Monday, December 14, 2009

Black v. The United States

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.


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.


  1. 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?

  2. I don't remember.

    I 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.

  3. In the meantime check this out.

  4. Posner’s judgment:

    page 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."