Modern mail fraud: the restoration of the public/private distinction.

• Author: Coffee, John C., Jr.
• Position: Thirteenth Survey of White Collar Crime

I INTRODUCTION

Over their long history, the mail and wire fraud statutes have gone through repeated periods of rapid expansion and contraction. The 1970s saw the flowering of the "intangible rights doctrine," an exotic flower that quickly overgrew the legal landscape in the manner of the kudzu vine until by the mid-1980s few ethical or fiduciary breaches seemed beyond its potential reach.(1) That doctrine was radically pruned by the Supreme Court in 1987 in the McNally decision,(2) which held that the federal mail and wire fraud statutes reached only those schemes that intentionally sought to deprive their victims of money or property, but not schemes seeking to deprive them merely of intangible rights. But McNally failed to drive a stake through the heart of the doctrine. Later that same year, the Court decided that the same statutes did protect victims from schemes to deprive them of intangible property rights.(3) Then, in 1988 Congress seemingly restored the intangible rights doctrine to its previous full scope by enacting 18 U.S.C. [sections] 1346,(4) Which broadly defined the critical term "scheme to defraud" (which appears in both the mail and wire fraud statutes) so that it expressly "includes a scheme or artifice to deprive another of the intangible right of honest services." Clearly intended to reverse McNally, this statute seemed to give congressional blessing to a body of law that, prior to McNally, had amounted in substance to a judicially created federal common law crime. For some, this re-enactment ended the debate and implied that federal courts now had the power to determine on an ad hoc basis when conduct so transgressed contemporary moral standards as to amount to a federal crime.(5)

In truth, however, the ebb and flow in the scope of the federal fraud statutes did not stop with the passage of [sections] 1346 in 1988. Rather, by a variety of techniques, federal courts have steadily chipped away at the expansive reach of [sections] 1346. Contemporaneously, a majority of the Supreme Court (albeit a slim majority) has suggested that it intends to limit national authority in favor of enhanced state and local power. Most notably, in United States v. Lopez,(6) for the first time in sixty years,(7) the Court discovered that Congress had exceeded the constitutional limits on the scope of the Commerce Clause, which limits required the invalidation of the Gun-Free School Zones Act of 1990.(8) In so doing, it noted that "under our federal system, the `states possess primary authority for defining and enforcing the criminal law.'"(9) Although the federal mail fraud statute rests on a different constitutional foundation from the Commerce Clause,(10) a Court unwilling to permit Congress to protect school children from guns at the cost of invading the realm of state authority might also discover internal (and external) limits on the scope of Congress's authority under the postal power. Several recent commentators have made this argument,(11) focusing particularly on the prevalence of the use of mail and wire fraud to prosecute state and local officials in public corruption and conflict of interest cases.(12) From a "Neo-Federalist" or "dual sovereignty" perspective, the use of a federal statute to reshape the structure of state governance may be thought to upset the "healthy balance" that Lopez said it sought to maintain between the states and the federal government.(13)

Although this prophecy that the Supreme Court will curb the federal fraud statutes may yet prove accurate, that is not the direction in which the lower federal courts have been moving. Rather, their concern, as later discussed, has been less with the public corruption cases (which seem seldom to be overturned(14)) than With the private fiduciary cases (where convictions have been regularly overturned).(15) Only in this latter context have federal appellate courts regularly found that the federal fraud statutes were being overextended. Unnoticed by recent commentators, the ironic fact is that federal courts have proven much less willing to tolerate the criminalization of relatively minor transgressions in the private context than they have in the public context.(16)

This dissonance between academic theory and actual practice is striking. What has proven disturbing to appellate courts is not that a local politician has been prosecuted for the undisclosed receipt of gratuities, but that federal prosecutors have sought to expand the scope of the intangible rights doctrine against private persons by propounding open-ended theories of the scope of [sections] 1346's "right to honest services." Unanchored in any recognizable source of federal, state, or common law, the potential reach of [sections] 1346 has troubled courts and has now been curbed by a string of appellate defeats for the government. Yet, no consistent rationale or clear doctrinal lines emerge from all these decisions taken together. Rather, these are cases still searching in a Pirandello-like fashion for a plot. This Article considers several possibly unifying themes and then recommends one that distinguishes sharply between the public and private contexts.

This Article will make positive, normative, and predictive claims about the recent trends in the mail fraud case law, which arguments will be developed in several distinct stages. Section II will examine the development of the intangible rights doctrine before and after the McNally decision and the passage of [sections] 1346. In particular, it will examine several recent federal appellate decisions that have reversed mail and wire fraud convictions because the courts concluded that the underlying conduct did not deprive any victim of a right to honest services (even though this same conduct might have been found to have violated the mail and wire fraud statutes in the years before McNally). Section III will examine the doctrinal options available to a court that wishes to curb the reach of the mail and wire fraud statutes to avoid overcriminalization. Section IV will recommend and apply a suggested standard under which, in a private fiduciary case, the deprivation of "honest services" must be actionable (although not necessarily criminal) under applicable state law or an independent federal statute. The basic doctrinal justification for such a limiting standard is that courts today may not look to federal common law in order to explicate an ambiguous concept (such as "right to honest services")--except when congressional intent is clear to recast the balance of federal/state authority. In particular, resort to federal law is disfavored when state legal standards already apply to the same actors. Finally, Section IV will argue that important policy justifications support interpreting and applying the mail and wire fraud statutes more aggressively in the public context than in the private context.

This Article's central doctrinal claim that the "right to honest services" under [sections] 1346 should be defined by state law or an independent federal statute has been suggested by others, but faces a doctrinal obstacle in that several cases have already held that the term is to be defined by federal common law.(17) This Article will suggest that these cases need to be (and can be) reinterpreted. At least since Atherton v. FDIC,(18) it now seems clear that federal common law will rarely be permitted by the Supreme Court to supply the applicable rule of decision. Although the legislative history of [sections] 1346 can be read to express an intent to endorse a federal common law rule, this Article will suggest that this intent is limited to the public fiduciary context. In the floor debate leading up to the enactment of [sections] 1346, the most ardent congressional champions of overruling McNally focused exclusively on the public fiduciary context and endorsed the then embryonic concept that the Guarantee Clause of the United States Constitution gave Congress the constitutional authority to regulate state and local corruption.(19) At the time, this was a novel idea that had just been articulated in an about-to-be published law review article that they cited.(20) Although it is very debatable indeed whether [sections] 1346 can or should rest on a Guarantee Clause foundation, Congress did make a "clear statement" in [sections] 1346 that it intended to assert federal authority within the public fiduciary context. At present, unless the tide of Neo-Federalism advances still further, this is sufficient to establish federal authority. Thus, it follows that [sections] 1346 should be construed according to federal common law, to the extent necessary to understand and implement this rationale. But this rationale requires that we look to federal common law standard only in the case of public fiduciaries. Whether one accepts or rejects the Guarantee Clause thesis, the legislative history still only supports use of federal common law to the extent necessary to purge public corruption.

The point then is that federal common law should override state law in the judicial construction of [sections] 1346 only to the extent necessary to protect the special rights that Congress saw as falling within the Guarantee Clause's protections. Here, that means that the citizenry's right to be protected from public corruption stands on higher ground and can receive a more liberal interpretation. But outside this sphere, the normal principles of statutory construction require the court to look to state law.(21) This is particularly true in connection with the determination of the duties owed by agents, employees, officers, and directors, because the Supreme Court has recurrently stressed that the governance of business organizations is to be determined by state law--unless Congress has clearly and explicitly said otherwise.(22)

In short, this Article's thesis is that [sections] 1346 should be construed according to state law in the case of private...