United States v. Devegter ( 1999 )

[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________
No. 99-8142
________________________
D. C. Docket No. 1:97-CR-508-1
UNITED STATES OF AMERICA,
Plaintiff-Appellant,
versus
MICHAEL DEVEGTER and RICHARD POIRIER, JR.,
Defendants-Appellees.
________________________
Appeal from the United States District Court
for the Northern District of Georgia
_________________________
(December 29, 1999)
Before BLACK and WILSON, Circuit Judges, and HILL, Senior Circuit Judge.
BLACK, Circuit Judge:
The Government appeals the district court’s partial dismissal of the
indictment against Appellees, Michael deVegter and Richard Poirier, Jr. The
indictment charged Appellees with conspiracy to commit wire fraud, in violation of
18 U.S.C. § 371, and wire fraud and honest services fraud, in violation of 18
U.S.C. §§ 1343 & 1346. Appellees moved to dismiss the indictment. The district
court granted the motion in part, dismissing the § 1346 counts on the ground that
the allegations in the indictment were insufficient to charge violations of that
section. The Government argues the district court erred in interpreting § 1346 and
that the allegations were sufficient to sustain the § 1346 charges. We agree with
the Government that the allegations of the indictment were sufficient to survive the
motion to dismiss, and therefore reverse and remand.
I. BACKGROUND
The federal criminal charges in this case arise from alleged corruption in the
process by which Fulton County, Georgia, selected an underwriter for the
refunding of municipal water and sewer bonds. The following description of the
facts is taken from the allegations in the indictment.
In the summer of 1992, Fulton County, acting through its Board of
Commissioners, decided to take advantage of favorable interest rates by refunding
some of its bonds. This process required an underwriter. For a professional
2
recommendation about whom the county should select as the underwriter, Fulton
County obtained the services of Stephens, Inc. (Stephens), an investment banking
firm. Appellee deVegter was a vice president at Stephens, and was the financial
advisor in charge of the Fulton County relationship.
Appellee Poirier was a partner at Lazard Freres & Co., an investment
banking firm that desired to obtain the position of senior managing underwriter.
Through an intermediary, Nat Cole, Poirier offered to pay deVegter in return for
improper intervention and assistance in Lazard Freres winning the contract.
Although deVegter told Cole that deVegter did not control the ultimate decision of
the Fulton County Board of Commissioners, deVegter agreed to the offer.
Throughout Stephens’ process of crafting its recommendation to Fulton
County, deVegter repeatedly manipulated the recommendation in favor of Lazard
Freres. While Fulton County’s “Request for Proposals” from underwriters was
being drafted, deVegter sent advance copies to Poirier and incorporated his
comments to make the document more favorable to Lazard Freres. Once proposals
were submitted, deVegter sent a copy of a competitor’s proposal to Poirier so that
he could analyze it and provide deVegter with reasons why Lazard Freres’
proposal was superior. Later, after another banker at Stephens had ranked the
various proposals, deVegter ordered the banker to adjust the rankings so that
3
Lazard Freres became the first-place proposal. The final recommendation from
Stephens to Fulton County accordingly ranked Lazard Freres as the best
underwriter; Fulton County adopted this recommendation and awarded Lazard
Freres the underwriting contract. At no time did deVegter inform Fulton County of
his financial interest in recommending Lazard Freres.
The deal was completed when Poirier, through Cole, paid deVegter $41,936
for his manipulation of the selection process. After the transaction was completed,
deVegter and Poirier took steps at their respective firms to cover up the
misconduct.
Appellees deVegter and Poirier were indicted for conspiracy and wire fraud,
including the honest services fraud theory of § 1346. The district court sustained
the conspiracy and wire fraud counts of the indictment against Appellees’ motion
to dismiss. The court granted part of the motion, however, concluding that the
allegations of the indictment were insufficient on the § 1346 charges. The court
held that § 1346 can be applied to private sector honest services fraud only when
the defendant breached a “clear fiduciary duty.” The court found that the
indictment failed to allege such a duty and therefore dismissed the § 1346 charges.
II. DISCUSSION
4
This court reviews de novo the dismissal of an indictment. See United
States v. Dabbs, 134 F.3d 1071, 1079 (11th Cir. 1998). “Under Fed. R. Crim. P.
