 “may well be in serious doubt”, because §1346 text was undeniably vague and ambiguous, subject to an ample variation in application by district and lower courts, [117] which have clouded the meaning of §1346 instead of clarifying it, by repeatedly resolving the ambiguities of the statute by judicially created definitions and limitations. Thus, according to DeMoss, the Fifth Circuit Court and the lower courts end up doing what most would say they lack the constitutional authority to do, namely, define criminal conducts on an ex post facto and ad hoc basis. [118] He concludes by suggesting that Congress should “repair this statute that, in my opinion, fails to provide the requisite “minimal guidelines to govern law enforcement”.” [119]
Now, returning to Judge Jacobs’ argument in the dissent of Rybicki, we must emphasize, once again, that standing over Handakas shoulders Jacobs considers that the meaning of honest services cannot be easily construed. On the contrary, he argues that the majority opinion in Rybicki is a prolonged search for some prior settled meaning for an opaque statutory phrase, namely, the intangible right of honest services. [120] He argues that that effort to infuse the meaning of such a phrase is conducted in a “painstaking way, and considers an abundant variety of alternative meanings.” However, Jacobs argues, a term of art has one single and apparent meaning, “in the same way that a pun has two”. [121]
Jacobs adds thereafter that the supposed intention of Congress of reinstating the pre-McNally case law body leads us nowhere anyway, in terms of prosecutorial power, and definition of the crime or notice to the public [122], and subsequently undertakes the task of providing additional persuasive arguments insisting on the idea that “notice (of the crime) is insufficient if lay persons are required to “perform the lawyer-like task of statutory interpretation by reconciling the text of separate documents”. [123]
Finally, Jacobs asserts:
“Construing a statute (as the majority does here) to say that scores of overruled cases are hereby revived, requires lay persons to do lawyer-like tasks that few lawyers would have the skills to perform: “No one can know what is forbidden by §1346 without undertaking the “lawyer-like task of answering the following questions: (1) Can pre-McNally case law be consulted to illuminate the wording of §1346? (2) Can any meaning be drawn from the case law, either the uneven pre-McNally cases or the few cases decided post §1346? (3) Is one to be guided only by case law within one’s own circuit or by the law of the circuits taken together (if that is possible)? Handakas, 286 F.3d at. 105.” It is remarkable how little the majority’s search for meaning has turned up.” [124]
I agree that a criminal statute that requires from lay people lawyer-task interpretations does not enjoy the definiteness requisite that common law has elaborated throughout the years, not to mention the super strong criticism that a lawyer educated under the civil law system could make under the nullum crimen sine lege praevia, stricta et scripta principle to penal laws so vaguely written.
Has the legislature established minimal guidelines to govern law enforcement?
This second inquiry on facial vagueness is very important, and is sufficient to decide constitutional infirmity. [125] Judge Jacobs contends that the legislature did not establish such minimal guidelines. He suggest that the law does not pass the need of minimal guidelines, as the statute does not permit a standardless sweep allowing officials, such as policemen, prosecutors, and juries, to pursue their own predilections, as held in Kolender. [126]
He further asserts that a law fails to provide sufficiently explicit standards when it impermissibly delegates basic policy matters to the abovementioned officials, for resolution on ad hoc and subjective bases, [127] and thus a statute may be considered facially vague in the case that it necessarily entrust lawmaking to the moment-to-moment judgment of law enforcement. [128]
According to the majority in Rybicki, the honest services offense is characterized by a misrepresentation or omission that is made by a private person who secretly acts in self interest while purporting to act in the interests of the employer, and is capable of leading a reasonable employer to change its conduct. [129] Nonetheless, the truth is that, as Jacobs accurately argued, no limit is placed on the exercise of prosecutorial discretion by requiring a showing that an employee prefers secretly to act on his own interest to the interest of the employer. [130] In the great majority of cases, this is the natural thing to happen!
