Cases by Issue - Fraud

Pasquantino v. United States - Oral Argument

Fri, 09 Jan 2009 14:49:04 +0000

Case:

Pasquantino v. United States

Media File:

03-725_20041109-argument.mp3

Related Transcript:

transcript.xml

Transcript:

Argument of Laura W. Brill

Justice Stevens: We'll hear argument in the case of Pasquantino against the United States.

Ms. Brill?

Mr. Brill: Justice Stevens, and may it please the Court:

There are five primary reasons why this prosecution is outside the scope of anything Congress has authorized.

First, the government's interpretation of the wire fraud statute is inconsistent with the revenue rule.

Second, it turns the rule of lenity on its head by allowing the government to incarcerate petitioners for 57 months for conduct that has never given rise to civil liability in this country.

Third, this prosecution contravenes our national policy of demanding reciprocity in matters of international tax enforcement.

Fourth, the government acknowledged below that it cannot bring this prosecution without disregarding another act of Congress, the Mandatory Victims Restitution Act, which is, as the name specifies, mandatory.

And, fifth, under this Court's decisions in McNally and Cleveland, the wire fraud statute applies only to schemes aimed at defrauding a victim into relinquishing something that it holds as money or property.

A sovereign's interest in an unassessed tax claim is neither money nor property.

Justice O'Connor: Well, can you look at the interest of the government as one of not allowing U.S. territory to be used to carry out a smuggling scheme?

I mean, why does it have to be viewed as one of trying to enforce some other nation's tax laws?

Mr. Brill: Justice O'Connor, the government's interest in prosecuting somebody does not define the scope of what the statute at issue proscribes.

Justice O'Connor: It's a wire fraud statute dealing with the use of communications capacity in this country to carry out a scheme designed to enable smuggling of goods.

Mr. Brill: Well, if the... if the statute was not written as it is... the statute, as written, uses the words "defraud" and the word... the word "property", and both of those terms are terms that this Court has defined very narrowly.

In Nader, it defined a "fraud" as--

Justice Scalia: Ms. Brill, I thought your brief said that we have an anti-smuggling statute, which is directed precisely against smugglers, but it only applies to those countries that have similar protection for us.

Mr. Brill: --Yes, Justice--

Justice Scalia: And Canada does not.

Mr. Brill: --Yes, Justice Scalia, that's exactly--

Justice Scalia: Now--

Mr. Brill: --correct.

Justice Scalia: --the existence of that statute would seem to suggest... and a statute which is limited to countries that will do the same for us... would seem to suggest that we don't want to do this for Canada.

Mr. Brill: Yes, that's exactly... that's exactly right, Your Honor.

There--

Justice Ginsburg: But it's also limited to vessels.

It's smuggling by water, not smuggling by--

Mr. Brill: --By automobile.

Justice Ginsburg: --vehicles, as is done here, so that we don't have any statute that covers smuggling on land.

Mr. Brill: Right.

Yes, Your Honor, that's correct.

Justice Scalia: Is there something better about reciprocity for vessels and not reciprocity for land smuggling?

Mr. Brill: I think it just evinces what Congress was concerned about most at the time, Justice Scalia, but it was... it is certainly the case that in any... any time that this country has endeavored to deal with matters of international tax enforcement, it has always demanded reciprocity.

It has done so through the smuggling statute, it has done so through the numerous tax treaties that the Second Circuit's RJR decision discusses at length.

And one of the points the RJR decision makes is that, in 1951, at the very time that Congress was looking at the wire fraud statute and enacting it, the Senate was, at the same time, becoming concerned that this country had gone too far in extending reciprocity in connection with its tax treaties and was actually evincing a policy of cutting back on the degree to which we would assist other countries in tax enforcement.

And so the issue is to look at... that the revenue rule must be used as a background principle of common law against which... against which the revenue... excuse me, against which the wire fraud statute is--

Justice O'Connor: Well, if we don't do view this case as involving some attempt to indirectly enforce Canada's tax laws... suppose we don't view it with that lens... then does that put it outside the so-called revenue--

Mr. Brill: --Well, if it were not... if it did not serve the function... it doesn't matter what the government's intent is and what is in the mind of the prosecutor, but if it did not have any effect of enforcing a foreign government's revenue rule, then, yes, it would be outside; but there are numerous ways in which this prosecution does enforce a foreign government's revenue rule.

Certainly, it deters future violations.

The sentence was based on the... an estimate of the intended loss, and there was no assessment or an adjudication in Canada to determine what the amount was that was owed.

And so the District Court became, essentially, part of the tax enforcement apparatus of the Government of Canada by performing that assessment in the first instance.

And so anytime that we impose criminal or civil liability in a manner that affects the tax policies of another country, we are enforcing that rule.

If we... whether we're requiring compliance with the... with the tax rule of a foreign country or punishing noncompliance.

All of those--

Justice Kennedy: Is the rationale for the rule that enforcement of taxes is so unpopular that we want to minimize the exposure to... of our judges so that they... the only thing they have to do is enforce taxes that... paid to our own government?

I'm serious about that?

Is that the rationale?

Mr. Brill: --Well, I think there's a certain amount of self-protection in some of the decision... decisions, surely; but the real... the underlying purpose of the revenue rule is a recognition that foreign... that taxes, in general, are a matter of policy.

They're inherently policy-based; they're not based on contract or other kinds of commerce.

They do not... they do not assist in resolving disputes between private parties.

And often they're imposed... especially customs duties, are imposed to disadvantage other countries, and so the courts have said these are a peculiar type of law, they serve only the interest of the... of the foreign sovereign, and there's a particular... there's been a particular sensitivity about scrutinizing those foreign laws, potentially declaring them invalid under the foreign governments' own laws or pursuant to our own Constitution.

And so revenue rules have historically been a categorical exclusion to general principles of comity through which we might otherwise recognize foreign laws or foreign judgements.

And the rule has come to be so entrenched, and has been so well established, that there's a whole body of background law in the tax treatise of our country, and of many other countries, that is based on our non-recognition and our non-enforcement of foreign revenue laws.

So--

Justice Ginsburg: But if we did... if we did enforce even a tax judgement of another country, there would be no U.S. law that would be violated.

You're talking about a common law, no country enforces the taxes of another.

But, at least in the Restatement of Foreign Relations now, that's put in terms of... there's no requirement that any country enforce the tax claims or judgements of another; but neither is there any prohibition.

Mr. Brill: --Well, Justice Ginsburg, the current restatement is worded in... addresses judgement specifically.

It does not... it doesn't address un-adjudicated tax codes.

But there's always been a much greater suspicion, a much greater reluctance, to get into enforcing a claim brought by a foreign country, where that country's own processes have not been allowed to run their course and to have the initial determination.

There... the restate... the second Restatement of Foreign Relations law, which is... was... came out in 1965 and is closer to reflecting what the law was at the time Congress enacted the wire fraud statute, says, in Section 41, Comment L,

"Under the... under the foreign relations law of the United States, courts in the United States will generally refrain from taking action to give effect to the penal or revenue laws of other states, except as provided by international agreement. "

And so that... that was a statement by the... by the propounders of the... of the Restatement of what they... what they believed the law was at the time.

Now, to the extent it's qualified, I think it's just to leave room for the fact that the Senate can promulgate treaties, or Congress can, by statute, command that courts recognize these laws.

But if--

Justice Scalia: You don't... you don't assert that this... that it... that this couldn't be done, do you?

You just--

Mr. Brill: --Not that--

Justice Scalia: --assert that we shouldn't assert that we shouldn't interpret this statute to have done it.

Mr. Brill: --Exactly, Justice Scalia.

If Congress had written a different wire fraud statute that had said,

"You can't have a scheme to defraud the revenue, whether foreign or domestic. "

that would have been a clear statement abrogating the revenue rule.

But we don't have any such clear statement, and the terms... the terms "defraud" and the terms "property" have to be read with the background rule in mind.

Justice Ginsburg: May I--

Justice Kennedy: But you would come to that conclusion even if we had a reciprocal enforcement agreement.

If this were Country X, where we did have a reciprocal enforcement agreement, you'd come to the same conclusion, no prosecution under this statute.

Mr. Brill: Correct, Your Honor, because there wouldn't... this statute wouldn't have been written to take that into account.

This--

Justice Kennedy: So, in a sense, the revenue position is irrelevant to your... to your secondary or your... or your independent argument on statutory construction.

The revenue rule is irrelevant to it.

Mr. Brill: --As to just whether an unassessed tax claim--

Justice Kennedy: Yes.

Mr. Brill: --is property, the revenue rule... the revenue rule adds a boost to it, but there are two... there are two dimensions to the property element.

One is that, as I said... and if a... if a tax claim is not... has not been subject to an assessment, that whatever interest the government may have in that is not in the nature of property; it is simply in the nature of law-enforcement power to collect.

They... some of these revenue rule cases talk about the power to--

Justice O'Connor: --So tax revenues are not property, in your view.

Mr. Brill: --Once a tax is collected, once the government actually has money in its hands, and if there's a scheme to, let's say, obtain an illegal refund through a tax and... that would be a scheme to deprive a government body of money.

But a scheme to merely evade paying a tax is not something that falls within the statute, separate and apart from the revenue rule.

But the revenue rule... as a result of the revenue rule, it is also the case that no state court would have recognized any property interest in a foreign sovereign, even if it had reached the point of a judgement.

And so it works in both ways.

The--

Justice Ginsburg: --May I ask you, Ms. Brill, something that puzzled me about this case?

It is a rather peculiar use of our wire fraud statute.

Are there any proceedings going on in Canada?

Has there been any attempt to extradite these people?

Mr. Brill: --Justice Ginsburg, there was an indictment that Canada issued against the Petitioners.

