Thursday, May 7, 2020

Supreme Court Reverses Bridgegate Convictions, Holding that Fraud Means Fraud; Implications for Defraud/Klein Conspiracy? (5/7/20)

In Kelly v. United States, 590 U.S. ___, ___ S.Ct. ___ (5/7/20), here, the court reversed the infamous Bridgegate convictions for “wire fraud, fraud on a federally funded program or entity (the Port Authority), and conspiracy to commit each of those crimes.”  The Court held that “Because the scheme here did not aim to obtain money or property, Baroni and Kelly could not have violated the federal-program fraud or wire fraud laws.” (From the Syllabus.)

This is perhaps not a remarkable holding (although I do remark below).  It was unanimous.  Moreover, federal crimes where fraud is an element of the crime have typically required an object to obtain money or property.  So, I think the holding is consistent with that line of cases, and the unanimous Court in Kelly so holds.

But, as I have noted elsewhere fraud or its parallel defraud in the federal criminal statutes, while normally requiring an object to obtain money or property, does not, as interpreted, so require for the defraud conspiracy, 18 U.S.C. § 371.  See John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough, 9 Hous. Bus. & Tax. L.J. 255 (2009), here.  Readers of this blog will know that § 371 defines two crimes – an object conspiracy and a defraud conspiracy.  The object conspiracy requires that the object of the conspiracy be the commission of a crime otherwise described in the law.  (The conspiracies charged in Kelly were object conspiracies, see Slip Op. 7 n. 1 and the case below styled United States v. Baroni, 909 F.3d 550, 556 (3rd Cir. 2018).)  Thus, for example, an object to commit tax evasion is an object conspiracy.

The defraud conspiracy, as interpreted, is more amorphous. The text of of § 371 for the defraud conspiracy is: “If two or more persons conspire * * * 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 * * *.”  Defraud normally is a verb form for fraud (a noun), particularly with respect to the focus to obtain money or property.  For example, the Merriam Webster online dictionary, here, defines “defraud” as (with examples):
transitive verb
: to deprive of something by deception or fraud
// trying to defraud the public
// Investors in the scheme were defrauded of their life savings.
And the synonyms are:
beat, bilk, bleed, cheat, chisel, chouse, con, cozen, diddle, do, do in, euchre, fiddle, fleece, flimflam, gaff, gyp, hose [slang], hustle, mulct, nobble [British slang], pluck, ream, rip off, rook, screw, shake down, short, shortchange, skin, skunk, squeeze, stick, stiff, sting, sucker, swindle, thimblerig, victimize
And the relevant definition of fraud (a noun), here, is:
specifically : intentional perversion of truth in order to induce another to part with something of value or to surrender a legal right
// was accused of credit card fraud
b: an act of deceiving or misrepresenting : TRICK
// automobile insurance frauds
Fraud and defraud thus have similar connotations with respect to the issue addressed in Kelly–an object to obtain money or property.

But, as the Supreme Court long ago recognized, although that is the usual meaning of fraud in the federal criminal code, the defraud conspiracy does not require the object to take money or property.   In Hammerschmidt v. United States, 265 U.S. 182, 187-188 (1924), the Court said
It is obvious that the writer of the [Haas] opinion and the Court were not considering whether deceit or trickery was essential to satisfy the defrauding required under the statute. The facts in the case were such that that question was not presented. The deceit of the public, the trickery in the advance publication secured by bribery of an official, and the falsification of the reports, made the fraud and deceit so clear as the gist of the offenses actually charged that their presence was not in dispute. The sole question was whether the fraud there practiced must have inflicted upon the Government pecuniary loss, or whether its purpose and effect to defeat a lawful function of the Government and injure others thereby was enough. That was all that Mr. Justice Lurton's words can be construed to mean. The cases in which this case has been referred to involved unquestioned deceit or false pretense, and it was only cited in them to the point that financial loss of the Government is not necessary to violate the section. 
To 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. It is not necessary that the Government shall be subjected to property or pecuniary loss by the fraud, but only that its legitimate official action and purpose shall be defeated by misrepresentation, chicane or the overreaching of those charged with carrying out the governmental intention. 
As I note in my article, this expansive, unusual, even aberrational, definition of defraud has created significant mischief.  For example, in Judge Kozinski’s famous words addressed to the defraud conspiracy in a tax setting (United States v. Caldwell, 989 F.2d 1056, 1058 (9th Cir. 1993), which I quote to start the article),
We consider whether conspiring to make the government's job harder is, without more, a federal crime.
Caldwell did not deal with the precise issue here–whether an object to take money or property is required, because it Hammerschmidt decided that issue, but Caldwell was an attempt to rein in the Government’s expansive imagination of the defraud conspiracy from Hammerschmidt.

Armed with Hammerschmidt and a companion in the tax arena, United States v. Klein, 247 F.2d 908, 920 (2d Cir. 1957), cert. denied 355 U.S. 924 (1958), DOJ Tax now proffers in the Criminal Tax Manual (CTM) the following definition (Government Proposed Jury Inst. No. 18.371-1, here, cleaned up to include only defraud conspiracy):
the defendant[s], [names], came to some type of agreement or understanding to [commit an offense against the United States, namely [defraud the United States for the purpose of impairing, impeding, obstructing, or defeating the lawful functions of the Internal Revenue Service of the Treasury Department in the ascertainment, computation, assessment, and collection of income (or other relevant, e.g., excise) taxes].
As stated, consistent with Hammerschmidt, there is no requirement that an object be to take money or property from the Government, although in almost all cases which are prosecuted that was likely a goal.  (In that sense, then the defraud / Klein conspiracy could be charged as an offense conspiracy.)

The question I ask now is whether, in light of Kelly, it is time for the Supreme Court to reconsider the aberrational interpretation of the defraud conspiracy permitted by Hammerschmidt?  For those with the right cases in the pipeline, it may be appropriate to do so.

Readers might want to also consider my list of horrors in a companion piece, an Online Appendix, to the article cited above.  See here.

No comments:

Post a Comment

Please make sure that your comment is relevant to the blog entry. For those regular commenters on the blog who otherwise do not want to identify by name, readers would find it helpful if you would choose a unique anonymous indentifier other than just Anonymous. This will help readers identify other comments from a trusted source, so to speak.