In the Courts

Private Individuals May Be Prosecuted for Intangible-Rights Fraud

In United States v. Williams, 441 F.3d 716 (9th Cir. 2006), the Ninth Circuit held that individuals could be convicted of fraud for depriving their victims of the intangible right to honest services, at least where the defendant has a fiduciary duty to the victim.

The defendant, an insurance salesman and financial planner, was convicted of mail and wire fraud and money laundering in a scheme involving using a durable power of attorney to loot a client's accounts and assets. He was charged with direct fraud under 18 U.S.C. ” 1341 and 1342, and under the theory that he had deprived his victim of the intangible right to honest services pursuant to 18 U.S.C.
' 1346. He argued that, in accordance with the Supreme Court's decision in McNally v. United States, 483 U.S. 350 (1987), ” 1341 and 1342 do not encompass 'intangible rights' fraud, and that although Congress reestablished intangible rights fraud with the passage of 18 U.S.C. ' 1346, that section applies only to public corruption and does not apply to private individuals. The Ninth Circuit disagreed, holding that nothing in the text or context of the statute limits its application to public officials. The court held that, at a minimum, the provision should apply to private individuals in a fiduciary or trust relationship with the victim, while declining to decide if the statute reaches any further.

Title 11 Disclosure Statement Cannot Serve As Basis for Conviction for False Entries

In United States v. McDaniel, 2006 WL 839095 (W.D. Mich. Mar. 28, 2006), the court held, in a case of first impression, that false statements in disclosure statements and plans of reorganization filed in a Title 11 proceeding are not knowing and fraudulent false entries in documents relating to the financial affairs of a debtor such that they should be subject to 18 U.S.C. ' 152(8).

The defendant filed a disclosure statement and amended plan of reorganization in a Title 11 proceeding. The government contended that those documents contained false statements that amounted to a violation of 18 U.S.C. ' 152(8). The court noted that the purpose of ' 152(8) is to ensure the integrity of financial recordkeeping so that the representative of the estate can accurately determine the debtor's assets and ensure they are equitably distributed. The court held that, because disclosure statements and plans of reorganization 'do not relate to a debtor's 'financial recordkeeping,” even if statements in those documents were proved false they can not serve as a basis for conviction under 18 U.S.C. ' 152(8).

Innocent Mailing Cannot Serve As Basis for Mail Fraud Conviction

In United States v. Ingles, 2006 WL 925599 (5th Cir. April 11, 2006), the Fifth Circuit held, in the context of arson and insurance fraud, that an insurance claim filed by someone who was not a party to the fraud could not serve as the basis for a mail fraud conviction.

The defendant was convicted of mail fraud and wire fraud because of his involvement in an arson scheme to defraud an insurance company. The defendant paid a friend to set fire to two camp houses owned by defendant's son. The son then filed insurance claims to recover from the resulting damage to the properties. Although the defendant and his accomplice were convicted, the son was acquitted of involvement in the scheme. On appeal, the Fifth ICircuit reversed the mail fraud convictions because the only use of the mails alleged was the son's mailing of his claim to the insurance company and the resultant correspondence be-tween them. The court held that because the insured party (the son) was not involved in the scheme, his claim to the insurance company was not fraudulent and could not serve as the basis for a mail fraud conviction.

In the Courts and Business Crimes Hotline were written by Thomas M. Craig, Associate with Williams & Connolly, LLP, Washington, DC, and Associate Editor of this newsletter.

DOJ Leniency Agreement No Bar to Indictment

In Stolt-Nielsen, S.A. v. United States, 2006 WL 722160 (3rd Cir. Mar. 23, 2006), the Third Circuit held, in a case of first impression in the Circuit, that the district court lacked authority to enjoin the executive branch from filing an indictment, despite the existence of a leniency agreement.