It has charges under... for smuggling, under Canadian law, which is Customs Act, Section 159.

It charges unlawful possession of imported spirits under Excise Act 163(1)(b), disposing of goods illegally imported, in violation of Customs Act, Section 155.

So Canada has its own process.

There has... there has not been, to my knowledge, any request by Canada for extradition, but the treaty between the United States and Canada does include revenue violations, and--

Justice Scalia: Presumably, if we punish this person this way, Canada wouldn't... there's no double jeopardy, right?

Mr. Brill: --That's correct.

Justice Scalia: So we'd be punishing this person for violating Canadian law, and then Canada would punish this person for violating Canadian law.

Mr. Brill: Yes, I haven't looked in detail at the statute of limitations provisions, but that could be the effect.

And we could be punishing them much more severely than Canada would be.

They have their own means of balancing what they think the appropriate balance is for these things, and certainly the wire fraud statute, 57 months in our--

Justice Kennedy: Well, I think the government has an interest in saying,

"Look, if you're going to smuggle, have your scheme up there in Canada; don't use our wire systems for fraudulent purposes. "

"We don't like that here. "

Mr. Brill: --And if they want to pass a law that says that, because of the... because there's a domestic--

Justice Kennedy: Well, they... of course, they say that this covers it, and it seems to me that really the... that turns on the definition of "property"--

Mr. Brill: --Okay.

Justice Kennedy: --which is an arguable point.

Justice Stevens: What if the... instead of a wire fraud case, it was assault and battery?

Supposing the Canadian revenue agent got inside of New York and one of your clients beat him up, would we have... solely because he was mad at him for trying to interfere with his attempt to smuggle into Canada... would we have to say that you can't do that, we have no jurisdiction over the assault and battery?

Mr. Brill: No, Justice Stevens.

It's... the question is whether you're--

Justice Stevens: The only purpose would be just what the purpose is here, they're trying to, you know, facilitate the smuggling operation.

Mr. Brill: --Well, the assault and battery... whatever the assault and battery provisions are, you would be bringing the prosecution solely for that purpose; it does not have any... the effect of applying the assault and battery statute, if there was one--

Justice Stevens: Interfere with Canadian's collection of their taxes.

That's the only reason for it.

Mr. Brill: --Well, I think it... in that case, it would be... it would be far too attenuated to reach that conclusion.

There could be... the motive of a person--

Justice Stevens: Why is that any more attenuated than a conspiracy carried out down here in Maryland using American assets to do the evil deed in Canada?

Mr. Brill: --Well, but the motive of the person performing the assault and battery would be irrelevant to the prosecution as to whether they intended to do the improper touching and, in fact, carried it out.

Justice Kennedy: Well, why isn't the motive irrelevant here?

We don't want our facilities to be used for criminal activities--

Mr. Brill: The question is whether--

Justice Kennedy: --any more than in the... in the hypothetical we don't want citizens beaten up on our soil.

Mr. Brill: --Justice Kennedy, the issue is whether... is what Congress had in mind in enacting the wire fraud statute.

And, in general, we presume that Congress had domestic concerns in mind, not that we have incorporated vast bodies of--

Justice O'Connor: Well, but it used broad language,

"Any scheme to defraud by means of wire communications in interstate or foreign commerce. "

Mr. Brill: --The wire... it is... the wire communications may be an interstate or foreign commerce, the word "any" modifies

"any scheme or artifice to defraud-- "

Justice Scalia: Is this statute applied against people who defraud the United States Government in taxes?

Mr. Brill: --Your Honor, the government's position on that, I believe, is somewhat inconsistent.

The tax... the tax division and the Department of Justice U.S. Attorneys manual specifies that it is... they believe it is the intent of Congress that tax matters will be dealt with through the internal revenue code, not through other means.

There are... there have been some prosecutions brought in the case of an illegal... an illegal tax shelter, where there is truly an... a private party who is defrauded into giving up money in connection with--

Justice Scalia: But you don't... you don't know of any prosecutions under this fraud statute for depriving the Federal Government of property.

Mr. Brill: --Well, the Henderson case, which we have cited in the reply brief, is one from the Southern District of New York, where Judge Weinfeld said, when faced with a mail fraud prosecution of that type, this is outside the scope of anything that Congress intended.

The... I would like to get back to the issue of money or property so that it... to have it conceptually why an unassessed tax claim is not money or property.

There is no allegation that... in the indictment or anywhere... that the petitioners took any money out of Canada's treasury.

So money is not an issue.

At most, it was an effort to evade Canada's right to collect money, not any money it has--

Justice Stevens: Ms. Brill, is this the same thing if it were a building fraud?

Suppose there were contractors building a Canadian building for the Canadian Government and they had a big fraud scheme down here, and it was to deprive the Canadian Government of money?

I think the statute would clearly apply.

Mr. Brill: --The statute only applies... what McNally said is, any assistance a governmental body obtains from the statute must be in the capacity of property-holder.

And so the... a scheme to defraud somebody out of their... out of a building, that's traditional property.

There's not... it is not the same thing.

Let's have an... let's take an example of an interference with prospective economic advantage.

So there is a defendant who says to somebody else who's about to get a contract... I know my competitor is about to get a contract, and I say,

"Why don't you go out of town? "

"There's a... there's a much bigger contract that you can get if you fly to Michigan. "

And, meanwhile, I go in, and I usurp the contract and take it for my own purposes.

Well, I've interfered with that person's prospective economic advantage, and so there would be a tort, and the person could collect from me.

But I have not taken any money or property from that person that was in his possession.

And what McNally and Cleveland plaintiffs to is whether there was money or property in the hands of the... of the victim.

And Canada's interest... until there has been an assessment, Canada's interest is purely that of a... of a sovereign.

It is... it does not have a claim to any money that is in the bank account of somebody who owes it a debt.

And the Johnston case, which we've cited in our reply brief, Your Honor, talks about... this Court talked about a statute in which there was a boxing promoter who collected fees for the boxing match and also collected taxes at the same time.

And the U.S. Government could not bring an embezzlement action against that person for not paying the taxes, because those taxes were not... were not yet anything that qualified as governmental property.

Justice Stevens: Ms. Brill, in the Court of Appeals, they treated the argument that this was not property as entirely separate from the revenue rule question.

And I thought your petition for cert was confined to the first question.

Mr. Brill: Well, Your Honor... no, Your Honor, we talked about both in the petition for cert..

And then the question--

Justice Stevens: But the question, itself, doesn't refer to the property issue.

Mr. Brill: --It talks about the--

Justice Scalia: Was it... was it phrased the same way it is in your brief, in the petition?

Mr. Brill: --Yes.

Yes, the--

Justice Scalia: Well, then the last part of it--

Mr. Brill: --Right, but--

Justice Scalia: --obviously covers it.

Mr. Brill: --Yes, the last part talks about--

Justice Stevens: Oh, I see.

I'm sorry, you're right.

Yeah.

Mr. Brill: --Yes, okay.

But to return... to return to the revenue rule... and thank you, Justice Stevens, for bringing me back to that... the government has acknowledged that there can be no restitution here.

And that's in... that's in the joint appendix, at page 106.

They expressly waived it.

They said that even if there was a foreign judgement that Canada was trying to bring here, that would be unenforceable.

There could be no RICO actions, because that's unenforceable; and no proxy suits on behalf of a foreign government.

And so the only thing that they say is, beyond... is not included... the only act of enforcement which they say is not included is, somehow, criminal enforcement.

And under Section 14 of the... excuse me, under the Fourteenth Amendment of the United States Constitution, Congress has power to enforce that amendment, and it has done so both in enacting statutes for civil recovery, as well as criminal recovery... criminal punishment, excuse me.

And so it's... the notion that somehow incarcerating someone is not... is not punishment is not something that makes much sense in that context.

The decisions of this Court have held that penalties are... monetary penalties count as punishment, and also that injunctions are... fall within the scope of the revenue rule.

That's in the Wisconsin versus Pelican Insurance case, which actually addresses the penal... the penal rule, which is the close corollary.

Justice Ginsburg: May I ask you, when... now that we're getting into money, one of the things that the sentencing board had to do was to find out how much of a loss there was, and that involved determining what taxes would be due under Canadian law.

And did that increase the sentence?

Did the... did the sentence vary with the amount of taxes that they... we found due?

Mr. Brill: Yes, Justice Ginsburg, it very much did.

The loss calculation was based on intended loss, and so they... what the District Court judge did was estimated the number of cases of liquor that were intended to be brought into Canada, and applied that number to the amount of the tax that Canada, he believed, would have applied to that... to that amount.

And that ended up changing the sentence from six months to, in the case of the Pasquantino brothers, 57 months, and the... and, in the case of Mr. Hilts, 21 months.

So the bulk of the sentence was based on the Canadian tax law and our courts making that assessment.

Justice Ginsburg: A judge making that assessment.

Mr. Brill: The judge made the sentence... made the assessment at sentencing, yes.

What the... what the... what the government did in this case was to submit, very self-consciously, all of the issues of Canadian tax law to the jury.

And the assistant U.S. attorney said this to the Fourth Circuit en banc panel several times, that they were presenting these matters of Canadian tax law as factual issues for the jury to find.

But, ultimately, in sentencing, it was... it was the court that ended up imposing and elevating that sentence.

If there aren't further questions, I'd like to reserve the balance of my time.

Justice Stevens: Mr. Dreeben?

Argument of Michael R. Dreeben

Mr. Dreeben: Justice Stevens, and may it please the Court:

A prosecution for wire fraud based on defrauding a foreign government of taxes serves at least four distinct United States prosecutorial interests.

The first is that the creation of schemes to defraud frequently spawns collateral criminal conduct in the United States above and beyond the fraudulent scheme itself.