12(b) an indictment may be dismissed where there is an infirmity of law in the
prosecution; a court may not dismiss an indictment, however, on a determination of
facts that should have been developed at trial.” United States v. Torkington, 812
F.2d 1347, 1354 (11th Cir. 1987). “[T]his court must reverse a dismissal if it
concludes that the factual allegations in the indictment, when viewed in the light
most favorable to the government, were sufficient to charge the offense as a matter
of law.” Id.The Government appeals the district court’s dismissal of the § 1346 counts
on two grounds. First, the Government argues that the district court erred in its
interpretation of private sector honest services fraud under § 1346. Second, the
Government asserts that the allegations of the indictment relating to the § 1346
charges were sufficient to survive the motion to dismiss.
A. Application of § 1346 to Private Sector “Honest Services” Fraud.
The federal wire fraud statute prohibits the use of the interstate wires to
carry out a fraudulent scheme. The statute provides that “[w]hoever, having
devised or intending to devise any scheme or artifice to defraud . . . transmits or
causes to be transmitted by means of wire . . . communication in interstate or
5
foreign commerce, . . . for the purpose of executing such scheme or artifice,”
commits a federal offense. 18 U.S.C. § 1343. In addition, “the term ‘scheme or
artifice to defraud’ includes a scheme or artifice to deprive another of the
intangible right of honest services.” 18 U.S.C. § 1346.
The § 1346 honest services fraud provision was enacted by Congress in
1988 after the Supreme Court’s decision in McNally v. United States, 483 U.S.
350, 107 S. Ct. 2875 (1987). In McNally, the Supreme Court held that the scope of
§ 13431 encompassed only schemes to defraud another of money or other property
rights, but not schemes to defraud another of intangible rights. See id. at 360.
“Congress passed [§ 1346] to overrule McNally and reinstate prior law,” which had
extended wire fraud liability to schemes to defraud another of intangible rights,
including an intangible right of honest services. United States v. Lopez-Lukis, 102
F.3d 1164, 1168-69 (11th Cir. 1997). Pre-McNally case law had recognized three
kinds of intangible rights the defrauding of which would create wire fraud liability.
First, defendants were convicted of defrauding persons of nonmonetary, intangible
interests. See McNally, 483 U.S. at 363-64 & n.4 (Stevens, J., dissenting); United
1
The prosecution in McNally involved a violation of the mail fraud statute, 18 U.S.C.
§ 1341. Except for the jurisdictional nexus (mails in § 1341, interstate wires in § 1343), the
statutes are the same, are interpreted identically, and cases decided under one are controlling
under the other. See Belt v. United States, 868 F.2d 1208, 1211 (11th Cir. 1989) (“The statutes
are given a similar construction and are subject to the same substantive analysis.”).
6
States v. Condolon, 600 F.2d 7, 8-9 (4th Cir. 1979) (scheme to defraud women of
time, effort, and expectations with seduction scam using bogus talent agency).
Second, government officials were convicted for depriving their constituents of
honest governmental services. See McNally, 483 U.S. at 362-63 & nn.1-2
(Stevens, J., dissenting); Lopez-Lukis, 102 F.3d at 1168-69 (citing cases). Third,
“[i]n the private sector, purchasing agents, brokers, union leaders, and others with
clear fiduciary duties to their employers or unions [were] found guilty of
defrauding their employers or unions by accepting kickbacks or selling
confidential information.” McNally, 483 U.S. at 363 & n.3 (Stevens, J.,
dissenting); United States v. Ballard, 663 F.2d 534 (5th Cir. Unit B Dec. 1981),
modified in part on other grounds, 680 F.2d 352 (1982).2 Therefore, this Court has
noted that although the paradigm case of honest services fraud is the bribery of a
public official, § 1346 is not limited to such conduct but extends to the defrauding
of some private sector duties of loyalty. See Lopez-Lukis, 102 F.3d at 1165 n.1.
This case involves the alleged commission of honest services fraud by private
2
In Stein v. Reynolds Securities, Inc., 667 F.2d 33, 34 (11th Cir. 1982), this Court
adopted as binding precedent all decisions of Unit B of the former Fifth Circuit handed down
after September 30, 1981.
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sector defendants, not a defrauding of the public of the honest governmental
services of a public official.3
The meaning of the “intangible right of honest services” has different
implications, however, when applied to public official malfeasance and private
sector misconduct. Public officials inherently owe a fiduciary duty to the public to
make governmental decisions in the public’s best interest. See Lopez-Lukis, 102
F.3d at 1169. “If the official instead secretly makes his decision based on his own
personal interests—as when an official accepts a bribe or personally benefits from
an undisclosed conflict of interest—the official has defrauded the public of his
honest services.” Id. When the prosecution can prove the other elements of the
wire fraud offense,4 taking kickbacks or benefitting from an undisclosed conflict of
3
Public sector honest services fraud falls into two categories. First, “a public official
owes a fiduciary duty to the public, and misuse of his office for private gain is a fraud.”