Further, the prosecutorial discretion is neither limited by the requirement of materiality. [131] Thus, Jacobs adds that the majority in Rybicki codified a doctrine that “is as standardless as the statute itself.” [132]
Latest Developments
Three very prominent cases are pending of decision of the Supreme Court with regard to the honest services doctrine. [133] It seems to be a unique opportunity for the Supreme Court to finally shape the MFS and its elements, to declare the norm unconstitutional, or to require Congress to redefine it in order for it to better comply with the definiteness criteria. Eric Sussman recently suggested that the Supreme Court is likely to bring some clarity to the landscape. [134]
Furthermore, as of Tuesday December 2, 2009, the Supreme Court gave a highly skeptical hearing, where the justices heard two cases, and showed that they are poised to declare the unconstitutionality of the MFS, or at least, of the honest services law. [135] This attitude of the Supreme Court is a beacon of hope. Through the two hour hearing, the justices took turns where they showed their skepticism about the norm, stating that it was too vague, open ended, and that it failed to define what was a/the crime. [136] The cases heard by the Supreme Court were a case against Conrad Black, for charges of having defrauded his company Hollinger International; and against Bruce Weyhrauch, former legislator of Alaska. [137] I have referred to Black previously in this document.
Justice Antonin Scalia declared on Tuesday that the law was a “mush”. According to the Los Angeles Times, Scalia said that “it was like a law that said every "bad act" was a crime and let prosecutors and judges decide what constitutes a crime without warning ordinary citizens.” [138] It is relevant to note also, that when the Supreme Court denied certiorari in Sorich v. United States, 555 U. S. (2009), Justice Scalia said in a dissent that it seemed irresponsible to let the existing chaos prevail. [139]
Justice Stephens G. Breyer and Chief Justice John G. Roberts also made several remarks on the vagueness of the statute, and suggested that it might be unconstitutional. [140] Breyer said that a criminal law should be understandable by a normal citizen. [141] Overall, none of the justices spoke in defense of the law. Only Justice Sotomayor said that the law could be used against kickbacks and bribes, by stating: “It’s illegal to take a kickback. There is nothing seemingly vague about that”. [142]
In spite of Sotomayor assertion, the general tendency of the court seems to be to declare the unconstitutionality of the norm.
Obviously, voices against the unconstitutionality of the MFS were also heard. Deputy Solicitor General Michael R. Dreeben argued that throwing out the statute would devastate a core area of public corruption law. [143]
The Supreme Court still has to hear one additional case, brought by former Enron CEO Jeffrey K. Skilling. The hearing is expected to take place as of March 1, 2010. [144] In this case, the defense argues that the federal “honest services” law is flawed because the government need not prove that the defendant’s actions were for his own personal gain. [145] It seems that only after this third hearing and a careful deliberation by the court, we will have a decision of the Supreme Court regarding the MFS and the honest services law.
Conclusion
The chaos derived from the judicial interpretation of the MFS and §1346 is apparent. Not even the courts have been able to define the nature, content, requisites and elements of the MFS and §1346, not to say lawyers, scholars, and prospective defendants. The arguments made by courts who argue that the statute has a plain meaning seem shallow phrases when contested with the broad range of decisions of other courts that disagree with one or other particular interpretation of the statute. Plus, the strong and persuasive arguments made in dissenting opinions such as Rybicki, or the panel decision in Handakas, followed by the hints given by some justices of the Supreme Court in the recent hearings of December 2, 2009, evince the need of putting an end to the legal farce that has circumvallated the MFS and §1346 after McNally for such a long time.
The fact that the MFS and §1346 have been used, as Justice Scalia argued in his Sorich dissent [146], in order to impose criminal penalties upon a staggeringly broad swath of behavior, including misconduct by public officials and employees, of private employees and corporate fiduciaries; and convictions of a local housing official who failed to disclose a conflict of interest [147]; a businessman that attempted to bribe a state legislator with the aim of influencing on legislation [148]; students who schemed with their professors to turn in plagiarized work [149]; lawyers who made payments to insurance adjusters in exchange for the expedited processing of their clients’ pending claims [150]; and city employees who engaged in political-patronage hiring for local civil-service jobs [151], among others, is simply outrageous.
The inquisitorial era of the MFS must come to an end; the Supreme Court should cut down the stake, and put in its place the American Constitution; the frustration of several courts that have expressed their deception on the face of the lack of a “simple formula specific enough to give clear cut answers to borderline problems” [152] must be addressed. The light must shine again, illuminating the path toward a legal system where the rule of law prevails, and crimes pre exist to the proceeding where they are charged, instead of being created ad hoc whenever the government or a court deem it necessary.
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http://www.businessinsider.com/supreme-court-to-take-up-honest-service-fraud-tuesday-2009-12
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http://abclocal.go.com/ktrk/story?section=news/local&id=7171137
http://www.newser.com/story/71582/supreme-court-to-hear-enron-ceos-appeal.html
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