Here, for example, one of the defendants was charged in the indictment with using a gun in relation to the charged wire fraud scheme.

Second--

Justice Ginsburg: Where?

Using a gun where?

Mr. Dreeben: --In the United States, Justice Ginsburg.

Justice Scalia: Well, why didn't you prosecute him for that?

Mr. Dreeben: That crime depended upon the validity of the wire fraud charges, because the crime was use of a gun during... in relation to this wire fraud scheme.

Justice Souter: But that really doesn't get you anywhere, does it?

I mean, if the United States says,

"We don't want this gun offense to be prosecuted unless there's a wire fraud prosecution. "

that doesn't tell you anything as to whether there ought to be a wire fraud prosecution.

Mr. Dreeben: Well, what it tells you, Justice Souter, is why the United States has an interest in enforcing a law that facially is written to cover schemes to defraud that are carried out using the United States wires.

Justice Scalia: But that's... but that's a reason for extending the statute to everything.

To everything.

Mr. Dreeben: No, Justice Scalia--

Justice Scalia: "Property" can mean anything at all.

I mean, what you're saying is, the broader you read this statute, the more bad guys we're going to catch.

I'll stipulate that.

Of course it's true.

Mr. Dreeben: --Well, Justice Scalia, I'm starting from the proposition that the language of the wire fraud statute textually applies to this scheme, and Petitioner's argument is that, because of the common law revenue rule, the statute should be read to exclude schemes to defraud a foreign government of tax revenue.

And the fact that a foreign government is defrauded of tax revenue does not mean that the United States does not have an independent interest in rooting out that scheme and prosecuting it.

In addition to the collateral criminal conduct that such schemes can spawn, the creation of such schemes indicates a criminal mind and a criminal group that can turn its techniques for used... using to smuggle into Canada, also to smuggle back into the United States or to victimize other victims in the United States.

Justice Scalia: What about evading a Cuban tax law that we think... that many people would think is an unjust tax law?

I mean, one of the things I'm worried about is that this gets us into foreign policy.

Are you sure that we always want to enforce the tax laws of foreign countries through this fraud statute, no matter what those tax laws happen to be?

Mr. Dreeben: The United States has prosecutorial discretion to determine when to invoke the statute and in what interests it should be served.

Justice Scalia: It may well, but when it comes here, this Court is going to have to decide... we'll just approve whatever you want to prosecute and let you not prosecute whatever you want?

Mr. Dreeben: There is no provision in the statute, Justice Scalia, for this Court to second-guess foreign-policy determinations that are made--

Justice Breyer: Well, not just foreign policy.

The White Russians come here because they don't want to pay Lenin's taxes designed to equalize all individuals, in terms of property.

Country A has a tax law that makes everybody a criminal because nobody really ever pays all the taxes.

Country C has a set of laws that tax bibles.

Country D has a... I mean, you know, we can spin out the examples endlessly, and they're not farfetched.

So take all the arguments from last week, called "any court arguments", cross... or two days ago... just let's cross-reference them.

The problem is complexity of tax law.

The problem is many, many, many would be contrary to American policy.

And the problem is, nobody really knows what they are; indeed, they don't even know what American tax law is, no single individual, I suspect.

Let's put in Italy, France, Byelorussia, Belarus, Ukraine, Saudi Arabia, and 35,000 others.

Everybody becomes a criminal.

And then we say,

"Don't worry, we'll only prosecute the real bad ones. "

That's the argument, I think, on the other side, and I'd like to hear your perspective.

Mr. Dreeben: --Justice Breyer, I don't think there's any reason to assume that everyone becomes a criminal.

What this--

Justice Breyer: No, only people who come over here because they don't want to pay taxes in those countries.

Sometimes we would agree with them--

Mr. Dreeben: --Justice Breyer, in order to violate the wire fraud statute, you have to use deception in order to deprive another--

Justice Breyer: --Yes, they don't tell Lenin that they're coming--

Mr. Dreeben: --Well, that wouldn't involve the use of the United States wires--

Justice Breyer: --and they write to each other.

They have a cousin, in Brooklyn, who forwards them the money to get out.

Mr. Dreeben: --Justice Breyer, if one stipulates that that violates the wire fraud statute or that there's enough conduct that does, the question still comes down to whether the United States chooses to prosecute that case.

This is not a--

Justice Breyer: So the question comes down to--

Justice Scalia: The question comes down to whether this statute, which doesn't have to be read that way, ought to be read that way, whether it makes sense to read it that way.

What about... does Canada have an income tax?

Mr. Dreeben: --I'm not sure of Canadian tax law.

Justice Scalia: Well, let's assume--

Mr. Dreeben: In the context of this case--

Justice Scalia: --Canada has an income tax.

Would you... would you prosecute a Canadian who files a deceptive Canadian income tax return?

Mr. Dreeben: --Not for using Canadian facilities to do so.

Justice Scalia: No, no, no, from this country.

He's... you know, he's a snow goose and is in Florida when he files his return.

Justice Souter: He files it electronically.

Justice Scalia: Yeah.

Mr. Dreeben: The wire fraud statute is applicable to schemes to defraud, generally speaking.

The questions in this case are whether there is a common law rule that should be read to provide background.

Justice Breyer: --reason for it.

I just... you don't seem to know completely about Canadian law.

How much do you know about the tax law of Vietnam?

Because Los Angeles is filled with Vietnamese refugees, many of communities of such people in the United States.

Do we know how many of them perhaps might owe taxes under the law of Vietnam, and maybe are talking to each other about whether they really want to pay it?

Mr. Dreeben: I don't think this is a realistic problem, Justice Breyer, that should require the court not to read a statute whose language--

Justice Breyer: Well, what about the wealth tax in France?

Mr. Dreeben: --There are a variety of taxing schemes all across the world.

The question that the United States has to make when it determines whether to prosecute a wire fraud scheme is whether it's in interest... in the interest--

Justice Stevens: Mr. Dreeben, at the beginning of your argument, you said there were four federal interests you were going to identify.

You've been able to identify one... you know, on running around with guns.

What are the other three?

Mr. Dreeben: --The other three are--

Justice Scalia: Second--

Mr. Dreeben: --The second one, which I began to allude to before hearing some questions about--

Justice Stevens: Before you were asked a brief question.

Mr. Dreeben: --are that people who engage in schemes in this country are capable of then using the same techniques against victims in this country.

The third reason is that the creation of international schemes to defraud, like the smuggling scheme in this case, poses independent threats to the United States Government because international criminal organizations are particularly difficult for the United States to deal with.

And the fourth reason is that it is an offense to a foreign government, the United States Executive Branch may conclude, to allow our soil and our wires to be used to perpetrate a smuggling scheme against a foreign government with the United States doing nothing about it.

Justice Ginsburg: Well, if we're concerned about offending the foreign country, then isn't the way to go, in fact, the way Congress has gone in this area, we negotiate treaties?

I mean, one of the reasons why we go the treaty route are the kind of problems that Justice Breyer brought up, we want to have reciprocal treaties.

We want two things.

We want to make sure that it's a basically fair system that we're dealing with.

On the other hand, we want to say,

"If we do anything with respect to your taxes, we want to make sure that we get the same benefit from you with respect to ours. "

So never mind the revenue rule, isn't it pervasive that... when it comes to enforcing tax claims, that the route that Congress has chosen to go, and the Executive, as well, has been the treaty route?

Mr. Dreeben: Justice Ginsburg, those are tax treaties designed to mutually assist the countries to collect taxes.

This is a prosecution directed at fraud.

The collection of taxes in a cooperative, reciprocal manner between governments implicates very different interests than the United States has when it seeks to combat people who have intended to devise, or have devised, a scheme to defraud in the--

Justice Ginsburg: One of--

Mr. Dreeben: --United States.

Justice Ginsburg: --one of... one of the last interests that you mentioned, about offending foreign governments, well, on the face of this, it would seem, the one that... the country that's been done out of taxes is Canada, not the United States.

So, we should help Canada, if it's interested in collecting revenue from these people or trying them for a criminal offense, to do that.

It... I asked Ms. Brill, Have they been indicted in Canada?

She said yes, but she said it's... they had not... there has not been a request for extradition.

Is that... is that--

Mr. Dreeben: That's my understanding, as well, Justice Ginsburg.

And the pursuit of this prosecution by the United States reflects that when United States citizens engage in fraudulent conduct on our soil, our government has a distinct interest, from Canada's interest, in pursuing the prosecution of this case.

Justice Scalia: --How long has this statute been on the books, this wire fraud statute?

Pretty old statute.

Mr. Dreeben: 1952.

And its antecedents are the mail fraud statute, which was enacted in 1872.

Justice Scalia: How many prosecutions like this have there been?

When was the first one?

Mr. Dreeben: This--

Justice Scalia: For, you know, using the mails or interstate commerce to defraud a foreign government of taxes?

Mr. Dreeben: --This type of prosecution became more common in the 1980s when Canada greatly increased its taxes on importation of tobacco and alcohol.

Justice Scalia: More common, or didn't exist at all before the 19... do you know of any case before--

Mr. Dreeben: No, I'm not aware of any case before--

Justice Scalia: --before the 1980s.

Mr. Dreeben: --That's right.

Justice Scalia: Doesn't that suggest to you that the statute isn't naturally read to cover stuff like that?

Mr. Dreeben: No, I think the statute--

Justice Scalia: We didn't have smugglers before then?

Mr. Dreeben: --No, of course there were smugglers before then, but the statute, on its face, is broad.

And the only justification... the only two justifications for seeking to read it narrowly are, first, that there's a common law revenue rule that forms a backdrop for the construction of the statute.

