Saturday, December 1, 2012

Coplan #1 - Panel Questions Validity of Klein Conspiracy (12/1/12)

In Coplanhere and here, introduced in yesterday's blog (Major CA2 Decision on E&Y Tax Shelter Convictions (11/29/12), here), the Second Circuit panel's opening shot is to question validity of the defraud / Klein conspiracy.  (The Klein conspiracy is a defraud conspiracy in a tax setting.) The Klein conspiracy is common in federal tax crimes.  As it has been mused before, the first paragraph in the prosecutors' template indictment is a conspiracy count.  And, in tax crimes, the Klein conspiracy is the first count in many of the prosecutions.

The issue is the meaning of the word "defraud" in the conspiracy statute, 18 UCS 371(a), here.  The pertinent part of the provision is short, so I quote it, bolfacing the words that are important here:
If two or more persons conspire either to commit any offense against the United States, or to defraud the United States, or any agency thereof in any manner or for any purpose, and one or more of such persons do any act to effect the object of the conspiracy, each shall be fined under this title or imprisoned not more than five years, or both.
What does "defraud" mean?  The panel questions the conventional wisdom as to what that word means in the statute as enacted by Congress many years ago.

The essence of the panel's reasoning is that, when the defraud conspiracy was enacted (and even now where the term is used in other statutes and other contexts), "defraud" had and has a specific meaning, derived from long Anglo-American jurisprudence.  That meaning is to "to deprive another of property rights by dishonest means."  The general rule of statutory interpretation is that, when Congress incorporates a word of common understanding into a statute, it means that common understanding to govern interpretation unless it states otherwise.  For the "defraud" conspiracy, there is no indication that Congress used or intended the term defraud in any other sense.  Nevertheless, the Supreme Court expanded the definition of defraud and that expansion has been routinely followed since, including in the seminal case of United States v. Klein, 247 F.2d 908 (2d Cir. 1957), here.  As expanded in the tax context, it means (quoting the instruction actually given to the jury in Coplan, quoted in footnote 38 of the panel decision; it is a long instruction and repeats the key expansion of the word "defraud" at several points and in several ways)):
The term "conspiracy to defraud the United States" therefore means that the defendants and their alleged co-conspirators are accused of conspiring to impede, impair, obstruct or defeat, by fraudulent or dishonest means, the lawful functions of the IRS to ascertain taxes and to collect lawfully due and owing tax revenue.
A conspiracy to defraud the United States does not necessarily involve cheating the government out of money or property. The statute also includes conspiracies to interfere with or obstruct any lawful government function by fraud, deceit, or any dishonest means. I instruct you that the IRS is an agency of the United States government. The term "conspiracy to defraud the United States" therefore means that the defendants and their alleged co-conspirators are accused of conspiring to impede, impair, obstruct or defeat, by fraudulent or dishonest means, the lawful functions of the IRS to ascertain taxes and to collect lawfully due and owing tax revenue. 
Only conduct that both is intended to impede the lawful functions of a government agency and is fraudulent or dishonest will support a charge of conspiracy to defraud a government agency. A conspiracy to impede the functions of a government agency by fraudulent or dishonest means may include such things as altering documents after they have been demanded by the government agency, creating false documents, destroying records, making false statements, attempting to induce others to make false statements, or engaging in any other fraudulent or deceptive conduct that would have the effect of impairing the ability of the government agency to determine material aspects of a transaction. By giving you these examples, ladies and gentlemen, I do not mean to suggest that these are the only actions that could impede the IRS by fraudulent or dishonest means, nor am I expressing any view as to whether conduct similar to these examples actually took place here. That's for you to decide. 
Not all conduct that impedes the lawful functions of a government agency is illegal. To be unlawful, that conduct has to entail fraud, deceit, or other dishonest means. It is not illegal simply to make the IRS's job harder. Only an agreement to engage in conduct that tends to impede the IRS, and also involves fraudulent, deceitful or dishonest means, constitutes an illegal agreement to defraud the United States. 
It is not necessary that the government or the IRS actually suffer a financial loss from a scheme. A conspiracy to defraud exists when there is an agreement to impede, impair, obstruct, or defeat, in any fraudulent or dishonest manner, the lawful functions of the IRS. One cannot use deception or dishonest means to impede, impair, defeat, or obstruct the IRS, even to protect a legitimate tax position. 
Where, however, there is an agreement to impede, impair, obstruct, or defeat the lawful functions of the IRS by fraudulent, deceptive, or dishonest means, the first element is satisfied regardless of whether the means of doing so in that particular instance are or are not unlawful in and of themselves. 
That's the first object that's alleged here, defrauding the IRS and the United States.
 As that instruction is given, there is no requirement that the conspirators have attempted to defraud the Government of anything.  Simply throwing the proverbial monkey-wrench in the operation suffices.

