In 1964, Supreme Court Justice Potter Stewart famously wrote:” I’ll know it when I see it.” The phrase was praised as realistic and gallant. In 2010, the United States Supreme Court unanimously weakened the federal statutes related to frauds and swindles. What you and I might recognize as fraud, may not be illegal. We’ll explore this now.
In my essays, I have explored three defenses against corruption:
- regulatory compliance,
- and enforcement.
Today, we will explore enforcement in greater detail.
Mail fraud and other fraud offenses is in 18 U.S. Code Chapter 63. Section 1341 is called “Frauds and Swindles”. I am going to geek-out for a bit because the Supreme Court contents and you and I do NOT understand this law as it is written. I’ll do my best to read it aloud carefully and it will scroll up on the blackboard too…
My legal education involves the following…
- A constitutional law class at Tufts summer school in the early 1980s,
- Seminars/job training related medical-legal law,
- The rights of arrested and detained folks,
- Crime scene procedures,
and that’s about it. Not a lawyer!
But I am a computer programmer with 30-years’ experience!
A check list
I know a checklist when I see one. I understand the use of commas and the use of the words “And” and “Or”. When we see the word “and” then two conditions must simultaneously exist. My car is black and has four doors. The word “or” means that at least one condition must be met. I want a car or a truck. I’ll accept either, car or truck.
In this law, the first question is: did someone engage in a scheme or intend to engage in a scheme? The authors state the intent to commit fraud is also a crime. You can either actually engage in a scheme or intent to engage in a scheme – both are crimes. There are a lot of people serving long jail times who planned and intended a crime but found themselves engaged in a sting operation by law enforcement.
Test Number 1
Did I actually engage in a scheme or did I intend to engage in a scheme?
Test Number 2
Did it involve some sort of transactional exchange – there is a pile of language trying to describe transactional exchange: sell, displose of, loan, exchange, alter, give away, distribute, supply, furnish.
Test Number 3
Examines the nature of the exchange: counterfeit money/coin, obligation, security, or other article.
Test Number 4
Did the exchange take place: in person, by truck, by mail, or was the property, money, security or item exchanged via some means that may include the US mail, trucks, or just delivered in person?
My interpretation of what I read: Did someone represent an even exchange that was not equal in value? In related law, contracts must have consideration. Consideration is the promise of something of value in change for something of value.
We recognize this as fairness or something fundamental when living and working within a community. A lesson one might learn best on Sesame Street. I know fairness when I see it.
We have a pretty common icon or image for fairness, don’t we? That image of a balance scale. The two sides should be equal.
I think I can recognize fraud when I see it. Two parties engaged in an exchange. One party exercised deceit while mispresenting the value to one side of the exchange. The other party was expecting fairness and some consideration, or equality, in the transaction.
This law comes in different flavors: Section 1343: fraud by wire, radio, or television. This flavor includes signs pictures, sounds, signals, and foreign commerce.
You’ll find bank fraud in 1344 and health care fraud in 1347. I see that if fraud involves death in a health care environment, the guilty party can be imprisoned for life. Good. Got it!
Section 1348: securities and commodities.
Section 1349 reiterates that the attempt to commit fraud is also a crime – which was also stated in the first bit.
Section 1350 states that corporate officers must certify financial reports tying corporate officers to related fraud and securities fraud. The boss is guilty, if the fraud involves financial statements and misrepresentations of company assets. Good. Got it!
18 U.S.C. § 1346
Let’s take a detailed look at Section 1346 the definition of scheme or artifice to defaud. The law reads: For the purposes of this chapter, the term “scheme or artifice to defraud” includes a scheme or artifice to deprive another of the intangible right of honest services. According the Merriam Webster “artifice” means artful stratagem or a trick. It is also false or insincere behavior. I have a pretty basic understanding of this definition, do you?
The chapter defines fraud explores some variations on the theme. The penalties can vary based on the context of the crime: financial institution, health care, etc. The foundation is well set.
Skilling v United States
Let’s return to the Skilling and the United States Supreme Court!
As the CEO of Enron, Skilling agreed to prevent its stock prices from falling by providing exaggerated reports of the company’s financial situation. He was eventually charged with securities fraud, wire fraud, insider trading, and false representations. One of the counts on which he was convicted was an honest services fraud conspiracy charge. He argued that the statute giving rise to the conviction was unconstitutionally vague because it did not clearly enumerate the types of actions that it prohibited.
