Facts of the Case:
Four former executives of Hollinger International were convicted of mail and wire fraud under 18 U.S.C. Section 1346 by an Illinois federal district court. In part, they had paid themselves $5.5 million in fees without the knowledge of the company's audit committee or board of directors.
At trial, the jury was instructed that it could find the defendants guilty if it deemed they had schemed to deprive Hollinger and its shareholders "of their intangible right to the honest services of the corporate officers, directors, or controlling shareholders of Hollinger," and if the objective of the scheme was "private gain."
On appeal, the defendants explained that while their objective was "private gain," the compensation had been crafted in order to avoid paying taxes to the Canadian government. Therefore, they argued that because their "private gain" was intended to be purely at the expense of the Canadian government and not the company, their actions did not violate the intent of Section 1346.
The U.S. Court of Appeals for the Seventh Circuit disagreed and affirmed the district court. It held that the deprivation of honest services owed to an employer is not mitigated simply because the inducement was a tax benefit obtained from a third party. The court reasoned that had the defendants disclosed to Hollinger's audit committee and board of directors that the compensation was meant to bring about tax benefits, the committee and board very well may have reduced the pay-out in light of the tax benefits.
Question:
1) Does 18 U.S.C. Section 1346 apply to private individuals whose alleged "scheme to defraud" did not intend harm to the private party to whom "honest services" were owed?
2) May a court of appeals avoid review of a prejudicial jury instruction by retroactively imposing a verdict preservation requirement that is not found in the federal rules?
We shall see what we shall see.
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didn't the audit committee and board of directors sign off on the payments, and then later in court deny that they had read and understood?
ReplyDeleteI don't remember.
ReplyDeleteI don't recall what the trial judge or the court of appeal said on this issue.
I'll try to look it oh lonely commnenter.
In the meantime check this out.
ReplyDeletehttp://topics.law.cornell.edu/supct/cert/08-876
Posner’s judgment: http://www.ca7.uscourts.gov/tmp/TL1FFTUS.pdf
ReplyDeletepage 2
"Hollinger had a subsidiary called APC, which owned a
number of newspapers that it was in the process of selling.
When it had only one left—a weekly community newspaper
in Mammoth Lake, California (population 7,093
in 2000, the year before the fraud)—defendant Kipnis,
Hollinger’s general counsel, prepared and signed on
behalf of APC an agreement to pay the other defendants,
plus David Radler, another Hollinger executive and a
major shareholder in Ravelston, a total of $5.5 million in
exchange for their promising not to compete with APC
for three years after they stopped working for Hollinger.
The money was paid. Neither Hollinger’s audit committee,
which was required to approve transactions
between Hollinger’s executives and the company or its
subsidiaries because of conflict-of-interest concerns, nor
Hollinger’s board of directors, was informed of this
transaction. Or so the jury was entitled to find; the evidence
was conflicting."
page 3
"It is true that Radler, who pleaded guilty and
testified for the government, said that he thought the
audit committee had approved the so-called management
fees. But the members of the committee testified otherwise
and the jury was entitled to believe them."
page 3
"There is more. The defendants failed to disclose the
$5.5 million in payments in the 10-K reports that they
were required to file annually with the Securities and
Exchange Commission. And they caused Hollinger to
represent to its shareholders falsely that the payments
had been made “to satisfy a closing condition.” "
page 4
"There was still more evidence of the fraud, but there is
no need to go into it. The jury convicted the defendants
of a second, similar fraud, on equally compelling evidence;
there is no need to extend the opinion with a discussion
of that either."
page 4
"The evidence established a conventional fraud, that is,
a theft of money or other property from Hollinger by
misrepresentations and misleading omissions amounting
to fraud, in violation of 18 U.S.C. § 1341. United States v.
Orsburn, 525 F.3d 543, 545-46 (7th Cir. 2008). But the jury
was also instructed that it could convict the defendants
upon proof that they had schemed to deprive Hollinger
and its shareholders “of their intangible right to the
honest services of the corporate officers, directors or
controlling shareholders of Hollinger,” provided the
objective of the scheme was “private gain.” That instruction
is the focus of the appeals."
page 8
"In this case, had the defendants
disclosed to Hollinger’s audit committee and
board of directors that the recharacterization of management
fees would net the defendants a higher after-tax
income, the committee or the board might have decided
that this increase in the value of the fees to them warranted
a reduction in the size of the fees. If $10 in tax-free
income is worth $15 to the recipient in taxed income,
the employer who learns about the tax break may
require the employee to accept in tax-free income less
than $15 in taxed income."
"This is not to say that every corporate employee must
advise his employer of his tax status. But the defendants
had a duty of candor in the conflict-of-interest situation
in which they found themselves. Instead of coming
clean they caused their corporation to make false filings
with the SEC, and they did so for their private gain. Such
conduct is bound to get a corporation into trouble with
the third party and the SEC."