That expansion which troubled the panel because it is broader than the normal meaning of the words Congress used in the statute and, so viewed, it could be viewed as judicial expansion of a statute which is prohibited judicial law making.

Nevertheless, being governed by precedent and stare decisis, the panel is unable to do anything other than accept the expanded definition.

This is  the first time I am aware of that a court has squarely recognized that problem and articulated a concern, even though all it could do no more.  The problem had been raised in  Abraham S. Goldstein, Conspiracy to Defraud the United States, 68 Yale L.J. 405 (1959), an article cited by the panel.  (I will have more about Professor Goldstein at the end of the blog.)  But courts accept the Supreme Court's pronouncements as blessing the expanded version and feel themselves bound by it, without the diversion of a possibility that it could be wrong.  Only the Supreme Court can address the issue.

This gets to an important point in our jurisprudence.  The application of the law -- the words Congress used in the statute -- is all about interpretation.  Notwithstanding Justice Scalito's rants, it is rare that words are used in a statute that leave no room for interpretation.  Sometimes that interpretation is less constrained by the words than other times.  Those familiar with Judeo-Christian Bible interpretation will know the genre well.  But, whereas in biblical interpretation, there is no definitive authority on interpretation, there is in our judicial system.  The words mean what the Supreme Court says they mean, even when the Supreme Court is wrong.  Words can come to mean things differently than they originally meant and, if the community subscribes to the reinterpretation, that is what the words now mean.  That process continuous in all  of life's contexts.  And that process is what happened in the Supreme Court with the defraud conspiracy.

I won't now go through the history of how that process found flower with the defraud conspiracy.  The panel does some of that in the opinion and cites the Goldstein article.  I do provide materials at the end of the blog that offer more learning on the issue.

If the point is a good one (I think it is), readers can be sure that the issue is going to resurface early and often.  As I said, the Klein conspiracy is common in tax prosecutions.   Many defendants have been convicted and many still are in prison for convictions submitted to the jury under the standard instruction with the expanded meaning.  Ultimately, only the Supreme Court can reverse.  And, cleaning up the mess of recognizing many years of misinterpretation will be difficult.