That is wrong, the government submits, because there is no common law revenue rule that has ever been articulated that says one country cannot prosecute people in that country for defrauding a foreign government of tax--

Justice Scalia: What's the second reason?

Mr. Dreeben: --The second reason is the claim that to deprive a foreign government of money by not paying tax revenues is not common law fraud.

Justice Scalia: Okay.

Well, and you have arguments against both of those two?

Which are arguments are at least... at least... arguable?

What about the third rule, the rule of lenity?

Mr. Dreeben: Well, Justice Scalia--

Justice Scalia: If we... if we are unsure, if it's a close question whether it's property, if it's a close question whether we're enforcing the tax laws of Canada by prosecuting somebody for violating the tax laws of Canada, if that's a closed question, why doesn't the rule of lenity apply?

Mr. Dreeben: --Well, if the Court concluded that the question was not susceptible of resolution by resort to the usual tools of statutory construction, then you would apply the rule of lenity.

But it's our submission that neither of these two theories--

Justice Stevens: But may I ask this question?

I think you have conceded, in a footnote... and maybe you're... almost conceded... that if this were a RICO case, a civil RICO case, that the Congress enacted the RICO statute against this background rule and that perhaps the RICO case could not go forward.

What if it were a federal RICO case and... the same facts... would the RICO statute be qualified by the revenue rule?

Mr. Dreeben: --No, it would not, Justice Stevens, and that's because of the precise distinction that I drew in response to Justice Scalia's question.

This is a suit by the United States Government, as Plaintiff, not by a foreign government, as Plaintiff or prosecutor.

The revenue rule is essentially concerned with interests of sovereignty.

One foreign government should not be able to come into our courts and enforce its sovereign power by using our courts to collect taxes from our citizens.

Justice Breyer: What about the other reasons underlying it, which is what I was trying to get at before?

I see, literally, that the common law... you know, the enforcement... this is not literally enforcement.

So what I was driving at with my questions is, even though literally it's not, the problems of complexity, the problems of knowability, and the problems of there being so many, many foreign tax laws that we might think are basically unfair, that those considerations apply here, just as they do with the enforcement rule, and then add the fact that turning people into criminals under threat of prosecution by the Federal Government is really very much equivalent to enforcing the foreign rule in a court.

I mean, that's the whole thing spelled out.

And I meant it seriously, though I used foreign examples to, sort of, drive the point home.

What is your response to that?

Mr. Dreeben: Well, Justice Breyer, first of all, the complexity of foreign tax law is something that would defeat a federal prosecution in which we need to show specific intent to defraud if the law were not sufficiently clear for us to be able to meet that burden.

This case illustrates the kind of prosecution that will be brought.

There are taxes that are due upon the importation of alcohol.

The Petitioners arranged, through the wires, to bring alcohol from Maryland up to New York, and then they got it across the border by not answering questions when asked by customs officials and by not going to secondary inspection when they were asked.

In order to bring a criminal prosecution that requires specific intent to defraud, the government is not going to be relying on obscure systems.

As to the concern about the enforcement of tax systems that the United States may believe are... is unfair, that is the prerogative of the Executive Branch to determine in deciding whether a prosecution should be brought in a particular case.

This Court has repeatedly recognized that the Executive Branch is the preeminent branch in the area of foreign affairs--

Justice Ginsburg: --To go to one more aspect of the statute which I don't think you've addressed, Congress said that... with respect to the wire fraud and mail fraud and, I think, other things... that restitution to the victim is mandatory, that it's not left up to the government to decide restitution or not.

Except here restitution sounds very much like enforcing Canada's taxes, so you have conceded no restitution.

But it seems to me that Congress thought of the wire/mail fraud statutes as cases in which there would be restitution, and that suggests that they didn't envision foreign taxes to be the object of the scheme to defraud.

Mr. Dreeben: --Justice Ginsburg, the syllogism doesn't track, because the entire scope of the revenue rule, as defined in the common law cases that can be pointed to as the background principle, has to do with a foreign government, or someone acting on its behalf, coming into this country's courts to enforce its tax rules.

Here what you have is the United States Government determining that it is in the interest of the United States to bring a criminal prosecution.

Now, in this case, the prosecutor did concede below that restitution was not appropriately ordered.

That's not the position of the United States.

The position of the United States is that restitution under the mandatory statute should be ordered and it does not infringe the revenue rule.

But there are--

Justice Ginsburg: Now, how could that be, because restitution is to the victim?

The victim is Canada.

You collect Congress... or Canada's tax, and you give it to Canada.

Is there any other kind of restitution?

Mr. Dreeben: --No, there isn't, Justice Ginsburg, but the revenue rule isn't of such a broad scope that it applies to efforts by the United States Government to secure punishment by... for a criminal conviction.

But, Justice Ginsburg, if the Court were to disagree with that and were to believe that restitution, even when it's been sought by the United States... not by a foreign government, in its own right, with the power to instigate a lawsuit... but that even when the United States does it, that somehow falls within the parameters of the common law revenue rule, then the answer to that problem would be to interpret the restitution statute against the background of the revenue rule, not to interpret the wire fraud statute against the background of the revenue rule and hold that a prosecution by the United States is wholly barred.

The Petitioner's submission here is really rather--

Justice Scalia: The restitution statute is not ambiguous at all; whereas, this statute has a number of ambiguities in it.

And if I had to find my way out of the restitution problem, I would pick the ambiguous statute to get out, rather than simply saying,

"Well, though this restitution statute says this categorically, we will ignore it, because if we didn't ignore it, we would be enforcing the revenue laws of another country. "

There's nothing against enforcing the revenue laws of another country, if we want to; this is just a question of statutory interpretation.

Should this ambiguous statute be interpreted that way?

If Congress said,

"We're going to enforce Canada's tax laws. "

there's nothing wrong with that.

But--

Mr. Dreeben: --Justice Scalia--

Justice Scalia: --So you have two statutes.

One of them seems to be quite ambiguous.

The other one is categorical, you get restitution in all cases.

Now, how do I wiggle out of it?

Mr. Dreeben: --There's a difference--

Justice Scalia: --Obviously, I wiggle out of it with the ambiguous statute.

Mr. Dreeben: --there's a difference, Justice Scalia, between an ambiguous statute and a broad statute.

The wire fraud statute is unequivocally broad, and it has been so interpreted.

It's not ambiguous on the question of whether it applies to schemes to defraud that may involve foreign victims; it says "any scheme to defraud".

And I think, as Justice Kennedy's questions pointed out earlier, if there were a scheme to defraud a foreign business interest in Canada or a foreign governmental interest in Canada relating to some commercial venture, the wire fraud statute would apply, and--

Justice Breyer: What about... what about a scheme--

Justice Scalia: But you haven't told me... you haven't told me how you get out of the restitution statute.

There's no ambiguity there, and it is not a rule of law that you can't... it's unconstitutional to enforce the tax laws of Canada.

Since it's entirely feasible, and since the text is categorical, how do you get out of the restitution statute?

Mr. Dreeben: --Here is how I get out of it, Justice Scalia.

If you think, as I do not, that the revenue rule would bar restitution at the behest of the United States in a criminal prosecution, there is a background principle that says when there is an established rule of the common law, Congress legislates against that background, and unless it makes its intent clear and unequivocal to overcome that background rule of the common law, then the statute will not be interpreted to be in derogation of it.

It was that principle that formed the basis for the government's view that Canada cannot come in under the RICO statute--

Justice Ginsburg: Well, that view is in... somewhat in tension with your view that the common law revenue rule doesn't stand in the way of this prosecution.

Because you have to interpret the statute in light of the general rule that one country doesn't mess with another country's taxes, absent a treaty.

Mr. Dreeben: --Well, Justice Ginsburg, there is no common law rule that one country doesn't "mess with" another country's taxes.

What there are, are a set of cases that deal with specific problems in which foreign taxes were at issue.

And in all of the 20th century versions of this problem, what you had is a foreign government or an entity, acting at the behest of a foreign government, coming into another country seeking to use that country's courts to enforce its own tax rules.

And in that context, the justifications for saying that one country will not enforce another country's revenue laws have to do with the sovereignty interests of the host country.

One country, when it seeks to obtain revenue to carry out its own governmental policies, is doing something fundamental to its sovereign existence, and there's no obligation of the United States to assist the foreign government in using its court system to achieve those independent sovereign aims.

No prohibition on it, either.

As Justice Scalia pointed out, it's not constitutional, if Congress wanted to allow it.

But countries, historically, have not.

And that principle does form an important backdrop--

Justice Breyer: --Have countries also... just... here, I don't know, in respect to the principle... would it have been viewed as contrary to the principle if a country were to pass a law... say, England were to pass a law saying it is a crime in England not to pay French taxes?

I'm not saying they couldn't do it; I'm just saying, Would a law like that, saying it is a crime in England not to pay French taxes... would it have been viewed as contrary to an abrogation of... or a... you know, whatever you call it... a derogation from the common law revenue rule?

Mr. Dreeben: --I think that that's essentially the same question in this case, with the one significant difference that here there is a domestic--

Justice Breyer: But do you see why I want to characterize it?

I mean, would you characterize... my criminal statute's absolutely clear... the clear is, it is a crime in England not to pay French taxes.

Now, would you, or would scholars, or whoever, view about the common law revenue rule, would they have said,

"There is a derogation from the common law revenue rule. "

or would they have said,

"It has nothing to do with it? "

Mr. Dreeben: --Well, I don't know what scholars would have said about it--

Justice Breyer: No, what would you have said?

Mr. Dreeben: --but this is what I would say about it.

Justice Breyer: Yeah.

Mr. Dreeben: When you're dealing with the principle that a statute of the United States will not be construed to be in derogation of a common law unless it's clear that that's its purpose, the court should be very careful in defining what the parameters of the common law are.