McNally, 483 U.S. at 355. Second, “an individual without formal office may be held to be a
public fiduciary if others rely on him because of a special relationship in the government and he
in fact makes governmental decisions.” Id. (quotation omitted). In this case, it is not alleged
that deVegter deprived the public of honest governmental services. Rather, the indictment
alleges that he deprived Fulton County of honest commercial services by providing corrupted
financial advice. Thus, the § 1346 violation charged in this case concerns the defrauding of
honest services in the private sector.
4
The elements of a § 1343 wire fraud offense are that the defendant “(1) intentionally
participated in a scheme to defraud; and (2) used wire communications to further that scheme.”
United States v. Brown, 40 F.3d 1218, 1221 (11th Cir. 1994). In addition, the Supreme Court
recently held that “materiality of falsehood is an element of the federal mail fraud, wire fraud,
and bank fraud statutes.” Neder v. United States, ___ U.S ___, 119 S. Ct. 1827, 1841 (1999).
Finally, of course, the Government must identify of what the victim has been defrauded—for
example, money, property, or the § 1346 intangible right of honest services.
8
interest will support the conviction of a public official for depriving his or her
constituents of the official’s honest services because “[i]n a democracy, citizens
elect public officials to act for the common good. When official action is
corrupted by secret bribes or kickbacks, the essence of the political contract is
violated.” United States v. Jain, 93 F.3d 436, 442 (8th Cir. 1996). Illicit personal
gain by a government official deprives the public of its intangible right to the
honest services of the official.
On the other hand, such a strict duty of loyalty ordinarily is not part of
private sector relationships. Most private sector interactions do not involve duties
of, or rights to, the “honest services” of either party. Relationships may be
accompanied by obligations of good faith and fair dealing, even in arms-length
transactions. These and similar duties are quite unlike, however, the duty of
loyalty and fidelity to purpose required of public officials. For example,
“[e]mployee loyalty is not an end in itself, it is a means to obtain and preserve
pecuniary benefits for the employer. An employee’s undisclosed conflict of
interest does not by itself necessarily pose the threat of economic harm to the
employer.” United States v. Lemire, 720 F.2d 1327, 1336 (D.C. Cir. 1983). A
public official’s undisclosed conflict of interest, in contrast, does by itself harm the
constituents’ interest in the end for which the official serves—honest government
9
in the public’s best interest. The “intangible right of honest services” must be
given an analogous interpretation in the private sector. Therefore, for a private
sector defendant to have violated the victim’s right to honest services, it is not
enough to prove the defendant’s breach of loyalty alone. Rather, as is always true
in a breach of loyalty by a public official, the breach of loyalty by a private sector
defendant must in each case contravene—by inherently harming—the purpose of
the parties’ relationship.
Other Circuits have established a well-reasoned standard for determining
whether private sector misconduct rises to the level of violating the victim’s right
to “honest services” under § 1346. “The prosecution must prove that the employee
intended to breach a fiduciary duty, and that the employee foresaw or reasonably
should have foreseen that his employer might suffer an economic harm as a result
of the breach.” United States v. Frost, 125 F.3d 346, 368 (6th Cir. 1997) (citing
Lemire, 720 F.2d at 1337), cert. denied, 119 S. Ct. 40 (1998); see also United
States v. Pennington, 168 F.3d 1060, 1065 (8th Cir. 1999) (citing Jain, 93 F.3d at
441-42); United States v. Sun-Diamond Growers of Cal., 138 F.3d 961, 973-74
(D.C. Cir.), aff’d on other grounds, 526 U.S. 398 (1998); United States v.
Czubinski, 106 F.3d 1069, 1077 (1st Cir. 1997); cf. Ballard, 663 F.2d at 540 (“a
breach of fiduciary duty can constitute an illegal fraud under § 1341 only when
10
there is some detriment to the employer”). The nature and interpretation of the
duty owed is a question of federal law.5
The cases illuminate this standard for a defrauding of “honest services” in
the private sector. In Frost, university professors violated § 1346 by knowingly
accepting plagiarized dissertations from graduate students, defrauding the
university of their fiduciary duties as professors by awarding fraudulently earned
degrees and foreseeably harming the university’s reputation if the illegitimacy of
the degrees were exposed. See 125 F.3d at 366-68. Similarly, in Sun-Diamond
Growers, a partner in a public relations firm violated § 1346 by funneling illegal
campaign contributions to a candidate, for which it was reasonably foreseeable that
the firm would suffer a significant loss in its primary asset, its public reputation.
