Saturday, May 28, 2016

The Defraud Conspiracy and It's Expansion; The First Circuit Speaks (5/28/16)

I have blogged before about the scope of the defraud conspiracy in 18 USC § 371, here, which, principally in a tax setting is referred to as a Klein conspiracy after United States v. Klein, 247 F.2d 908 (2d Cir. 1957), a tax case that over time has been very prominent in tax crimes prosecutions.  The other conspiracy in §371 is the offense conspiracy.  The offense conspiracy is a conspiracy to commit an offense defined in another criminal statute.  The offense itself must pass constitutional muster.  Assuming that it does, the conspiracy crime to commit the offense will almost assuredly pass muster. The defraud conspiracy, however, is loosey-goosey.  (That's a term of art that I use in this context, but I think it is descriptive for the defraud conspiracy.  The statutory text is:  "to defraud the United States, or any agency thereof in any manner or for any purpose."  As interpreted, however, it is variously formulated but a standard formulation is that it is a conspiracy to impair or impede the lawful function of a Government agency.  You will notice something curious about that formulation, for, although the statute textually requires a conspiracy to "defraud," that standard formulation says nothing about fraud or defraud.  Fraud or defraud normally requires unlawfully taking something of value (property, including money).  Generally, where fraud or defraud is a textual element of a federal criminal statute, that taking or intended taking of something of value is required.  See United States v. Coplan, 703 F.3d 46, 61-62 (2d Cir. 2012).  If a person behaves badly but does not take or intend to take something of value, the crime is not fraud or defraud (at least outside the defraud conspiracy statute).  But, that is not true in the defraud conspiracy, at least as interpreted.  (Like the Bible and Constitutional interpretation, it is all about interpretation; it does not really matter what the words mean or would have meant to the drafter or, in this case, the legislature; it is how the words are interpreted and that can be something else indeed.)

The Supreme Court has pronounced that the interpretation of the defraud element in the defraud conspiracy merely means a conspiracy to impair or impeded the lawful function of the IRS.  I have noted before that this Supreme Court expansion of the meaning of the textual element of defraud has been subject to question.  United States v. Coplan, 703 F.3d 46 (2d Cir. 2012), here, cert. denied 134 S.Ct. 71 (2013); See Coplan #1 - Panel Questions Validity of Klein Conspiracy (Federal Tax Crimes Blog 12/1/12), here.  Basically, the Second Circuit panel majority opinion questioned the Supreme Court's prior interpretations culminating in Hammerschmidt v. United States, 265 U.S. 182 (1924) that expanded the scope of the defraud conspiracy beyond the usual meaning of the word fraud or defraud.  The Second Circuit panel stated that, in view of the Supreme Court's holding in Hammerschmidt and its own holding in Klein, it could do no more than express the concern that the Supreme Court's interpretation went beyond the text of the statute.

In United States v. Morosco, ___ F.3d ___, 2016 U.S. App. LEXIS 8753 (1st Cir. 2016),  here, the First Circuit was asked to consider this issue and applied the Hammerschmidt interpretation in a case not involving tax or the IRS.  The Court did address several of the issues that swirl around that Hammerschmidt interpretation, so I offer here the portions of the opinion.  The background is that the defendants were convicted of the defraud conspiracy related to HUD property inspections.  I cut and paste the key portions of the opinion (all footnotes except one (because it is important) omitted):
Void-for-Vagueness Claim 
Fitzpatrick and Morosco complain that section 371's defraud clause — criminalizing any conspiracy "to defraud the United States, or any agency thereof in any manner or for any purpose" — is unconstitutionally vague as applied to them. For those not in the know, a law is unconstitutionally vague if it fails to give ordinary people fair notice of what is forbidden, or if it fails to give the designated enforcers (police, prosecutors, judges, and juries) explicit standards (thus creating a risk of arbitrary enforcement). See Welch v. United States, 136 S. Ct. 1257, 2016 WL 1551144, at *3 (2016). Of course the requisite fair warning can come from judicial decisions construing the law. See, e.g., United States v. Lanier, 520 U.S. 259, 266, 117 S. Ct. 1219, 137 L. Ed. 2d 432 (1997). And judges have no business junking a statute simply because we could have written it "with greater precision." Rose v. Locke, 423 U.S. 48, 49, 96 S. Ct. 243, 46 L. Ed. 2d 185 (1975). 