At this point, I will just leave readers to the Court's presentation in the opinion.  I will cut and paste the presentation (unfortunately I don't know how to double indent for quotations, so bear with me)j:
A. The Origins of the Klein Conspiracy 
Enacted in 1867, the original federal conspiracy statute was appended to "An Act to amend existing Laws relating to Internal Revenue and for other Purposes." (quoting Act of March 2, 1867, ch. 169, § 30, 14 Stat. 484). In the 1875 codification, the statute was moved from its place among the internal revenue measures and included among the general penal provisions. Id. at 418 n.36. In United States v. Hirsch, 100 U.S. 33 (1879), the Supreme Court held that the conspiracy provision was generally applicable to the whole body of federal law. In so holding, the Court described the prohibited fraud as "any fraud against [the United States]. It may be against the coin, or consist in cheating the government of its land or other property." Id. at 35. 
"It is a well-established rule of construction that where Congress uses terms that have accumulated settled meaning under . . . the common law, a court must infer, unless the statute otherwise dictates, that Congress means to incorporate the established meaning of these terms." Neder v. United States, 527 U.S. 1, 21 (1999) (internal quotation marks and alterations omitted) (omission in the original). At common law, the words "to defraud" meant to deprive another of property rights by dishonest means. n17 See Hammerschmidt v. United States, 265 U.S. 182, 188 (1924); Porcelli v. United States, 303 F.3d 452, 457 n.1 (2d Cir. 2002) (noting that the "familiar common law meaning" of the term '"fraud"' involved "using falsity to do the victim out of money or property interests"). Other federal criminal statutes are generally in accord. See, e.g., United States v. Pierce, 224 F.3d 158, 165 (2d Cir. 2000)  [*21] ("In the context of mail fraud and wire fraud, the words 'to defraud' commonly refer 'to wronging one in his property rights by dishonest methods or schemes' . . . ." (quotation marks omitted)). 
   n17 In the authoritative dictionary of the day, "defraud" was defined as "[t]o deprive of right by fraud, deception or artifice." The American Dictionary of the English Language 347 (1864). "Fraud" was defined as "[d]eception deliberately practiced with a view to gaining an unlawful or unfair advantage; artifice by which the right or interest of another is injured; injurious stratagem; deceit; trick." Id. at 541. The American Dictionary of the English Language, published by Noah Webster in 1864, is, of course, not to be confused with the American Heritage Dictionary of the English Language, published by Houghton Mifflin in 1969, or any modern dictionary bearing the surname of the great American lexicographer. 
Nonetheless, the word "defraud" in § 371 has been interpreted much more broadly. The current understanding of "conspiracy to defraud" liability may be traced to two seminal Supreme Court cases. In the first case, Haas v. Henkel, 216 U.S. 462 (1910), the defendants obtained advance information from a statistician employed by the Department of Agriculture in order to gain a speculating advantage in the grain futures market. The Court invoked an expansive reading of the word "defraud" to bring the defendants' conduct within the conspiracy statute. Specifically, the Court held that "it is not essential that such a conspiracy shall contemplate a financial loss or that one shall result. The statute is broad enough in its terms to include any conspiracy for the purpose of impairing, obstructing, or defeating the lawful function of any department of government." Id. at 479. 
Fourteen years later, in Hammerschmidt v. United States, 265 U.S. 182 (1924), the Court attempted to retrench from the expansive reading of § 371 in Haas. In the words of Professor (later, Dean) Abraham S. Goldstein of the Yale Law School, "[t]he expansive reading of the statute in Haas . . . finally led the Supreme Court to attempt a systematic examination of what the judiciary had wrought. Hammerschmidt v. United States furnished the occasion." Goldstein, 68 Yale L.J. at 429 (footnote omitted). The Hammerschmidt defendants were convicted of a conspiracy to defraud the United States by interfering with the World  [*23] War I military draft through the printing and circulation of handbills urging those subject to the draft not to obey it. The Supreme Court reversed the convictions under § 371, holding that "[t]o conspire to defraud the United States means primarily to cheat the government out of property or money, but it also means to interfere with or obstruct one of its lawful governmental functions by deceit, craft or trickery, or at least by means that are dishonest." Hammerschmidt, 265 U.S. at 188 (emphasis added). Because the defendants' "open defiance" of the Selective Service Act was devoid of deceit or other trickery, the Supreme Court held that their conduct did not fall within the scope of § 371. Id. at 189. 