The court should not take a common law rule and treat it as some dynamic entity that has capability of growing a dimension that is not consistent with its purposes and that it had never assumed in any decided case as a means of telling Congress,

"You can't do what you have done. "

So I would say, Justice Breyer--

Justice Scalia: We haven't told... no, no, no, no, no, no, we're not telling Congress,

"You can't do what you have done. "

We're saying, "Congress hasn't done this".

Mr. Dreeben: --Well, the only reason you would say that Congress hasn't done it, Justice Scalia, is if you concluded that... and I would ask the Petitioners what their best citations are, because I haven't been able to find them... what cases indicate that a country cannot bring the kind of prosecution that the United States did here to vindicate its own independent sovereign--

Justice Breyer: Nobody says they can't do it.

That's why I asked you my question.

My question is simply whether you would consider an absolutely clear law...

"We will... we... it is a crime not to pay your French taxes. "

I'm asking whether you would consider that... I'm not saying they can't do it; I just want to know... would it be in derogation of the common law principle?

Mr. Dreeben: --It would probably be in derogation of a more--

Justice Breyer: That's where--

Mr. Dreeben: --fundamental principle.

Justice Breyer: --Oh.

Mr. Dreeben: Not the revenue rule--

Justice Breyer: Not the--

Mr. Dreeben: --but a more fundamental principle that one country usually does not legislate with respect to extraterritorial acts.

Justice Breyer: --That would be another one, too.

Mr. Dreeben: But if you--

Justice Breyer: Because the... I... that's why I want to know--

Mr. Dreeben: --But that's not applicable here, either, Justice Breyer, because the crime involves wire fraud in the United States.

Justice Souter: Yeah, but why is it ethical, to the extent that there seems to be a mandatory obligation to order restitution?

And it seems to me that the restitution that would be ordered would be just as much in derogation of the common law principle as the out-and-out collection in Justice Breyer's example.

Mr. Dreeben: Justice Souter, again, to say that it's in derogation of the common law principle assumes that the common law principle has applicability to one country seeking to vindicate interests of its--

Justice Souter: Well, but I... a moment ago, you said,

"Okay, we'll assume that there would be some derogation. "

in Justice Breyer's example.

I don't see why you don't come to the same conclusion with respect to the restitution aspect here.

Mr. Dreeben: --Because the derogation that I was talking about with respect to Justice Breyer is punishing conduct that occurs entirely extraterritorially.

This is not conduct that occurs entirely--

Justice Souter: Yeah, but the revenue... the revenue rule does not rest simply on the rationale of non-extraterritorial enforcement.

It has... it has other rationales: difficulty of understanding what the revenue rule is; the... you know, the problems of policy; there are lots of revenue rules in foreign countries that we certainly wouldn't want to enforce, and so on.

It's not just extraterritoriality.

In those... those policies would be just as much implicated by the... by the restitution as by the out-and-out enforcement in Justice Breyer's example.

Mr. Dreeben: --Well, Justice Souter, I think that the policies underlying the revenue rule are narrower than the ones that you have articulated; but, even more to the point, they are not justifications that found their way into any holdings that would leave a reasonable legislator in 1952, when the wire fraud statute was enacted, to conclude that this is a rule that I'm going to have to specifically--

Justice Scalia: Well, perhaps--

Justice Souter: Well--

Justice Scalia: --I'm sorry.

Justice Souter: --Go ahead.

Justice Scalia: No, no problem.

Justice Souter: I was going to say, perhaps there were no specific holdings, because it would have been regarded as, kind of, a bizarre derogation of the rule in the first place.

Nobody had dreamed up this scheme earlier.

Justice Scalia: I was about to say the same... the same thing.

You keep saying there are no cases that do this.

Are there... are there... are there cases, before 1980, which do what you want to do... that is, to use our fraud law, or something, to effectively enforce Canada's... or some foreign country's tax law?

Mr. Dreeben: --No, but what I would say about--

Justice Scalia: No.

Mr. Dreeben: --the revenue rule is that it is a shrinking principle of the common law, not one that has been growing.

It originally started out as a principle that allowed countries to avoid invalidating contracts that they believed were in furtherance of commerce.

It gradually came under attack, because what it said is that the United States will not notice that a foreign country's laws have been violated in the formation of a contract, and so the contract will be enforced.

Commentators recognized that that was contrary to principles of comity and recognition that each country does have a reciprocal interest in acknowledging each other's laws.

In the 20th century, those contract cases completely drop out of the picture, and what becomes left are sovereignty cases where a country is seeking to exert its sovereign power inside the United States or inside a foreign country... the United States, itself, tried it once in Canada... to collect taxes.

And countries said,

"We're not going to do that. "

"We're going to leave it to the treaty process. "

But the rationales that Justice Breyer and Justice Souter have articulated, about complexity of foreign law and odious foreign tax systems, have never been the driving force behind the revenue rule.

It's been--

Justice Breyer: --I got your point.

I think it is the... in my answer... in my clear example, you would say no, that's not in derogation for the reason that there's an independent local reason for doing it.

It's not being done to... whether it has that effect or not, it's not being done in order to collect the foreign tax.

Mr. Dreeben: --That's right.

Justice Breyer: That's been your response throughout.

Mr. Dreeben: That is correct.

Justice Breyer: Okay, I--

Mr. Dreeben: What you have instead is a law of the United States that's enacted to serve perfectly valid interests that the United States Government has in rooting out fraud in this country and in dealing with schemes to defraud that are created here.

And for the court to say that,

"We don't like these kinds of prosecutions, because we're concerned about really bad foreign tax systems, and we're concerned about complicated law, and we're concerned that some common law rule that had never actually assumed the scope that Petitioners ascribed to it, should be formed... read as the background principle for the interpretation of this statute. "

is not a principle that finds any support in the construction of federal--

Justice Ginsburg: Mr. Dreeben, can I ask you... this is such a curious case.

You were very candid in telling us that when Canada put these astronomical taxes on tobacco and alcohol, that was almost an invitation to smugglers.

Did we have any discussions with Canada... I mean, they do have that border, which is rather easy to cross... about what we were going to do when they put the taxes on liquor sky-high?

Mr. Dreeben: --I am not aware, Justice Ginsburg, of what specific law enforcement conversations occurred, but I can tell you that there is extensive law enforcement cooperation with Canada, as a close neighbor, and that the interests of the United States very much do favor our policing against smuggling here, and Canada policing against smuggling there.

Thank you.

Justice Stevens: Thank you, Mr. Dreeben.

Ms. Brill, you have four-and-a-half minutes left.

Rebuttal of Laura W. Brill

Mr. Brill: Thank you.

The common law cases universally say that it does not matter who is bringing the claim.

It can be the foreign government or it can be another person.

Justice Stevens: Can I just ask you to tell us what your strongest case is?

Because they did raise that question.

Mr. Brill: Sure.

On the... on the issue of the identity of the person bringing the claim, the contract cases, Holman and Boucher, stand for that proposition, and the Peter Buchanan case, which came down in 1950, just before the wire fraud statute was enacted... this was in the Appellate Court in Ireland... it says,

"It is not a question whether the plaintiff is a foreign state or the representative of a foreign state or its revenue authority. "

"In every case, the substance of a claim must be scrutinized. "

"And if it then appears that it is really a suit brought for the purpose of collecting the debts of a foreign revenue, it must be rejected. "

That's at 1955 A.C. 529.

And so with the... with the Mandatory Restitution Act, this clearly is something to collect the debts of a foreign nation.

And the sentencing scheme that Justice Ginsburg alluded to earlier, in which the sentences were enhanced based on the intended loss, demonstrate that this is an enforcement action.

Stringam versus Dubois, which is an Alberta case from 1992, involving... the plaintiff there was an executor of a probate estate, and the court said,

"The identity of the plaintiff in the action is not vital if the action indirectly has the effect of enforcing revenue laws of a foreign country. "

That's at 135 A.C. at page 70.

And the way the revenue rule has been cited repeatedly is that it... what it prevents is not just direct enforcement, but direct or indirect enforcement.

And so it is... the fact that there have not been criminal prosecutions, it clearly would have been in derogation of the common law for a... for England to pass a statute saying it is criminal in England to break the laws of France.

Justice Breyer: See, he's saying it isn't, for the reason that, he says, that if England did it for independent reasons, it wasn't doing it because it wanted to help France get it's money, that then it wouldn't have been in derogation.

Of course, it would have been legal, either way, but he says it wouldn't have been in derogation, for that reason.

Mr. Brill: Right.

Well, it clearly would have.

There was no common law practice... we have... we have not found, in all the research... and the government has not found... any example of a criminal prosecution... not just in this country; anywhere in the world... to... deriving from the violation of a foreign government's tax.

And so--

Justice Souter: You're saying, in effect, that derogation is an effects test, not an intent test.

Mr. Brill: --Yes, Your Honor.

Yes, Justice Souter.

And the... in terms of what the government's interests are, there were no deceptive acts in this country.

The way the government gets a material misstatement is by a failure to disclose at the Canadian border, which only... even though they did not put in evidence of what the... that Canada even had a law requiring disclosure, the only way there could have been any kind of material misstatement would be if Canadian law required it, not if... not anything that happened in the United States.

In Cleveland, the court was very clear to point out... one of the reasons to adopt a rule of lenity in interpreting the mail fraud statute and the wire fraud statute is because violations serve as a predicate for RICO actions and for money-laundering violations.

And so what the government's position is, is that we should carve out this ad-hoc exception and allow wire fraud prosecution, even though we would not allow any kind of a civil RICO action and even though we're going to have an ad-hoc exception for the Mandatory Victims Restitution Act.

But what the court said in Cleveland is, the way we should do this is by adopting a proper interpretation in the first place, not by... of the wire fraud statute... not by having ad-hoc exceptions.