Helpfully, both sides agree — rightly — that Fitzpatrick and Morosco preserved their vagueness claim below (via a motion to dismiss the indictment) and that our review is de novo. See, e.g., United States v. Hussein, 351 F.3d 9, 14 (1st Cir. 2003). Also helpfully, both sides concede that binding precedent squarely forecloses this claim.1Link to the text of the note And we second that assessment. 
Start with Fitzpatrick's and Morosco's most loudly trumpeted point. As they tell it, section 371's "defraud" clause only bans conspiracies to deprive the government of property and money by dishonest schemes, a reading (they add) that jibes with the common-law understanding of "defraud." And such a reading would help them (they continue) because they never scammed the government out of property or money. Unhappily for them, years' worth of Supreme Court precedent holds that section 371 "is not confined to fraud as that term has been defined in the common law," see Dennis v. United States, 384 U.S. 855, 861, 86 S. Ct. 1840, 16 L. Ed. 2d 973 (1966); that defrauding the government under section 371 means obstructing the operation of any government agency by any "deceit, craft or trickery, or at least by means that are dishonest," see Hammerschmidt v. United States, 265 U.S. 182, 188, 44 S. Ct. 511, 68 L. Ed. 968 (1924); and that the conspiracies need not aim to deprive the government of property or money, see id., because the act is written "broad enough . . . to include any conspiracy for the purpose of impairing, obstructing, or defeating the lawful function of any" government "department," see Haas v. Henkel, 216 U.S. 462, 479, 30 S. Ct. 249, 54 L. Ed. 569 (1910). Ever faithful to high-Court holding, our caselaw rejects the idea that section 371 only bars conspiracies to defraud the government out of property or money. See United States v. Barker Steel Co., 985 F.2d 1123, 1136 (1st Cir. 1993) (relying on Supreme-Court cases interpreting section 371 and its basically "similar predecessors"); Curley v. United States, 130 F. 1, 6-10 (1st Cir. 1904) (explaining that "defraud" in section 371's forerunner has a broader meaning than the common-law definition — and justifiably so because the statute's aim is to protect the government, and deceit can impair the workings of government even if the conspiracy does not take the government's property or money). Obviously then, this facet of Fitzpatrick's and Morosco's vagueness thesis goes nowhere.
Undaunted, Fitzpatrick and Morosco also suggest that because no statute or regulation criminalizes receiving a list of sample units before any HUD inspection, the government could not prosecute them under section 371. But our cases take all the wind out of their sails, holding as they do "that lawful activity may furnish the basis for a" section-371 conspiracy conviction. See United States v. Hurley, 957 F.2d 1, 4 (1st Cir. 1992) (finding unconvincing "defendants' asserted lack of 'fair warning' that their 'legal' conduct could be the basis for a criminal prosecution," noting that "[t]he statutory prohibition against defrauding the government adequately put defendants on notice that a scheme designed to frustrate tax collection was prohibited"); accord Barker Steel Co., 985 F.2d at 1131 (emphasizing that section 371 bans both "(1) conspiracies to commit a specific offense against the United States, included elsewhere in the criminal code, and (2) conspiracies to defraud the United States," and rejecting defendants' argument "that if no other federal law or regulation proscribes alleged conduct, then [they] cannot be held criminally responsible pursuant to § 371" — "[i]f the second clause were interpreted to require commission of a specific offense, it would have the same meaning as the first clause thus rendering the second clause redundant"); United States v. Tarvers, 833 F.2d 1068, 1075 (1st Cir. 1987) (stressing that section 371 "does not require that the means used to achieve the unlawful goal of the conspiracy be unlawful"). So this aspect of Fitzpatrick's and Morosco's vagueness theory also goes nowhere. 