The Klein conspiracy doctrine at issue here is the progeny of Haas and Hammerschmidt. fn18 In United States v. Klein, 247 F.2d 908, 916 (2d Cir. 1957), the defendants were charged with tax evasion and a "defraud conspiracy" in connection with their whiskey selling business. Id. at 915-16. The district court entered judgments of acquittal on the substantive counts, and the jury convicted on the remaining § 371 conspiracy count. On appeal, we found sufficient evidence to support the § 371 conspiracy conviction based on twenty "acts of concealment of income," including false statements on tax returns and in interrogatory responses. Id. at 915. Relying on Hammerschmidt, we held that 
[m]ere failure to disclose income would not be sufficient to show the crime charged of defrauding the United States under 18 U.S.C. § 371. The statute, however, not only includes the cheating of the government out of property or money, but "also means to interfere with or obstruct one of its lawful governmental functions by deceit, craft or trickery, or at least by means that are dishonest." 
Id. at 916 (quoting Hammerschmidt, 265 U.S. at 188). Thus, in order to prove a Klein conspiracy, the Government must show "(1) that [the] defendant entered into an agreement (2) to obstruct a lawful function of the Government (3) by deceitful or dishonest means and (4) at least one overt act in furtherance of the conspiracy." United States v. Ballistrea, 101 F.3d 827, 832 (2d Cir. 1996) (alteration omitted). 
   n18 Indeed, the appellation "Klein conspiracy" is in some sense a misnomer, since the primary holding of Klein is a quotation from Hammerschmidt.
B. The Challenge to Klein 
The defendants argue vigorously on appeal that the Klein conspiracy theory is textually unfounded. The Government's stare decisis defense of the Klein doctrine lends support to this view, as it rests entirely on the construction of § 371 in Hammerschmidt. There is nothing in the Government's brief recognizable as statutory interpretation — no discussion of plain meaning, legislative history, or interpretive canons. Indeed, in all 325 pages of its brief, the Government does not even quote the text of § 371. The Government thus appears implicitly to concede that the Klein conspiracy is a common law crime, created by the courts rather than by Congress. That fact alone warrants considerable judicial skepticism. See United States v. Lanier, 520 U.S. 259, 267 n.6 (1997) ("Federal crimes are defined by Congress, not the courts . . . ."); see also Rogers v. Tennessee, 532 U.S. 451, 476 (2001) (Scalia, J., dissenting) ("[T]he notion of a common-law crime is utterly anathema today . . . ."). 
To justify an expansive reading of § 371, courts have occasionally implied that a conspiracy to defraud the Government is to be read more broadly than a conspiracy to defraud a private person. See Goldstein, 68 Yale L.J. at 424. Dicta in McNally v. United States, 483 U.S. 350 (1987),  for example, accepted such a distinction. Quoting a decision of the Court of Appeals for the First Circuit, the Supreme Court stated that "'[a] statute which . . . has for its object the protection of the individual property rights of the members of the civic body, is one thing; a statute which has for its object the protection and welfare of the government alone, which exists for the purpose of administering itself in the interests of the public, [is] quite another.'" Id. at 359 n.8 (quoting Curley v. United States, 130 F. 1, 7 (1st Cir. 1904) (alterations in original)). But this conclusion appears to rest on a policy judgment—that, in the nature of things, government interests justify broader protection that the interests of private parties—rather than on any principle of statutory interpretation. 
Notwithstanding these infirmities in the history and deployment of the statute, it is now well established that § 371 "is not confined to fraud as that term has been defined in the common law," but reaches "'any conspiracy for the purpose of impairing, obstructing or defeating the lawful function of any department of Government.'" Dennis v. United States, 384 U.S. 855, 861 (1966) (quoting Haas, 216 U.S. at 479). Indeed, Coplan (whose counsel "takes the laboring oar" on the Klein conspiracy issue) "readily concedes that, were the weight of this Circuit's case law outcome-determinative in this matter, his challenge to the government's Klein theory would fail." Coplan Reply 3. 
Although the defendants argue forcefully on appeal that we should follow the example of Skilling v. United States, 130 S. Ct. 2896, 2928 (2010), and "pare" the body of § 371 precedent "down to its core," id., such arguments are properly directed to a higher authority. As an intermediate appellate court, we are bound to follow the dictates of Supreme Court precedents, no matter how persuasive we find the arguments for breaking loose from the moorings of established judicial norms by "paring" a statute. 
In sum, because the Klein doctrine derives from and falls within the scope of the law of the Circuit (itself grounded on long-lived Supreme Court decisions), we reject the defendants' challenge to the validity of that theory of criminal liability.