And the reference to prosecutorial discretion that there should be faith that the government will only prosecute, I guess, what the government regards as exceptional cases is not something that can provide any business involved in an international transaction with any... with any comfort.

And thank you very much.

Justice Stevens: Thank you.

The case is submitted.

Unknown Speaker: The honorable court is now adjourned until tomorrow at ten o'clock.

Attribution:

The Oyez Project

Featured:

Cedric Kushner Promotions v. King - Oral Argument

Fri, 09 Jan 2009 14:50:30 +0000

Case:

Cedric Kushner Promotions v. King

Media File:

00-549_20010418-argument.mp3

Related Transcript:

transcript.xml

Transcript:

Argument of Richard A. Edlin

Chief Justice Rehnquist: We'll hear argument now in No. 00-549, Cedric Kushner v. Don King, et al.--

Mr. Edlin.

Mr. Edlin: Mr. Chief Justice, and may it please the Court--

The decision of the Second Circuit adopting a scope of employment test should be rejected and reversed for three principal reasons.

First, the scope of employment test cannot be reconciled with the plain language of the statute.

Second, the decision below runs contrary to this Court's decision in Reves, as well as in Turkette and as well as in Scheidler.

Finally, the decision below would unnecessarily eviscerate the ability of private litigants in the Government to bring 1962(c) actions.

Turning to the first point, on page one of--

Justice Breyer: Can you tell me something, before you get into this, I would appreciate your correcting the following misapprehension, if it is, or affirming it.

This is my question--

Mr. Edlin: --Yes, sir.

Justice Breyer: --Are we talking about only a really odd situation?

A situation where we're talking about one individual?

Because if there are several individuals in a corporation, there really is no problem that this Act clearly applies, but we're only talking about a circumstance where there's just like one person.

Is there a general aspect--

Mr. Edlin: Your Honor, the problem--

Justice Breyer: --of what we're talking about?

Mr. Edlin: --I think the problem with the Second Circuit's decisions is that it does reach the general problem.

Clearly if you have a corporation that has many employees, and one of the corporate employees is the person, and the rest of the corporation is the enterprise, I see no problem with that case.

I see no problem with this case.

This case is exactly the same, because the introduction of the corporate form changes things, and whether it's a one person corporation or a multiple person corporation, the issue is precisely the same.

Justice Kennedy: But... I just want follow up Justice Breyer's question, in the case of a large corporation, what would the Second Circuit say?

The same thing?

Mr. Edlin: I think the problem with the Second Circuit's decision is that it may well say the same thing.

Justice Breyer: Now, that's what I didn't see because it seemed to me in any real corporation it's not going to be following what the corporation wants to commit a crime, so it's not in the scope of your employment to commit a crime.

And so under the Second Circuit's rule, unless you're suddenly... unless we're talking about a corporation that wants to go off and commit crimes, the person's never going to be acting in the scope of his employment, so always he's caught within the statute.

If there's, you know, several people, certainly.

Am I right?

Can you explain that very clearly?

Mr. Edlin: The problem that we have with the Second Circuit's decision is that it is hard to rationalize with the meaning of the statute and with the Court's decision in Reves.

Reves clearly, for example, confers liability on all inside managers.

Whatever else it does, it certainly confers liability on all inside managers.

There's no question under Reves that Mr. King would be included within the operation and management test that this Court adopted there.

The Second Circuit's decision immunizes precisely the same group of people, or a single person, that Reves would impose liability upon.

And the Second Circuit's decision is not limited and does not distinguish between corporations in which there is one principal party or corporations in which there are many parties.

I agree with you the scope of management test doesn't really work, but it's because it doesn't work.

It's not because the Second Circuit has limited it to just this fact item.

Justice Souter: In any case, I was going to ask basically the same question.

It seems to me that if the scope of management test includes at least, as I assume it must, some reference to the purposes of the corporation, then no corporation, whether it's a regular corporation or a pure formality, can be organized as a matter of law to commit acts of racketeering.

So the odd thing to me about the Second Circuit's opinion is the notion that one would be within the scope of employment while engaging in the prohibited activities.

And I would have thought that that was a legal impossibility.

Am I missing something?

Mr. Edlin: Your Honor, I--

Justice Souter: I should ask your opponent that question, but just to stir him up--

Mr. Edlin: --If you're missing something, I am too, and I am eager to hear an answer from Mr. Fleming on that question.

But even beyond the corporation, certainly RICO reaches both legitimate and illegitimate enterprises and, in the context of the illegitimate enterprise, scope of employment analysis makes no sense at all.

So I just think that when you look at what the Second Circuit is doing, it can't be reconciled with what the words of the statute said.

The words of the statute are extraordinarily broad.

This Court has had many opportunities to look at this section of the statute, and when we look, for example, on page one of the blue brief, at the definitions, person includes any individual or entity, and an enterprise for this purpose includes any corporation.

And 1962(c) refers to any person employed by an enterprise.

Justice Kennedy: --On these facts, could you have alleged that King was the enterprise and the corporation was the person?

Mr. Edlin: On these facts, I think that that... you could allege that, Your Honor.

I think that that would be--

Justice Kennedy: So you could have count one, where one is the person, and count two, and it's the same?

That seems rather odd.

Mr. Edlin: --No, I don't think that you can do both.

I don't think you can set it up and try to have it both ways, but I think--

Justice Kennedy: But I thought you just indicated you could do that.

Mr. Edlin: --If you chose just one.

If you had... if you chose Don King Productions as the--

Justice Kennedy: Well, do you flip a coin to decide which way you're going to do the count?

Do the pleading?

Mr. Edlin: --Unfortunately, you know, you might have to do that in the Second Circuit.

I don't think that's the way that the statute is--

Justice Kennedy: No, but under your theory.

Under your theory you say that you can participate with your own corporation.

I said what's the difference between an enterprise and a person on the facts of this case?

It seems to me that they could have just been flipped around.

Mr. Edlin: --On the facts of this case, Your Honor, certainly the pleading that we have in this case satisfies the standards of the case.

There's an individual, he is conducting his affairs through a corporate enterprise and engaging in racketeering activities.

No question that that pleading is appropriate.

Now if you flip it and you had Don King Productions conducting the affairs of Don King, depending upon what the facts were, that would not violate the plain language of the statute.

There are contexts that one could probably come up with in which the facts would justify that sort of pleading.

In this case, I think we've pled it the right way.

Justice Ginsburg: But as far as pleading is concerned, the rules allow you to plead in the alternative, and you don't have to pick your theory at the pleading stage, so I guess your answer to Justice Kennedy means that in your complaint you could have alleged it both ways and then waited to pick until later on.

Mr. Edlin: I think that that's no doubt technically correct, but I don't think that's what we're trying to do just because you can plead in the alternative.

I don't think that pleading in the alternative means that you can plead wholly inconsistent theories of facts.

You can plead alternative results, but I don't think that a pleading in the alternative like this would pass a motion simply because I do think that in terms of the structure of the person and the enterprise, you do have to pick it.

Justice Ginsburg: Do you need a corporation on your theory?

I mean, I was reading your presentation and I had the notion that it wouldn't matter if it were a sole proprietorship.

At least if it had employees, the sole proprietorship could be the enterprise and King could be the person.

Is that correct?

Mr. Edlin: That's correct, Your Honor.

In that case, a sole proprietorship with employees would be an association in fact enterprise and, again, distinct from the person.

So as long as there is no complete overlap between the person and the association in fact, those pleadings which are again not at issue in this case have routinely been upheld as appropriate pleadings.

I think, Justice Ginsburg, that our circuit just got this one wrong, and I think that it's very simple to address it.

Moving past the language of the statute and on toward the Reves case, again as I mentioned just a moment ago, Reves carefully considered the appropriateness of imposing liability upon employees or others who were in operational and management control of the corporation.

There is no question that under that test Don King would qualify as someone in operational or management control of this enterprise, and that is the appropriate standard to use here.

It is not a scope of employment standard.

Reves is the appropriate standard, and under Reves Mr. King would have liability.

The Second Circuit's decision simply immunizes that.

The final vice with the Second Circuit's decision goes toward the evisceration of 1962(c) actions.

1962(c) actions, I believe... I haven't done the math, but I believe they are the wide majority of RICO claims that are brought.

There are many more cases there.

Now, whether you take the Government's example of a--

Justice Scalia: Any idea what percentage of them really pick up organized crime, which is supposedly the object of RICO?

Mr. Edlin: --I don't, Your Honor.

I don't know.

Justice Scalia: Yes.

That would be a more interesting statistic as far as whether your interpretation really fulfills the purpose of RICO.

Mr. Edlin: Your Honor, there is no doubt that the statute was targeted at organized crime, but there is also little doubt--

Justice Scalia: That's right.

And all your statistic may prove is that the statute is being used excessively for a purpose that it did not have in mind at all.

Mr. Edlin: --Your Honor, there is little question that what you're saying is true, except for the fact that this Court has read in Sedima into the statute the fact that it has an extremely broad sweep and it catches precisely this kind of activity.

Congress made a choice in unveiling the broadest possible statute, that it would err on the side of including these kinds of cases, possibly even shifting the burden to Federal courts to deal with these kinds of claims so that loopholes were not created for clever racketeers to slip through and avoid liability.

I believe that that demonstrates the breadth of the statute, and if that is a problem to be remedied as this Court has observed on many occasions, it lies with Congress.

The plain language of this statute has been amply satisfied by this pleading, and I believe that the... again, to my last point, the problem with the Second Circuit decision is that whether you take the Government's example of the corporate president who directs the company to bribe public municipalities, or whether you take our example of an organized crime family incorporating and appointing everybody an executive vice president, those two situations, under the Second Circuit standard, would not be caught within the scope of the statute, and--

Chief Justice Rehnquist: Mr. Edlin, you rely rather heavily on our decision in Reves, and I notice the court of appeals opinion didn't mention it at all.