In the course of an investigation by the Antitrust Division of the Department of Justice into possible antitrust violations, the defendant, a supplier of shipping services, entered into a Conditional Leniency Agreement with the DOJ. Under the terms of the agreement, the government promised not to prosecute the defendant, its officers or directors for anticompetitive activity, subject to the company's strict compliance with certain conditions. The government later concluded that the company had not been sufficiently forthcoming, withdrew its grant of leniency, and announced its intention to indict the company and one of its officers under the Sherman Act. The company brought suit to enforce the agreement and obtained an injunction barring the government from filing the indictment. On appeal, the Third Circuit reversed. The Court held, on separation of powers grounds, that the district court lacked the authority to enjoin the executive branch from filing the indictments. The court did note, however, that, once indicted, the company may attempt to enforce the Leniency Agreement as a defense to conviction.

Private Individuals May Be Prosecuted for Intangible-Rights Fraud

In United States v. Williams , 441 F.3d 716 (9th Cir. 2006), the Ninth Circuit held that individuals could be convicted of fraud for depriving their victims of the intangible right to honest services, at least where the defendant has a fiduciary duty to the victim.

The defendant, an insurance salesman and financial planner, was convicted of mail and wire fraud and money laundering in a scheme involving using a durable power of attorney to loot a client's accounts and assets. He was charged with direct fraud under 18 U.S.C. ” 1341 and 1342, and under the theory that he had deprived his victim of the intangible right to honest services pursuant to 18 U.S.C.
' 1346. He argued that, in accordance with the Supreme Court's decision in McNally v. United States , 483 U.S. 350 (1987), ” 1341 and 1342 do not encompass 'intangible rights' fraud, and that although Congress reestablished intangible rights fraud with the passage of 18 U.S.C. ' 1346, that section applies only to public corruption and does not apply to private individuals. The Ninth Circuit disagreed, holding that nothing in the text or context of the statute limits its application to public officials. The court held that, at a minimum, the provision should apply to private individuals in a fiduciary or trust relationship with the victim, while declining to decide if the statute reaches any further.

Title 11 Disclosure Statement Cannot Serve As Basis for Conviction for False Entries

In United States v. McDaniel, 2006 WL 839095 (W.D. Mich. Mar. 28, 2006), the court held, in a case of first impression, that false statements in disclosure statements and plans of reorganization filed in a Title 11 proceeding are not knowing and fraudulent false entries in documents relating to the financial affairs of a debtor such that they should be subject to 18 U.S.C. ' 152(8).

The defendant filed a disclosure statement and amended plan of reorganization in a Title 11 proceeding. The government contended that those documents contained false statements that amounted to a violation of 18 U.S.C. ' 152(8). The court noted that the purpose of ' 152(8) is to ensure the integrity of financial recordkeeping so that the representative of the estate can accurately determine the debtor's assets and ensure they are equitably distributed. The court held that, because disclosure statements and plans of reorganization 'do not relate to a debtor's 'financial recordkeeping,” even if statements in those documents were proved false they can not serve as a basis for conviction under 18 U.S.C. ' 152(8).

Innocent Mailing Cannot Serve As Basis for Mail Fraud Conviction

In United States v. Ingles, 2006 WL 925599 (5th Cir. April 11, 2006), the Fifth Circuit held, in the context of arson and insurance fraud, that an insurance claim filed by someone who was not a party to the fraud could not serve as the basis for a mail fraud conviction.

The defendant was convicted of mail fraud and wire fraud because of his involvement in an arson scheme to defraud an insurance company. The defendant paid a friend to set fire to two camp houses owned by defendant's son. The son then filed insurance claims to recover from the resulting damage to the properties. Although the defendant and his accomplice were convicted, the son was acquitted of involvement in the scheme. On appeal, the Fifth ICircuit reversed the mail fraud convictions because the only use of the mails alleged was the son's mailing of his claim to the insurance company and the resultant correspondence be-tween them. The court held that because the insured party (the son) was not involved in the scheme, his claim to the insurance company was not fraudulent and could not serve as the basis for a mail fraud conviction.

In the Courts and Business Crimes Hotline were written by Thomas M. Craig, Associate with Williams & Connolly, LLP, Washington, DC, and Associate Editor of this newsletter.