In The Courts

Seventh Circuit Limits Scope of 'Prior Administrative Order' Sentencing Guideline

In United States v. Wallace, 2004 WL 103315 (7th Cir. Jan. 23, 2004), the Seventh Circuit held that a “Statement of Voluntary Discontinuance,” signed by the defendant to assure the U.S. Postal Inspection Service that he would stop sending bad checks through the U.S. mail, did not constitute a prior administrative order, injunction, or process of the sort that should trigger a two-level sentence enhancement under U.S.S.G. ' 2B1.1(b)(7), after his conviction for subsequent acts of mail fraud. Section 2B1.1(b)(7) provides that, “[i]f the offense involved … a violation of any prior, specific judicial or administrative order, injunction, decree, or process not addressed elsewhere in the guidelines … increase by 2 levels.”

In reversing the district court's application of the enhancement, the court compared the defendant's conduct with fact patterns in some of the few other cases addressing the guideline. The court explained that unlike the fact patterns in a Second Circuit case and earlier Seventh Circuit case, the defendant's signed statement was much more informal than an actual order, injunction, decree, or process, and was more like an informal administrative warning letter. The court further stated that the fact that the Postal Service regulations provided for an informal process of disposing of matters did not automatically render that mechanism “process” under the guidelines. In reaching its decision, the court took into account the fact that there had been no extensive negotiation between the defendant and the Postal Service prior to his signing the letter, and no official action had been taken against the defendant by the Postal Inspection Service for his earlier acts of potential mail fraud. The panel emphasized that whether a warning or agreement reaches the level of “process” under the guideline must be determined on a case-by-case basis.

Second Circuit Rejects Vagueness Challenge to 18 U.S.C. ' 1346 'Honest Services' Fraud Provision

In United States v. Rybicki, 2003 WL 23018917 (2nd Cir. Dec. 29, 2003) (en banc), two attorneys appealed their convictions for fraud under 18 U.S.C. ' 1346, which provides “for the purposes of this chapter [18 U.S.C. '' 1341 et seq.], the term 'scheme or artifice to defraud' includes a scheme or artifice to deprive another of the intangible right of honest services.” The defendants had been convicted of arranging for payments to be made to claims adjusters employed by insurance companies, so that the claims adjusters would expedite settlement of the claims of the defendants' clients. The defendants also took steps to disguise and conceal the source of the payments.

In a 7-4 decision, the court affirmed the convictions, holding that ' 1346 was not vague as applied, and that a person of ordinary intelligence has a reasonable opportunity to know that conduct such as paying insurance claims adjusters to expedite claims, without their employers' knowledge, deprives the insurance company of the “honest services” of their employees. The court explained that the line of cases before the enactment of ' 1346 involving “honest services” fraud, which could be generally categorized as bribery/kickback cases, and self-dealing cases, provided guidance as to the meaning of '' 1346 as enacted by Congress. In light of the pre- ' 1346 case law, the court interpreted ' 1346 to mean, in the private sector context:

“a scheme or artifice to use the mails or wires 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.”

In light of the history and language of the statute, the court did not agree that ' 1346 was “virtually unlimited” as urged by the defendants. The en banc court also revisited the test for the extent to which economic harm must be foreseeable to the perpetrator in order to give rise to a violation of ' 1346. The original Rybicki panel had held that it must be “reasonably foreseeable that the scheme could cause some economic or pecuniary harm to the victim that is more than de minimis.” The en banc panel instead endorsed a materiality test previously adopted by the Fourth Circuit, which includes as an element of '1346 whether the “misrepresentation would naturally tend to lead or is capable of leading a reasonable employer to change its conduct.”

Fourth Circuit Interprets Guidelines

In United States v. Stone, 2004 WL 99036 (4th Cir. Jan. 22, 2004), the Fourth Circuit reviewed sentences for conspiracy to defraud the United States, and filing false tax returns. The defendant was the lead electrician at a General Services Administration facility, and in that capacity had the authority to place requests for small jobs to be contracted out, without the need for a bidding process. For emergency work, these jobs did not require advance approval by any other GSA employee. At some point, the defendant approached a number of contractors and asked them to start inflating invoices, or submitting false invoices. When the contractors received payment from the GSA for inflated invoices, a portion of the excess would go to the defendant, through either cash payments or tangible gifts.

The district court sentenced the defendant to 84 months, which included upward departures under ' 2T1.1(b)(2) for use of a sophisticated means to conceal a fraud, and ' 3B1.3, for abuse of a position of trust or use of a special skill. After rejecting a number of other challenges to the district court's rulings, the Court of Appeals largely affirmed the district court's application of those guidelines.

The court held that as the lead electrician at the GSA facility, the defendant abused a position of trust under ' 3B1.1 by submitting false forms for work orders because he exercised enormous discretion, and was in charge of the electrical repairs that were the basis of the fraud. However, the court did not agree that the “special skill” clause of ' 3B1.3 would apply, because “the examples of special skills provided in the commentary seem to require more skilled education, training and licensing than is usually associated with being an electrician.” The court also upheld the district court's determination that the defendant had used a “sophisticated means” to conceal his tax fraud offense. Under ' 2T1.1 n.4, a sophisticated means includes “conduct that is more complex or demonstrates greater intricacy or planning than a routine tax-evasion case.” The court believed that by receiving income from the conspiracy structured as in-kind gifts (and even as personal services in the form of construction on his home), and by using some fictitious entities to facilitate the transfer of the payments, the defendant made it more difficult for the IRS to detect his tax evasion, and thus fell within the guideline's purview.