Did you urge that case in the Second Circuit?

Mr. Edlin: --We urged it in the Second Circuit.

We argued it extensively in the Second Circuit, and what is interesting to me at least in the Second Circuit's decision... there are a couple of points of interest.

One, it did not discuss Reves.

Second, it was a panel of two judges in the Second Circuit, but also Judge Lloyd George of Nevada who, in addition to presumably knowing something about boxing, knows something about the laws outside the Second Circuit and how his circuit interprets this.

A per curiam decision which drops a very strong footnote in footnote 4 which... in which the Second Circuit owns up to the fact that its decision, it's intention, if not direct conflict, with the laws of every other circuit on this point, I think demonstrates in some way that the Second Circuit was inviting this certiori.

Chief Justice Rehnquist: Well, a visiting judge is expected to follow the precedent in the circuit which he visits.

Mr. Edlin: I'm simply observing that I found how the court issued its decision interesting, given the fact that it does not mention Reves.

It is very difficult to understand how this case, which is so close to Reves, is not even mentioned in this very short Second Circuit decision.

And I think the reason is obvious.

It can't be reconciled.

There is no way to take the facts of this case and support them under any reading of Reves.

Justice Breyer: I suppose that what they're worried about, if I'm trying to imaginatively put myself in their shoes, is that a person could claim the following.

Take any company whatsoever that does business in interstate commerce, and the plaintiff says there's... there's a manager in that company who, on a couple of occasions, at least two, told the salesmen to overstate or to lie about a characteristic of the product.

That's it.

And now all of those become RICO violations because it is claimed that this person, you see, is engaging or participating in the affairs of American Express Company or any other large company, through a pattern of racketeering activity, i.e. two instances of mail fraud.

And that's so distant from the purposes of this statute that they're searching for ways to limit the scope.

Mr. Edlin: Justice Breyer, I agree with that.

However, this Court has rejected every instance in which a circuit court has sought to artificially restrict the language of the statute and has observed that the remedy is with Congress.

This statute was not passed without Congress observing that these exact criticisms were possible.

It was passed over opposition.

The answer to the opposition was simply that the protections of the statute did not take place in the definitional sections, it took place in the pattern and enterprise sections so that garden variety frauds are typically not committed with a pattern and continuity.

Justice Scalia: That's no... that's no protection in the hypothetical that Justice Breyer gave you.

I mean, you have one salesman who steps over the line a couple of times, and suddenly you're... you're... the corporation is into RICO.

I mean, that's totally absurd.

Mr. Edlin: Justice Scalia, whether it is or it isn't, it was considered by Congress at the time it was passed, and Congress made a decision that it would--

Justice Scalia: But don't tell me it's not absurd.

Say you know it's absurd, but that's what Congress provided.

I thought you were trying to say it's not absurd.

Mr. Edlin: --I'm trying carefully to say it's not absurd in that example, but apparently it's hard, and I won't continue to try to do it.

The fact is, though, that we do have a statute.

It's been read by this Court a number of times, it supports our interpretation of the statute.

The Second Circuit's decision should be reversed, and I would like to reserve whatever time I have remaining for rebuttal.

Thank you.

Argument of Austin C. Schlick

Chief Justice Rehnquist: Very well, Mr. Edlin.

Mr. Schlick, we'll hear from you.

Mr. Schlick: Mr. Chief Justice, and may it please the Court--

Section 1962(C) reaches racketeering activity by a defendant who is employed by the RICO enterprise, without regard to the scope of the defendant's employment.

That is clear from the text of Section 1962(c) which reaches racketeering activity by any person employed by or associated with any enterprise.

A scope of employment rule defies that plain language.

In addition, a scope of employment rule is inconsistent with the statutory scheme in three additional respects.

First, a scope of employment rule defies Congress's intent to reach criminals who infiltrate and corruptly run legitimate businesses.

It's important in that respect to address the question of whether a criminal or otherwise wrongful act can be within the scope of employment.

And the answer to that is yes, it can be.

Section 231 of the Restatement of Agency addresses that point, but consider the example of a corporation which instructs its employee to make a sale, knowing that the way that that sale was made traditionally is through bribery.

In that case, the bribery would be within the scope of employment, notwithstanding that it would be unlawful and, notwithstanding, there might not have been specifically urged by the corporation.

Because of that, when criminals take control of a business, they are able to bring illegal activity within the scope of that business.

And under the Second Circuit's scope of employment rule, that would immunize the racketeering activity.

Second, the scope of employment rule would create additional difficulties in applying Section 1962(c), because the test itself is contextual and subject to the case specific application.

This Court discussed that in Faragher v. City of Boca Raton.

The difficulties and the permutations of the rule.

Third, a scope of employment limitation is inconsistent with the Court's holding in Reves that a defendant, under Section 1962(c), must participate in the operation or management of the affairs of the business.

If participation and operation and management is necessary for there to be liability, then carrying out the affairs of the business cannot prevent liability.

An employee who controls a corporation would, under that rule, be immune from liability when he misuses his control of the corporation to involve the corporation in racketeering.

If the Court has no questions?

Justice O'Connor: Do you see any way to limit the application of RICO to the situations described by Justice Breyer?

It is a little far afield from its ostensible purpose.

Mr. Schlick: Yes, Justice O'Connor, the concern intuitively about Justice Breyer's hypothetical is the predicate act, which is mail fraud or wire fraud.

If you took the same hypothetical and substitute arson or murder or narcotics trafficking as the offense, I don't think that anyone would be shocked or surprised.

Justice Breyer: But that isn't the problem.

The question I think is... is there anything, any judicial interpretation, because mail fraud is one of the predicate acts, isn't it?

We're not a legislature.

I mean, so the question is, is there some area in this which would be an interpretation that brings it closer to the basic congressional intent which is just as you describe, to get organized crime people the bad things, but not sweep in so many things.

Or this simply a question of that's how the legislation was drafted, put up with it.

Mr. Schlick: This case goes to the interpretation of Section 1962, which applies to criminal as well as civil cases.

Courts have looked under Section 1964(c) to addressing particular abuses in the civil context, but what ever one thinks of the allegations in this particular complaint, the core fact pattern which is the running of a business in a pervasively corrupt manner is exactly what Congress intended to reach through RICO.

Justice Kennedy: Do you agree that this complaint could have been just as easily drafted, switching the enterprise and the participant?

Mr. Schlick: Justice Kennedy, it would be possible to frame a complaint either way, but the fact that--

Justice Kennedy: And I mean prove the case as well.

Mr. Schlick: --But to do that, you would be alleging two different fact patterns.

Suppose the corporation needed the personal assets of Mr. King to carry out its racketeering activity.

In that case, it might be possible to have the corporation named as the defendant or person, and Mr. King as the enterprise.

But that would be a different fact pattern than the one alleged here.

It would not be possible simply to flip the defendant and the enterprise at will.

Justice Kennedy: I'm not sure why not, under this fact pattern.

Mr. Schlick: Under this fact pattern, the allegation is that Mr. King has used not only his personal resources but also other agents, other employees, of DKP Corporation to carry out the racketeering activity, so it would be necessary to allege an enterprise that incorporates those persons or things that are used in the racketeering.

Argument of Peter Fleming, Jr.

Chief Justice Rehnquist: Thank you, Mr. Schlick.

Mr. Fleming, we'll hear from you.

Mr. Fleming: Mr. Chief Justice Rehnquist, and may it please this Court--

As usual, you depart from what you're prepared to say.

First, the application of 1962(c) to ordinary business, is absurd.

We do not rely upon that, although we do believe that if thinking along with us the Court concludes that the Second Circuit's reading of 1962(c) and its application is correct, the absurdity of the other reading would lead acceptance of its result.

Mr. Justice Breyer, our case is not limited to a single employee situation.

It would be... the Second Circuit's approach would be applicable if there were five or six employees or more.

Justice Breyer: Then that's their concern, because if that's right, then the one time when the interest of the employee committing the crime and the interest of the corporation are likely to be congruent is where you have an evil corporation, and that seems to be the one time that clearly the Second Circuit rule would exempt from the statute, and so oddly enough, insofar as it has an impact, its impact is bad in terms of the statutory purpose.

That's the argument of it.

Mr. Fleming: And exempt under (c), but would not exempt under--

Justice Breyer: I know, but insofar as the Second Circuit rule has real has real bite beyond a single person, its bite is biting the person... in other words, bite goes just in the wrong direction.

Mr. Fleming: --Our position would be, Justice Breyer, that (a) covers that situation, and it was Congress's intent that (a) cover that situation, where the same response to Justice Souter's question, and that has to do with whether any criminal act or predicate act or civil fraudulent act can be considered within the scope of employment.

Unfortunately, I think experience shows that those... that torts of that sort are conducted within the scope of employment.

Justice Souter: Well, that... that's an easy conclusion to draw if your sole test of scope of employment is intent to benefit the corporation, but the scope of employment inquiry is broader than that and, even apart from the fact that there's always a policy component to it, you've got to take into consideration in some way corporate purpose, and I take it we at least have common ground that there is no... there is not State corporation law that would charter a corporation to commit within the scope of its corporate authority an act of racketeering.

We agree on that, don't we?

Mr. Fleming: We do agree on that.

Justice Souter: Okay.

And if that has got to be considered then in determining what can fall within the scope of the employment of an employee or an officer, then it's hard for me to see how any act of the officer could, under State corporation law, be within the scope of his employment because it can't be within the scope of the corporate purpose.

Mr. Fleming: It could be... it could be to further the interests of the corporation.