In what is basically a Hail Mary pass, Morosco argues that two fairly recent cases signal a new willingness on the high Court's part to entertain vagueness challenges — a willingness (the argument goes) that we must emulate. The two cases are (1) Skilling v. United States, 561 U.S. 358, 130 S. Ct. 2896, 177 L. Ed. 2d 619 (2010), limiting "honest services" fraud so that it only applies to defendants involved in either bribery or kickback schemes, and (2) Johnson v. United States, 135 S. Ct. 2551, 192 L. Ed. 2d 569 (2015), declaring the Armed Career Criminal Act's residual clause — a provision dealing with crimes that "involve[] conduct that presents a serious potential risk of physical injury" — too vague to be enforced. His pass falls incomplete, however, and for a simple reason. Neither Skilling nor Johnson overruled the Haas/Hammerschmidt line of section-371 cases. And because overruling Supreme Court precedent is the Court's job, not ours, we must follow Haas/Hammerschmidt, etc. until the Court specifically tells us not to — something that is true even if these long-on-the-books cases are in tension with Skilling and Johnson (and we do not suggest that they are). See Hohn v. United States, 524 U.S. 236, 252-53, 118 S. Ct. 1969, 141 L. Ed. 2d 242 (1998) (declaring that Supreme Court "decisions remain binding precedent until [the Court] see[s] fit to reconsider them, regardless of whether subsequent cases have raised doubts about their continuing vitality"); Rodriguez de Quijas v. Shearson/Am. Express, Inc., 490 U.S. 477, 484, 109 S. Ct. 1917, 104 L. Ed. 2d 526 (1989) (instructing that "[i]f a precedent of this Court has direct application in a case, yet appears to rest on reasons rejected in some other line of decisions, the Court of Appeals should follow the case which directly controls, leaving to this Court the prerogative of overruling its own decisions"); see also United States v. Coplan, 703 F.3d 46, 61-62 (2d Cir. 2012) (rejecting the idea that a circuit court should use Skilling to rework controlling section-371 precedent, noting that lower courts should leave any reworking to the Supreme Court); Spector Motor Serv. v. Walsh, 139 F.2d 809, 823 (2d Cir. 1943) (L. Hand, J., dissenting) (cautioning lower courts against "embrac[ing] the exhilarating opportunity of anticipating" the overruling of a Supreme Court decision), vacated sub nom. Spector Motor Serv. v. McLaughlin, 323 U.S. 101, 65 S. Ct. 152, 89 L. Ed. 101 (1944). 
With the vagueness issue out of the way, we press on. 
* * * * 
Mens-Rea Claim 
At oral argument before us, Morosco (through his lawyer) conceded that while what he did (giving CHA the list of to-be-inspected units before the inspection) "does not appear to be innocent," he "did not see it as criminal." That tees up his mens-rea argument, which is sort of a corollary to his void-for-vagueness claim: Morosco contends that section 371's defraud clause — which, to repeat, outlaws conspiracies "to defraud the United States, or any agency thereof in any manner or for any purpose" — lacks a mens-rea requirement. And, he intimates, to cure this problem, the judge should have told jurors (but did not) that they could only convict if they found that he knew his actions constituted a crime — an instruction, he says, that would have resulted in his acquittal, because, as he knew, no HUD regulation criminalized giving housing-authority officials a list of to-be-inspected units before the inspections. Color us unconvinced. 
Mens rea (for the uninitiated) is the mental state — "knowingly" or "willfully," for example — required to convict. The idea behind the mens-rea requirement "is that a defendant must be 'blameworthy in mind' before he can be found guilty" — an idea that "is 'as universal and persistent in mature systems of law as belief in freedom of the human will and a consequent ability and duty of the normal individual to choose between good and evil.'" See Elonis v. United States, 135 S. Ct. 2001, 2009, 192 L. Ed. 2d 1 (2015) (quoting Morissette v. United States, 342 U.S. 246, 250, 252, 72 S. Ct. 240, 96 L. Ed. 288 (1952)). So important is this concept that we will usually read criminal statutes as implicitly requiring proof of mens rea even when they do not have a mens-rea component explicitly written into them, id. — though in doing so we read into them "only that mens rea which is necessary to separate wrongful conduct from 'otherwise innocent conduct,'" id. at 2010 (quoting Carter v. United States, 530 U.S. 255, 269, 120 S. Ct. 2159, 147 L. Ed. 2d 203 (2000)). 
But "[t]his is not to say that a defendant must know that his conduct is illegal before he may be found guilty." Id. Far from it. Instead, he "generally must 'know the facts that make his conduct fit the definition of the offense.'" Id. (quoting Staples v. United States, 511 U.S. 600, 608 n.3, 114 S. Ct. 1793, 128 L. Ed. 2d 608 (1994)). We say "generally," however, because in certain situations — like where a statute presents a danger of criminalizing apparently innocent acts — we sometimes require proof that the defendant knew his conduct infracted a specific law. See, e.g., Cheek v. United States, 498 U.S. 192, 200-01, 111 S. Ct. 604, 112 L. Ed. 2d 617 (1991). 
