Wednesday, December 19, 2012

Further on the Second Circuit Detour on the Interpretation of the Defraud / Klein Conspiracy (12/18/12)

I write today on the Second Circuit's detour in Coplan to question the foundations of the expansive reading in Hammerschmidt of the defraud conspiracy (a Klein conspiracy in a tax setting).  Readers of this blog will know that I have a long-term interest in the subject -- see e.g., my earlier post on the Coplan case, Coplan #1 - Panel Questions Validity of Klein Conspiracy (Federal Tax Crimes Blog 12/1/12), here, and my 2009 article covering the scope of the Klein conspiracy and its Code counterpart, tax obstruction under Section 7212(a), John A. Townsend, Is Making the IRS's Job Harder Enough?, 9 Hous. & Bus. Tax L.J. 260 (2009), here).

Tax Notes Today has an article on the topic, Shamik Trivedi, Is Klein on the Ropes?, 2012 TNT 244-1 (12/19/12).  I thought I would use this pulpit -- not a bully pulpit, but my pulpit -- to address some of the issues raised in the article.

To state the obvious, the issue is all about interpretation.  In Hammerschmidt, the Supreme Court interpreted the word "defraud" in the defraud conspiracy statute (now 18 USC 371, here) broadly and atypically to the usual meaning of the word "defraud."  The "atypicalness" of the interpretation is what prompted the Second Circuit's detour in Coplan.  In hindsight, that expansive interpretation cannot be justified by the normal techniques of interpreting a statute, but the Supreme Court clearly so interpreted the statute.  The Supreme Court's interpretations are the law until overruled.  It is all about interpretation, and the Supreme Court has interpreted.  (Sorry for the redundancy, but it is important.)

I am reminded of a similar process of interpreting the Bible.  In his monumental work, Professor Jim Kugel addresses that process in a way that, I think parallels what happens in this type of interpretation process.  James L. Kugle, How to Read the Bible: A Guide to Scripture, Then and Now (Free Press 2008), here.  Professor Kugel makes the point that the process of interpretation could -- and I think he would say should -- involve giving words meanings not necessarily intended by the original drafters.  I know that will strike religious fundamentalists and constitutional originalists as blasphemy, but it happens both in the context of religion and law (Justice Scalia notwithstanding).  Just to pick a quote from Professor Kugel's book to illustrate:
Their [the ancient interpreters] interpretations soon became what the Bible meant. Their explanations of different stories and laws and prophecies were passed on for centuries afterward. Institutionalized by church and synagogue, preached and sung about, depicted in floor mosaics, stained-glass windows, paintings, and statues, endlessly talked about in monasteries and on village greens, echoed in poetry and philosophy and learned discourse of all kinds, this interpreted Bible (that is, the Bible as explained by the ancient interpreters) was the Bible all throughout the Middle Ages, the Renaissance, and to a large extent, even up to today.
The Bible is not what the words say but what we interpret the words to mean.

To use one of Professor Kugel's examples (also used by many others), through a process of interpretation, "eye for an eye" came to mean something quite different from what the literal words would seem to mean and the community of believers and of citizens do not now believe that we should follow the literal words in meting out justice.  It is that process which takes a text written in ancient times for an ancient audience and makes it relevant to life today.  While the "defraud" conspiracy is not so ancient text (it is old, just not ancient), it is subject to an interpretative process over a shorter period of time.  If the Supreme Court said in Hammerschmidt in 1924 that that word defraud is to be interpeted expansively in an atypical fashion, well that is the law.  And, having been the law for so long, it would wreak havoc for the Supreme Court to now  pare back that interpretation (can you imagine the number of suits that would result from that, particularly since, in a tax setting, Klein conspiracies are common in convictions?).

I am not persuaded by the argument that Skilling sets the tone for resolving the issue of whether Hammerschmidt's broad interpretation should be scaled back to the more typical interpretation of defraud.  If the interpretation of the word "defraud" were a new issue reaching any court, then I think the typical interpretation of the word defraud should control.  But, courts -- even the Supreme Court -- are not writing on a clean slate.  (The Supreme Court can wipe the slate clean, but is usually quite reluctant to do so for long-settled interpretations.)

So, bottom-line, while I would prefer that the expansive interpretation of defraud did not apply (I am not a  prosecutor), that interpretation certainly does at least now until the Supreme Court or Congress decides otherwise.  So, I think the play in the joints for practitioners is to interpret the broad interpretation.  For example, in the TNT article I cite above, the suggestion is made that the defraud conspiracy (Klein conspiracy in a tax setting) has a lower burden of proof than an offense conspiracy.  I  am not sure that is the case, and discuss that issue at length in my article cited above.  Practitioners should advocate for a restrictive reading of the broad interpretation.

Now, for some specific comments on the article.

1.  The  article quotes a practitioner as saying that the Klein conspiracy is "prosecutor-made law."  That is hyperbole and, of course, wrong.  Prosecutors can espouse and advocate all they want, but unless it finds traction in the courts it goes nowhere.  Prosecutors constant noising about / charging the Klein conspiracy has perhaps made some courts less sensitive to the risks in the charges, but courts do ultimately have to sign on and it is our job as practitioners to sensitize the courts.  Coplan's counsel did a masterful job of doing that, not in getting the Second Circuit to retreat from the expansive interpretation, but to recognize the risks and look carefully at the evidence to see if it fit the crime.

2.  Klein is federal common law.   Perhaps true, but all interpretations of a statute which are not commanded by the text of the statute are federal common law.  The question is whether those interpretations make sense in context.  Apologies to Justice Scalia.  Merely calling it federal common law or calling Hammerschmidt / Klein an improper judicially created crime does not advance the inquiiry.

3.  Skilling is not directly in point.  It is true that the Court in Skilling pared by some of the more expansive interpretations of the statute, there 28 USC Section 1346, here), but those interpretations were the lower courts' interpretations.  While there is always some institutional inertia for consensus decisions of lower courts, there is even more institutional inertia for prior interpretations of the Supreme Court itself.  That was not involved in Skilling.

4.  The article notes, quoting one practitioner:  "The doctrine is so vaguely defined that it encompasses "virtually every tax-related criminal activity under the sun, as long as two or more people agree to do it. You don't have to worry about whether a certain piece of evidence fits the offense that you have charged, because nearly everything fits into a Klein conspiracy,"  I think this too is hyperbole.  In fact, the Second Circuit in Coplan applied the Klein conspiracy doctrine to the facts at hand and found the facts did not fit the crime.  As I said before, I think, until and  unless Hammerschmidt is "pared back," practitioners can best serve their clients by assisting courts do what the Second Circuit actually did in Coplan.

5.  One practitioner noted a "work-around" for the Government if courts started retreating from Hammerschmidt's expansive interpretation of the defraud conspiracy.  The fix would be simply to allege an offense conspiracy to violate Section 7212(a), here, which criminalizes actions or endeavors in any way to  "obstruct or impede, the due administration of this title," which sounds a lot like a Klein conspiracy.  Good point.

6.  One practitioner noted that both sides in Coplan are requesting rehearing en banc.  I had not heard that.  Other than the Hammerschmidt /  Klein issue, I can't see enough in the opinion for rehearing en banc, and even on the Hammerschmidt / Klein issue, the Second Circuit en banc panel would still be boxed in by Hammerschmidt, so I don't see that reason for rehearing en banc.

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