See 138 F.3d at 973-74. In Ballard, by comparison, an energy company hired a
consultant to obtain the best oil purchase contracts possible, including a right of
first refusal for the company. See 663 F.2d at 537-42. This Court concluded that
the consultant’s contract made him an agent of the company, so his undisclosed
5
See, e.g., Frost, 125 F.3d at 366 (“Federal law governs the existence of fiduciary duty
under the mail fraud statute.”); Lemire, 720 F.2d at 1335-36 (“The duty breached need not arise
from state or federal law; in particular, it may stem from an employment relationship of the sort
that imposes discretion and consequently obligations of loyalty and fidelity on the employee.”);
cf. Ballard, 663 F.2d at 541 (“the duty to disclose . . . may be imposed by state or federal statute
or may arise from the employment relationship itself”); cf. also McNally, 483 U.S. at 377 n.10
(Stevens, J., dissenting) (fraudulent scheme need not violate state law to support federal mail
fraud conviction).
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kickbacks from oil sellers violated his fiduciary duties to the energy company and
harmed the company because the nondisclosure was material to the relationship.
See id. at 540-44 & n.22 (holding, on honest services theory prior to enactment of
§ 1346, that conduct constituted violation of § 1341 mail fraud statute). Likewise,
in Pennington, a CEO violated § 1346 by breaching his fiduciary duty to obtain the
most advantageous contracts for the company in return for undisclosed kickbacks.
See 168 F.3d at 1065. In contrast, § 1346 liability was rejected in Jain because
although the defendant psychiatrist took unethical referral fees from drug
companies, the court concluded that he did not have the specific intent to defraud
his patients of his fiduciary duty and that the nondisclosure of the fees was not a
material harm to the patients because it did not affect the quality of their treatment.
See 93 F.3d at 441-42. Similarly, in Czubinski, the defendant browsed through his
employer’s confidential files without authorization, but the court concluded that
there was no intent to defraud the employer of the employee’s honest services
because the employee achieved no private gain from his action. See 106 F.3d at
1077. Thus, a private sector violation of § 1346 honest services fraud involves a
breach of a fiduciary duty and reasonably foreseeable economic harm.
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B. Sufficiency of the Allegations of the Indictment.
We next must determine whether the allegations of the indictment were
sufficient to survive the motion to dismiss in this private sector § 1346 honest
services case. We agree with the Government that the allegations of Fulton
County’s right to deVegter’s honest services were sufficient.6
The indictment does not allege in exact words that deVegter owed a
“fiduciary” duty to Fulton County. Linguistic precision is not required in an
indictment, however. Instead, an indictment may be short and simple—its
allegations are sufficient if they include all elements of the offense and briefly
describe the facts of the commission of the offense. See, e.g., United States v.
Adkinson, 135 F.3d 1363, 1375 n.37 (11th Cir. 1998) (“An indictment need do
little more than track the language of the statute charged to be sufficient.”); United
States v. Fern, 155 F.3d 1318, 1325 (11th Cir. 1998) (indictment sufficient if
factual allegations stated therein warrant inference that jury found probable cause
for all elements of offense).
6
There is no dispute that the indictment alleges the other elements of the offense. See
supra note 4. The indictment expressly alleges that Appellees had the specific intent to defraud
Fulton County and used the wires in executing the scheme. Although the indictment was issued
prior to the Supreme Court’s decision in Neder, we conclude that the same allegations that
support the sufficiency of the allegation of deVegter’s duty also sufficiently allege that the
nondisclosure of the bribe was material to Fulton County.
13
The allegations of the indictment implicitly allege that deVegter breached a
fiduciary duty owed to Fulton County. Fulton County retained Stephens to provide
“independent advice” about whom to hire as an underwriter, and Stephens
disclaimed any conflict of interest. “[A]s a financial advisor to Fulton County,”
deVegter “had a duty to act honestly and faithfully in all of his dealings with
Fulton County, and to transact business in the best interest of Fulton County.”