Back to our case. Essentially parroting a pattern-jury instruction, the parties — Morosco included — asked the judge to tell the jury that a section-371 conviction requires proof that the defendant acted "willfully," i.e., with "bad purpose, either to disobey or to disregard the law." See Nancy Torresen, 2015 Revisions to Pattern Criminal Jury Instructions for the District Courts of the First Circuit 119 (2015), available at (instruction 4.18.371(3)); see generally United States v. Charlton, 502 F.3d 1, 3 n.2 (1st Cir. 2007) (noting that the pattern instructions, though often helpful, "have not been officially adopted by th[is] court"). And the judge agreed to do just that. First, though, he told the jurors that section 371 reaches conspiracies to defraud that "have been agreed upon willfully to impair, impede or defeat the proper operation of the federal government by . . . deceit, craft, trickery, or dishonest means." He also told them that the government had to prove "two types of intent": an intent to "willfully and knowingly join[] the conspiracy" and "an intent to violate, whether reasonable or not, . . . the underlying" section-371 offense. As for what "willfully" means, the judge said that
[t]o act willfully . . . means to act voluntarily and intelligently and with the specific intent that the underlying crime, that is, interfering with the proper operation of the [HUD] program, . . . be committed. That is, when we talk about acting "willfully," we talk about acting with bad purpose either to disobey or disregard the law, and not to act simply because of ignorance, or accident, or mistake. 
Defending the judge's charge, the government (to quote its brief) says that section 371 neither explicitly nor implicitly "require[s] 'willful' action" — a "knowing[]" mens rea suffices — so, the government asserts, the instruction here actually required prosecutors to prove "a level of mens rea" higher than what the statute demands. n6 Interesting as the government's thought may be, the only mens-rea issue relevant here is the one Morosco raises: i.e., his claim that the judge should have said more than he did, instructing them that to convict they had to find that he knew his actions were not just improper (he basically concedes that they were) but were "criminal." The problem for Morosco is that he never asked for such an instruction, meaning we review only for plain error — a hard-to-meet standard that requires a person in his shoes to show "error, plainness, prejudice to [him] and the threat of a miscarriage of justice." See United States v. Torres—Rosario, 658 F.3d 110, 116 (1st Cir. 2011); see also United States v. Frady, 456 U.S. 152, 163, 102 S. Ct. 1584, 71 L. Ed. 2d 816 (1982) (noting that plain error means an error so obvious that a judge is "derelict in countenancing it, even absent the defendant's timely assistance in detecting it"). But Morosco cites no authority — and we know of none — saying that the mens rea for a case like his is that the defendant knew his conduct constituted a crime. So the situation here is not within a country mile of plain error — i.e., an "'indisputable'" error by the judge, "given controlling precedent." See Correa-Osorio, 784 F.3d at 22 (quoting United States v. Jones, 748 F.3d 64, 70 (1st Cir. 2014), which in turn cited United States v. Marcus, 560 U.S. 258, 262, 130 S. Ct. 2159, 176 L. Ed. 2d 1012 (2010)).
   n6 For support, the government cites out-of-circuit cases holding that a section-371 prosecution does not require "willful" intent, see United States v. Khalife, 106 F.3d 1300, 1303 (6th Cir. 1997); United States v. Cyprian, 23 F.3d 1189, 1201-02 (7th Cir. 1994); United States v. Derezinski, 945 F.2d 1006, 1012 (8th Cir. 1991) — though the government acknowledges, at least implicitly, that the judge's "[t]o act willfully" instruction essentially tracks the one we approved in another conspiracy-to-defraud case involving section 371. See United States v. Monteiro, 871 F.2d 204, 208 (1st Cir. 1989). 
We are not done with "willfully," however. 
Supplemental-Instruction Claim 
After deliberating for about two hours, the jury sent the judge a note saying, "Can we have an expanded definition of what constitutes 'willfulness' in regards to this charge?" Admitting that he was "not exactly sure what 'expanded'" meant, the judge talked with the parties' attorneys and proposed "simply repeat[ing] what I said before here, to which no objection was made . . . ." Because the jury had sought an "expanded definition," lawyers for Fitzpatrick and Morosco asked the judge to say more. Fitzpatrick's attorney offered some language. n7 But the judge declined to take counsel's suggestion, concluding that the recommendation did not add usefully to what he proposed to say. Fitzpatrick's lawyer then asked the judge to caution the jurors that they should not regard the supplemental instruction "as a substitute for the earlier instruction . . . ." Calling counsel's request "silly" — because, the judge said, the earlier instruction and the supplemental instruction were "the same thing" — the judge then gave the jury a written supplemental instruction, which read (cross-outs omitted):
   n7 Here is what Fitzpatrick's lawyer proposed:
An act or failure to act is, quote, willful, unquote, if done voluntarily and intentionally, and with the specific intent to do something the law forbids, or with specific intent to fail to do something the law required to be done; that is to say, with bad purpose either to disobey or to disregard the law. The burden to prove intent, as well as all other elements of the crime, rests with the government.  