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The above offer my principal comments on this aspect of the Coplan decision.  In the balance of the blog, I will offer links to further reading materials on the issue.  For a related discussion of the defraud / Klein conspiracy in the instructions in CoplanCoplan #4 - Court Approves Defraud / Klein Instruction -- Making the IRS Job Harder May Be Enough (Federal Tax Crimes Blog 12/4/12), here.

The seminal and perhaps the definitive discussion, is Abraham S. Goldstein, Conspiracy to Defraud the United States, 68 Yale L.J. 405 (1959), cited by the panel.  (Goldstein's Wikipedia entry is here.)  The article is  required reading for those interested in the subject of the defraud / Klein conspiracy.  For more on Professor Goldstein, see Dan M. Kahan, Befriended by Abe Goldstein, 115 Yale L J 501 (2005), here, where Professor Kahan says in part (footnotes omitted, my bold-facing):

Nor does any student of mine escape without learning the fundamental  lesson of Abe’s  Conspiracy To Defraud the United States. Easily the most  important article ever written on conspiracy,  Conspiracy To Defraud, like Insanity Defense, dashes a formalist conceit—namely “the old saws that federal  crime is closely defined by the legislature and that there are no judge-made  common law offenses against the United States.” Carefully charting its origins and historical function, Abe shows that the federal conspiracy statute, because of its generative incompleteness, effectively licensed the “retroactive creation of crime by the judiciary to meet the needs of a society in transition, by expanding old categories and creating new ones.” 
Again, Abe’s analysis transformed me. Not only did he puncture a dogma that I had never been taught to recognize  as  such;  he  also  cured  me  of  the reflexive instinct to lament in pious and trite terms supposed judicial and legislative derogations of the legality principle. Abe wasn’t sanguine about the function of the conspiracy and other vague criminal statutes in creating a de facto common law of crimes; rather he was realistic about it, recognizing its inevitability, and also noting its potential for both ill and good. The lesson for me (and for others) is that the formation of criminal law is a dynamic and shared one for courts and legislatures (and for juries and prosecutors, too, for that matter, as Abe also noted), and that rather than alternately ignore or decry this reality we should dedicate ourselves to perfecting it, so that it serves our ends rather than undermines them. I don’t think I would have pieced this together without Abe; and I know if I hadn’t, my scholarly engagement with the field of criminal law would have been severely stunted.  
It is a theme of the literary study of the classics that the great epic poets, in the guise of immortalizing the heroes  whose actions they chronicled, were actually motivated to immortalize themselves through the creation of lasting and celebrated works. This ambition to live forever through the influence of one’s ideas is sometimes offered as an  explanation for the heroic labors of scholars.  
Yet this account clearly doesn’t explain Abe. I have seen plenty of academic glory seekers. Abe wasn’t one. He was as modest as he was brilliant. Although he ended up achieving a fair measure of it, the idea of acquiring fame—much less immortal fame—I’m sure never occurred to him as he wrote The Insanity Defense, Conspiracy To Defraud the United States, and other works.

See also Kate Stith, Abraham Goldstein's Contributions to Criminal Law Scholarship (Yale Law School Faculty Scholarship Series 1/1/2005), here.  I should also note that the author of the panel opinion, Judge Cabranes (Wkipedia entry here), is a former Yale Law professor.

I have also written article on the surprising and disturbing potential sweep of the defraud conspiracy, echoing some of the concerns about it.  John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough, 9 Hous. Bus. & Tax. L.J. 255 (2009), here.  In that article, I note the Supreme Court's expansion of the definition of word defraud in the conspiracy statute.  My heading for the most relevant section of the article (at pp.   ) is:  "1. It Depends on What the Meaning of Defraud Is," and note in the footnote:  "308 I do not necessarily intend to allude to the classic Clinton quote: "it depends on what the meaning of the word 'is' is." It seems to me that the same genre of word game goes on in parting from the common meaning of the word "defraud" in the conspiracy statute as Clinton unpersuasively attempted for the word "is" in the context of sex."

Also worthwhile reading on the issue of the scope of the expanded definition is Judge Kozinski's opinion in United States v. Caldwell, 989 F.2d 1056, 1058 (9th Cir. 1993) where he starts with:
 “We consider whether conspiring to make the government’s job harder is, without more, a federal crime.” 
Finally, oi footnote 18 quoted above, I have always conceptualized the Klein conspiracy as the tax crimes iteration of the general defraud conspiracy which is what, in my conception, could perhaps be called the Hammerschmidt conspiracy.

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