Tuesday, April 04, 2006

Mail Fraud Conviction Vacated: Defendant's Deceptive Conduct Did Not Deprive Other Party of Any Anticipated Benefits

United States v. Charles Novak, Docket No. 05-0108-cr (2d Cir. April 3, 2006) (Sotomayor, Katzmann, Eaton (by desig'n)): This interesting opinion affirms some counts of conviction (e.g., for unlawful receipt of labor payments and for RICO conspiracy), vacates others (e.g., for mail fraud and for making false statements under ERISA), and requests supplemental briefing on the effect of its partial vacatur on the other counts of conviction (e.g., money laundering). This Blog will discuss two issues: (1) whether 29 U.S.C. § 186(b)(1), prohibiting a union official from receiving anything of value from anyone who employs a member of the union, requires proof that the employer knew that the money it gave to an employee would be re-directed (as kickbacks) to the defendant union official; and (2) whether a mail fraud conviction can be sustained where the evidence fails to show that the defendant's deceptive acts deprived the other party of any anticipated benefits.

The essential facts are somewhat hard to decipher, though the scheme is reminiscent of "The Sopranos". Novak is the VP of a Union whose members operate the temporary elevators on construction sites. Contractors of the construction sites paid the members' salaries. Novak was paid by the Union. By his position, Novak had the power to determine which union members obtained work at which site (if any).

For reasons unexplained in the opinion, the contractors agreed to pay Union members for hours they did not work (these are called "no show hours" -- similar to Tony's "no show job" with the carting company from Sunday's episode). Time sheets for all union workers would be submitted by a "lead" union member under Novak's control, and the contractor (knowing that the time sheets were inflated to include the no-show hours) would issue checks payable directly to the workers / members. The workers would then "kick back a portion of the wages received" for the no-show hours to Novak. Apparently, the contractors did not know about the kick-back aspect of the scheme. (Ed.: Really?).

Novak was eventually indicted on a variety of charges resulting from this scheme. He was convicted by a jury and sentenced to 108 months' imprisonment.

(1) Novak was convicted of unlawful recipt of labor payments under 29 U.S.C. § 186(b)(1), which makes it unlawful for a union official "to receive or accept anything of value from someone who employs members of that [union]." He claims on appeal that this conviction should be overturned because he received money only from the union members, and because the contractors were not aware that he was receiving money in this manner.

The Circuit rejected this argument, relying principally on United States v. Cody, 722 F.2d 1052, 1059 (2d Cir. 1983), which stated that "nothing [in § 186] requires mutuality of guilt for the conviction of either the employer or the representative of employees." Cody affirmed the union official's conviction where the evidence showed only that (1) the employer paid wages to union members to perform construction-related work; and (2) "the members instead spent their working hours acting as Cody's personal chauffeurs." Under Cody, the mere fact that the contractors were unaware of the employees' kickbacks to Novak did not shield him from liability. The Court also read Cody to hold that a conviction under § 186 "requires a showing that the transfer from the employer to the employee and the transfer from that employee to the union official are so closely related as to constitute a single scheme." Op. 7 (emphasis added).

The Court then found that "the kickbacks to Novak were inextricably linked to the employees' receipt of the paychecks from the contractors," thus satisfying Cody's linkage requirement. Op. 8. As it explained: "Had the employees not agreed, for whatever reason, not to participate in Novak's scheme, they would not have received paychecks from the contractors. Thus, the employees' receipt of paychecks from the contractors, and the employees' subsequent payments to Novak, were so closely related that the transfers in this case . . . were actually between an employer and a union representative." Op. 8.

(2) Novak was also charged with mail fraud, the foundation for which "lay in Novak's receipt, through the mail, of portions of the money that the contractors paid [Union] members for the no-show hours." Op. 8. The indictment charged Novak with using the mail "to defraud and to obtain the property of the contractors." Id.

Novak claims on appeal that the evidence was insufficient to sustain this conviction because no evidence showed that he intended to defraud the contractors. Rather, since "[t]he money came from the Union members, . . if any harm was intended, it was to the property rights of the [members / workers] and not the contractors." Op. 9. The Government's response is that "the element of fraudulent intent is satisfied by the contractors' unwitting participation in Novak's plan." Id. Its theory is that the "contractors would never have issued checks for the no-show hours had that known that a portion of the money would be received by Novak, since doing so would have exposed them to criminal liability . . . under § 186." Id.

The Court rejected the Government's argument and vacated the mail fraud conviction. It relied principally on United States v. Starr, 816 F.2d 94, 99-100 (2d Cir. 1987), which vacated the defendants' mail fraud convictions after concluding that although the defendants (who operated a bulk-mail service) defrauded their customers (by charging them regular-mail rates and then burying their mail under lower-priced bulk mail, and then pocketing the difference), "the customers received exactly what they paid for." Op. 10. Starr rejected a similar theory offered by the Government in Novak's case: "While the customers' assumption that the money they paid to defendants would be directed toward a lawful purpose did implicitly constitute a part of the bargain between the parties, that defeated expectation alone did not affect the nature or quality of the services that was the basis of the customers' bargain." 816 F.2d at 99-100.

The mere fact that "the victims would not have entered into the transaction had they known of the deception," in short, is insufficient to satisfy the "intent to defraud" element of the mail fraud offense. Op. 11. Thus, the fact (as hypothesized by the Government) that "the contractors would not have paid for the no-show hours had they been aware that Novak would receive a portion of the money . . . is inadequate to support a finding of fraudulent intent." Op. 14.

Rather, the Court held after canvassing a number of mail and wire fraud cases, Op. 11-13, "the harm contemplated in a scheme to defraud must affect the very nature of the bargain itself." Op. 14 (quoting Starr, 816 F.2d at 98). "Such harm is apparent where there exists a discrepancy between benefits reasonably anticipated because of the misleading representations and the actual benefits which the defendant delivered, or intended to deliver." Id. And because the contractors "received all they bargained for, and [because] Novak's conduct did not affect an essential element of those bargains," his mail fraud conviction could not be sustained. Op. 14.


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