  To act "willfully" means to act voluntarily and intelligently and with specific intent that the underlying crime — conspiracy to impair, impede and defeat the proper operation of the physical condition assessment of federally-funded housing units of the Chelsea Housing Authority by the United States Department of Housing and Urban Development's Real Estate Assessment Center ("REAC") — be committed, that is to say with bad purpose, either to disobey or to disregard the law and not because of ignorance, accident or mistake.
The jury returned guilty verdicts roughly an hour later. 
Fitzpatrick thinks that the judge's actions here constituted an abuse of discretion, the standard (the parties agree) that governs our oversight of preserved claims, see United States v. Rivera-Hernández, 497 F.3d 71, 83 (1st Cir. 2007), with unpreserved claims getting plain-error review. Ultimately, though, we see no reason to reverse. 
Fitzpatrick's lead argument is that the judge should have given an "expanded" definition of "willfully" since that is what the jury asked for. But he does not tell us what the judge should have said differently in defining that term — e.g., he does not argue that the judge should have given the supplemental instruction that counsel suggested. And given this situation, we can hardly say that his argument adds up to an abuse of discretion. Cf. generally Lussier v. Runyon, 50 F.3d 1103, 1111 (1st Cir. 1995) (saying that, "[i]n general, the abuse of discretion framework is not appellant-friendly"); Dopp v. Pritzker, 38 F.3d 1239, 1253 (1st Cir. 1994) (emphasizing that that most "appellants who consider themselves aggrieved by discretionary decisions of the district court . . . are destined to leave this court empty-handed"). 
Conceding that the judge "did not wrongly define 'willfully'" in the original charge, Fitzpatrick next blasts the judge for (supposedly) "omitt[ing] the thrust of the defense," first by not reminding the jury that conviction required "dual intent" — i.e., proof that he had "knowingly and willfully joined the conspiracy," plus had "the specific intent to commit the underlying crime"; and then by "omitting the earlier emphasis" that "'mere presence'" at the scene of a crime does not implicate the bystander in that offense (the judge had given a "mere presence" charge in his original instructions). Fitzpatrick preserved neither claim, however. And he makes no attempt to explain how he satisfies the requisites of plain error. We are under no obligation to do his work for him. See, e.g., United States v. Etienne, 772 F.3d 907, 918 n.7 (1st Cir. 2014); United States v. Calderón-Pacheco, 564 F.3d 55, 58 (1st Cir. 2009); accord Citizens Awareness Network, Inc. v. United States, 391 F.3d 338, 354 (1st Cir. 2004). 
Lastly, Fitzpatrick argues that the judge should have warned the jury that the supplemental instruction was not a substitute for the original instruction. Perhaps such an instruction might be called for when a judge "amplifie[s] or explain[s]" the original instruction. See United States v. Parent, 954 F.2d 23, 27 (1st Cir. 1992) (quoting Beardshall v. Minuteman Press Int'l, Inc., 664 F.2d 23, 29 (3d Cir. 1981)). But even Fitzpatrick admits that the judge's supplemental instruction essentially mimicked the original, unobjected-to "willfully" charge. And he cites no case — or any persuasive reason — requiring that a judge must give the pined-for warning in a situation like ours. 
What this all means is that Fitzpatrick's supplemental-instruction claim has no legs. But there is still work for us to do.
JAT Comment:  I don't know that this necessarily adds anything new, but it certainly presents the discussion in a different context.  But, even though the First Circuit does not plumb the depth that the Second Circuit did in Coplan, it says enough to say that the Hammerschmidt interpretation is loosey-goosey indeed.  I have raised related concerns about the defraud conspiracy, both whether the Hammerschmidt expansion is appropriate à la Coplan and whether the mens rea standard for conviction is parallel and the same as the Cheek definition of willfully.  At least in my mind, the First Circuit struggled to affirm by rejecting arguments that it should have thought more about; even if it affirmed as it probably felt constrained to do by Hammerschmidt, it could have gone farther with the permutations with respect to willfully and related issues.  (And, this is just me, I thought the drafter of the opinion was too cute in the way he wrote it.)

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