This duty included obligations “to make full and fair disclosure to Fulton County
of any personal interest or profit” and “not to disclose confidential information
received in his capacity as a financial advisor.” In addition, Fulton County:
relied upon [deVegter] to (a) participate in the formulation of a
“Request for Proposals” (the “RFP”) to send to prospective
underwriters, (b) independently review and evaluate underwriting
proposals submitted in response to the RFP, and (c) make an
independent recommendation to the Fulton County Board of
Commissioners regarding which investment firms should be [hired as
underwriters].
(emphasis added). In breach of these obligations, deVegter took a bribe from
Poirier to manipulate Stephens’ recommendation in favor of Lazard Freres,
improperly disclosed documents to Poirier, and failed to disclose the conflict of
interest to Fulton County.
Taken together, the allegations of the indictment sufficiently allege that
deVegter owed a fiduciary duty to Fulton County. We therefore need not decide
14
the question reached by the district court—whether a fiduciary duty is necessary in
private sector § 1346 cases.7 The allegations describe a relationship in which
Fulton County relinquished de facto control of the underwriter selection decision to
Stephens. Although the Board of Commissioners nominally retained the ultimate
decision, the reality was that Stephens—and, by extension, deVegter—maintained
a position of dominance, superiority, and influence over Fulton County. Just as the
contract and relationship in Ballard made the consultant an agent owing a fiduciary
duty of loyalty to the energy company that was violated by undisclosed kickbacks,
this indictment alleges that deVegter had a fiduciary relationship with Fulton
7
It is clear that a breach of a fiduciary duty, when accompanied by reasonably
foreseeable economic harm, is sufficient to state a private sector violation of § 1346. Most
private sector § 1346 honest services fraud cases decided in the other Circuits, see supra section
II.A., like this case, have involved breaches of fiduciary duties. But cf. United States v. Sancho,
157 F.3d 918, 921-22 (2d Cir. 1998) (relying on text of § 1346 to conclude that court need not
decide whether duty owed by private sector consultant was fiduciary because the court found “no
doubt” that duty “comes within the statute’s requirement of an ‘intangible right of honest
services’”), cert. denied, 119 S. Ct. 1076 (1999); Lemire, 720 F.2d at 1336-37 (discussing
importance of requirement of foreseeable economic harm caused by employee’s intent to defraud
employer without stating that employee owed fiduciary duty).
15
County because he was vested with a position of dominance, authority, trust, and
de facto control in recommending an underwriter.8
Finally, the indictment sufficiently alleges that reasonably foreseeable
economic harm to Fulton County was a consequence of Appellees’ fraudulent
scheme. As described above, the purpose of Fulton County’s employment of
deVegter was to obtain an independent recommendation about the best
underwriting proposals submitted. Corrupting the process by which this
recommendation was made poses a reasonably foreseeable risk of economic harm
to Fulton County because the best underwriter might not be recommended. The
indictment then further specifically alleges that deVegter “directed [another]
banker to change the rankings by elevating Lazard to first place.” By affirmatively
8
“At the heart of the fiduciary relationship lies reliance, and de facto control and
dominance. The relation exists when confidence is reposed on one side and there is resulting
superiority and influence on the other.” United States v. Chestman, 947 F.2d 551, 568 (2d Cir.
1991) (citations and quotations omitted). In reversing a conviction because of improper venue,
the Second Circuit criticized the indictment and noted that:
We think the elements of domination or control are of particular importance in a
case like this one [involving “nondisclosures to sophisticated corporations in
arms-length contractual insurance relationships”], where all parties to the various
contractual relationships were concededly sophisticated companies with
experience in the industry, and where the alleged victims had a variety of
practical and contractual rights to participate in or challenge defendants’
decisions.
United States v. Brennan, 183 F.3d 139, 150-51 (2d Cir. 1999). In this case, by contrast, the
element of de facto control by the defendant is present.
16
acting to recommend an inferior proposal over a superior one, deVegter inflicted
reasonably foreseeable economic harm on Fulton County.
The district court therefore erred when it concluded that the indictment’s
allegations regarding Fulton County’s right to deVegter’s private sector honest
services were insufficient to sustain the § 1346 charges. We reverse the district
court’s dismissal of those charges and remand for proceedings consistent with this
opinion.
III. CONCLUSION
For the foregoing reasons, the order of the district court dismissing the
§ 1346 counts of the indictment against Appellees is reversed, and the case
remanded for proceedings consistent with this opinion.
REVERSED AND REMANDED.
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