Seventh Circuit Limits Scope of 'Prior Administrative Order' Sentencing Guideline

In United States v. Wallace, 2004 WL 103315 (7th Cir. Jan. 23, 2004), the Seventh Circuit held that a “Statement of Voluntary Discontinuance,” signed by the defendant to assure the U.S. Postal Inspection Service that he would stop sending bad checks through the U.S. mail, did not constitute a prior administrative order, injunction, or process of the sort that should trigger a two-level sentence enhancement under U.S.S.G. ' 2B1.1(b)(7), after his conviction for subsequent acts of mail fraud. Section 2B1.1(b)(7) provides that, “[i]f the offense involved … a violation of any prior, specific judicial or administrative order, injunction, decree, or process not addressed elsewhere in the guidelines … increase by 2 levels.”

In reversing the district court's application of the enhancement, the court compared the defendant's conduct with fact patterns in some of the few other cases addressing the guideline. The court explained that unlike the fact patterns in a Second Circuit case and earlier Seventh Circuit case, the defendant's signed statement was much more informal than an actual order, injunction, decree, or process, and was more like an informal administrative warning letter. The court further stated that the fact that the Postal Service regulations provided for an informal process of disposing of matters did not automatically render that mechanism “process” under the guidelines. In reaching its decision, the court took into account the fact that there had been no extensive negotiation between the defendant and the Postal Service prior to his signing the letter, and no official action had been taken against the defendant by the Postal Inspection Service for his earlier acts of potential mail fraud. The panel emphasized that whether a warning or agreement reaches the level of “process” under the guideline must be determined on a case-by-case basis.

Second Circuit Rejects Vagueness Challenge to 18 U.S.C. ' 1346 'Honest Services' Fraud Provision

In United States v. Rybicki, 2003 WL 23018917 (2nd Cir. Dec. 29, 2003) (en banc), two attorneys appealed their convictions for fraud under 18 U.S.C. ' 1346, which provides “for the purposes of this chapter [18 U.S.C. '' 1341 et seq.], the term 'scheme or artifice to defraud' includes a scheme or artifice to deprive another of the intangible right of honest services.” The defendants had been convicted of arranging for payments to be made to claims adjusters employed by insurance companies, so that the claims adjusters would expedite settlement of the claims of the defendants' clients. The defendants also took steps to disguise and conceal the source of the payments.

In a 7-4 decision, the court affirmed the convictions, holding that ' 1346 was not vague as applied, and that a person of ordinary intelligence has a reasonable opportunity to know that conduct such as paying insurance claims adjusters to expedite claims, without their employers' knowledge, deprives the insurance company of the “honest services” of their employees. The court explained that the line of cases before the enactment of ' 1346 involving “honest services” fraud, which could be generally categorized as bribery/kickback cases, and self-dealing cases, provided guidance as to the meaning of '' 1346 as enacted by Congress. In light of the pre- ' 1346 case law, the court interpreted ' 1346 to mean, in the private sector context:

“a scheme or artifice to use the mails or wires 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.”

In light of the history and language of the statute, the court did not agree that ' 1346 was “virtually unlimited” as urged by the defendants. The en banc court also revisited the test for the extent to which economic harm must be foreseeable to the perpetrator in order to give rise to a violation of ' 1346. The original Rybicki panel had held that it must be “reasonably foreseeable that the scheme could cause some economic or pecuniary harm to the victim that is more than de minimis.” The en banc panel instead endorsed a materiality test previously adopted by the Fourth Circuit, which includes as an element of '1346 whether the “misrepresentation would naturally tend to lead or is capable of leading a reasonable employer to change its conduct.”

Fourth Circuit Interprets Guidelines

In United States v. Stone, 2004 WL 99036 (4th Cir. Jan. 22, 2004), the Fourth Circuit reviewed sentences for conspiracy to defraud the United States, and filing false tax returns. The defendant was the lead electrician at a General Services Administration facility, and in that capacity had the authority to place requests for small jobs to be contracted out, without the need for a bidding process. For emergency work, these jobs did not require advance approval by any other GSA employee. At some point, the defendant approached a number of contractors and asked them to start inflating invoices, or submitting false invoices. When the contractors received payment from the GSA for inflated invoices, a portion of the excess would go to the defendant, through either cash payments or tangible gifts.

The district court sentenced the defendant to 84 months, which included upward departures under ' 2T1.1(b)(2) for use of a sophisticated means to conceal a fraud, and ' 3B1.3, for abuse of a position of trust or use of a special skill. After rejecting a number of other challenges to the district court's rulings, the Court of Appeals largely affirmed the district court's application of those guidelines.

The court held that as the lead electrician at the GSA facility, the defendant abused a position of trust under ' 3B1.1 by submitting false forms for work orders because he exercised enormous discretion, and was in charge of the electrical repairs that were the basis of the fraud. However, the court did not agree that the “special skill” clause of ' 3B1.3 would apply, because “the examples of special skills provided in the commentary seem to require more skilled education, training and licensing than is usually associated with being an electrician.” The court also upheld the district court's determination that the defendant had used a “sophisticated means” to conceal his tax fraud offense. Under ' 2T1.1 n.4, a sophisticated means includes “conduct that is more complex or demonstrates greater intricacy or planning than a routine tax-evasion case.” The court believed that by receiving income from the conspiracy structured as in-kind gifts (and even as personal services in the form of construction on his home), and by using some fictitious entities to facilitate the transfer of the payments, the defendant made it more difficult for the IRS to detect his tax evasion, and thus fell within the guideline's purview.