Skilling was charged under 18 USC 1371, 1343, 1346 – the very suite of laws we’re discussing.
Opinion of the Court
From the 1940s, courts interpreted “any scheme or artifice to defraud” to include deprivations not only of money or property, but also of intangible rights which lent to the development of “honest-services” doctrine. Even if the scheme occasioned a money or property gain for the betrayed party, courts reasoned, actionable harm lay in the denial of that party’s right to the offender’s “honest services.” Most often these cases involved bribery of public officials, but over time, the courts increasingly recognized that the doctrine applied to a private employee who breached his allegiance to his employer, often by accepting bribes or kickbacks.
In 2010, the Supreme Court wrote this phrase into their opinion:
I’ll stand up as ordinary people, you can too. I understood the law that I read. It took a couple of times through it all. I get it: “devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises, or to sell, dispose of, loan, exchange, alter, give away, distribute, supply, or furnish or procure”
I guess if I had to define fraud for ordinary people, I’d use a balance scale, Sesame Street puppets and a cute song about fairness. If you sell me a cookie to eat and I pay a fair price for that cookie, but that cookie is made of foam and I can’t eat the cookie, that’s fraud.
If you cook the financial books to make a company look great and sell that to investors as a good cookie and people bite down on something that is not-a-cookie, that’s fraud.
One of the tenants of honest-service dealt also with conflicts of interest.
Let’s make believe that you are a landowner. 20 years ago, you bought a parcel of land for “one dollar and consideration”. That parcel of land is next to the town garage and town gravel site. Now today, you, the landowner, are the boss of the town department of public works and roads. And you are the road commissioner. And you are also one of three members of the town council.
Then you decide to sell the land to the town for $100,000. The town decides not to put the purchase of the land out to bid. In fact, instead the town classifies the purchase of land as a purchase of bulk gravel. And you also remember that under Vermont statutes, a town council can meet behind closed doors when discussing the purchase of land. Now the records are sealed.
There is some stinky-stink on this deal right. I see conflict of interest. The elected town council member is not providing honest-service. There are too many factors at play. This land on fair-market is worth maybe twenty-grand.
Of course, my example is a true story. The citizens smelled the stink and raised their pitchforks and carried torches into the darkness.
Had it gone through; I think any number of us would recognize that this elected official failed to provide honest-service to the town’s people. In one human body, we see the landowner, the road commissioner, the road-crew boss, and one-third of the town council.
Had the town bit down on this cookie, it would have been a foam-filled fake! The scales never balanced. The purchase of the land was only the beginning of the true costs. The town would need state permits, engineering reports, geological reports, environmental reports all prior to opening a gravel quarry.
Fraudsters are clever people – well the good ones are. Think of fraud and corruption like a virus. It will morph and evolve in the face of conflict.
We need a bit of a broad-spectrum law that says if your actions unfairly tip the balance of a transaction to your favor while acting with deceit, then you are a crook.
In short, the Supreme Court has defined “scheme or artifice to defraud” as meaning bride and/or kickback only.
The opinion states that this was the least of Congress’ intent.
So now we get the least-possible ruling.
We willingly accept vagueness in our understanding of obscenity; that being the context for the 1964 statement: “I’ll know it when I see it”. Yet, when crooks rip people off with fraud, we need more specificity?
If people organize themselves to commit fraud while finding a pathway that avoids kickbacks and bribes, then they avoid prosecution.
Hopefully, investigators and prosecutors cast a wide net around U.S. federal laws when charging people because key elements of our laws that seem obvious can be nullified.
Ahsha Tribble and Jovanda Patterson of FEMA have been indicted and arrested by the FBI for fraudulent activities related to a $1.1 billion contract involving FEMA funds, Puerto Rico, and Cobra Acquisitions. Counts 2, 3, 4, and 5 all related to the statute just now discussed.
In some conference room, the defense lawyers are informing their clients: We don’t have to worry about these four counts. The Supreme Court weakened those a decade ago. Any activity related to conflict-of-interest, self-dealing, or facts not related to bribery and kickback won’t be brought up.
Maybe these conspirators did enough to get convicted.
By the way Jeffery Skilling is/was serving a 14-year sentence for his crimes.