Justice Souter: Right, but that's true only if that's your sole test of scope of employment, and if that's going to be the case, it would just, it seems to me, make for clearer thinking if we didn't talk about scope of employment and instead said, look, the test is whether it's to further the financial interest of the corporation.

Mr. Fleming: And what the court of appeals said... Second Circuit said in Riverwoods was in the course of their employment and on behalf of the corporation... and on behalf of the corporation.

Justice Souter: And I'm suggesting that you can't have both.

You might have a subjective purpose to bring lucre to the corporation, but I don't see how as a matter of law to be within the scope of employment, too.

Mr. Fleming: The Court would... what you're saying, Your Honor, is that if an employee commits a tort... commits a fraudulent act, it simply cannot be considered from the scope of employment.

I would disagree with that if, in fact, he was acting for the benefit of the corporation.

Justice Scalia: Yes, I think you have to disagree with that.

And I think you would say that a corporate charter cannot, certainly under any State law that I'm aware of, authorize the corporation to act negligently either.

Mr. Fleming: That's correct.

Justice Scalia: Nonetheless, when a... or willfully negligent, either.

And nonetheless, when a corporate officer does that, he's deemed to be acting within the scope of his employment.

Mr. Fleming: And we all know what happens.

Justice Souter: But then scope of employment then turns--

Mr. Fleming: So long as he's acting for the benefit of the company.

Justice Souter: --Then scope of employment, in effect, is going to be limited in this context to serving a corporate purpose in the sense of trying to bring monetary gain to the corporation.

That is the sole test.

Mr. Fleming: That is correct, Your Honor.

Justice Scalia: No, you wouldn't say that's the sole test, Mr. Fleming.

Surely if somebody is a lineman for a telephone company and he does some act that, you know, that is an act only appropriate for the vice president, you wouldn't say he's acting within the scope of his employment.

It has to be somehow within the assigned job that the individual has been given, doesn't it?

Mr. Fleming: Yes, I think it does.

Justice Scalia: Of course it does.

Mr. Fleming: I'm sorry... I misunderstood.

I thought what Justice Souter was saying was that the person's acting in his job... he may be acting tortiously in his job, but he's acting for the benefit of the company, and I believe that occurs all of the time, unfortunately, and when it does occur, it is within the scope of his employment.

Justice Souter: But I think the... I don't want to take more of your time on this than this last question, but it seems to me that the way the circuit was referring to the test, it was confining the test to this one element.

Was it trying to further the financial interest of the corporation.

Whether we as lawyers or judges would come up with a different test for that phrase, I don't know.

But that seems to be the one criterion that the circuit was applying, and I thought that's what you were agreeing to.

Mr. Fleming: I am in agreement with that.

The Second Circuit's view is very clear.

They say, as all the circuits say, that under 1962(c) the RICO person must be distinct from the enterprise, whatever that enterprise may be.

They then say that so far as they are concerned, corporate employees working for the... on behalf of and for the benefit of the corporation, are not distinct from the corporation itself.

We think that's consistent with the traditional view of a corporation.

There's the argument--

Justice O'Connor: The thing that strikes me as a little bit odd about the scope of employment test is that the scope of employment in Reves is one we usually make as relevant to whether the employer is liable, and it's not the inquiry we make when we're looking to see if the employee is liable, and I just don't see how the test quite fits.

Mr. Fleming: --If understand what you said, Justice O'Connor.

You make exactly our point about RICO and why the Second Circuit is correct.

Justice O'Connor: I wouldn't think so.

I didn't make the point for that purpose.

Mr. Fleming: The common law provides, as the Court knows, that a corporation is liable certainly civilly and sometimes criminally for the conduct... for the wrongful conduct of its employees.

RICO exempts the enterprise from liability and points to the person only.

We think if you have to look at that issue, when you're asking yourself what Congress was looking for in 1962(c), we say that because the enterprise is exempt from liability for the wrongful conduct of the person, that can be consistent with common law principles only in that situation where the corporation is exempt by common law.

Chief Justice Rehnquist: Mr. Fleming, a moment ago you referred to the distinctness requirement, and you said all the circuits are in agreement on that.

Is that your considered opinion as opposed to the scope of employment requirement?

Mr. Fleming: All the circuits agree that under 1962(c), there must be the RICO person... it could be any person... the RICO person must be distinct from the enterprise.

All the circuits agree on that, and all the circuit... excuse me, Justice Ginsburg?

Justice Ginsburg: You could have a sole proprietorship that has some employees, and that would satisfy the distinctiveness requirement, would it not?

Because as long as it wasn't just the one person operation with no employees, so you don't have to have another form.

You could be operating a sole proprietorship and still meet the distinctiveness requirement, as I understand it.

Mr. Fleming: Not in... not in the... in the seventh circuit, yes.

And in another circuits, perhaps yes.

In the Second Circuit, no, if the predicate acts were performed for the benefit of the sole proprietorship.

But I agree, Justice Ginsburg, that a sole proprietorship with a few employees is subject to 1962(c) application.

The question is whether the Second Circuit's view of the application of 1962(c) should prevail, or whether the view of other circuits should prevail.

The Second Circuit is saying that corporate employees acting with the corporation and for the benefit of the corporation are really a part of the corporation and are not distinct from the corporation for the purposes of the distinctness required by RICO.

Justice Ginsburg: The United States is one example where the Second Circuit position would meet, and it says here's a corporation, tells its employees go out and bribe the local police, it will be able to do this, that, or the other thing, and they won't touch us.

Those employees who are giving the bribe then are acting in the scope of their employment for the benefit of the corporation, and under your theory, there would be no RICO claim.

Is that correct?

Mr. Fleming: Against the employees.

But I think there could be punishment of the corporation, and perhaps of the employees also, under Section A of 1962, in which the corporation is the beneficiary and can be punished.

When you look at the--

Justice Ginsburg: It would be, I suppose, could make a criminal bribery case, but as far as 1962(c), on your theory, such a pattern would not fit because it was within the scope of their employment to give out these sweeteners.

Mr. Fleming: --And for the purported benefit of the corporation.

Justice Ginsburg: Yes.

Mr. Fleming: But the conduct could be reached under RICO under Section (a), both as to the corpora... certainly as to the corporation, and we believe also as to the persons.

And when you look at the entire statutory scheme, you have a situation where under (a) the beneficiary corporation... what Mr. Blakey calls the perpetrator corporation... is subject to RICO liability.

It doesn't make any sense.

When you get to 1962(c), there should be a quasi redundancy, and that's why the--

Justice Breyer: I thought that (a) is about... is investing racketeering proceeds in an enterprise, and (b) is about obtaining control, and (c) is about managing the enterprise or participating in its affairs through a pattern of racketeering activity.

They seem different.

So I thought that... imagine the case where you have a group of racketeers... I mean, let's call them really bad people, all right?

The really bad people in fact created or are found in positions of responsibility in an enterprise, and what they do is they have a series of really bad acts.

So we get that out of it.

Unknown Speaker: Now, where the really bad people are in an enterprise and they're running it through really bad acts, your interpretation, according to the other side, will basically in the worse case bring them out of section (c).

Justice Breyer: Because these are really bad people, they have a lot of really bad acts, so they're just the people that (c) wants, and you write them out, because after all they are not going against, they are even furthering what the enterprise is there for.

Now, that's what they say.

Now, you say, which may be true, if their interpretation is right and the legal distinctness consists of either (a) legal distinctness, or (b) factual distinctness, the distinctness requirement is always satisfied but for the fact that where there is a single person, and he doesn't even work through a corporation.

So you say that meets it meaningless.

Now, they say between the two, theirs is better.

All right?

So what's your reply to that, because they say that there should be limitations?

There are other words in the statute to do it, not this one.

Mr. Fleming: --Our reply, Your Honor, is that between one or the other, ours is better.

The Second Circuit--

Justice Breyer: I know that's what you think, but at the moment I would say given the fact that your interpretation takes it out of the heartland where it should apply, why isn't theirs better?

Mr. Fleming: --Because I believe the conduct that the Court describes can be reached, even under RICO, under other the sections of RICO.

Justice Breyer: Well, do you get it under (a), because I thought (a) was about investing in an enterprise, and I'm assuming--

Mr. Fleming: The... the... (a) is reprinted in gray brief, the amicus brief, at page 4(a).

Justice Breyer: --Well, it talks about investing the income or part of the proceeds.

Mr. Fleming: If I could, Your Honor, it shall be unlawful for any person, so it should be unlawful for any corporation which has received any income derived from a pattern of racketeering to employ that in the operation of the enterprise.

In the Herako case, the Herako case, it's exactly how Judge Cutahy harmonized Professor Blakey's argument about perpetrator corporations.

Justice Scalia: What you're saying it's... it's using the income in the operation of its own enterprise?

Mr. Fleming: Yes.

Justice Scalia: But I thought you say that person and enterprise have to be distinct.

Mr. Fleming: Person and enterprise have to be distinct under 1962(c).

Justice Scalia: Oh.

You say for (a) they can be the same.

Mr. Fleming: The courts say that they can be the same, but courts say that (a) is a corporate beneficiary RICO statute; the perpetrator corporations--

Justice Scalia: So you can get the corporation because it makes the income and invests it in its own operations.

Mr. Fleming: --Exactly.

Justice Scalia: What about the individuals?

Mr. Fleming: I believe you can get the individuals under (a) also, Your Honor.

Justice Scalia: Well, how?

They're not getting the income.

Mr. Fleming: Well, it's a question of booking, I suppose.

The difficult word there is received which after concede, but if the venal people that Justice Breyer is describing are engaging in all sorts of activity which is bringing income into the organization or the enterprise, I believe they can be captured under (a) also.

The real risk here--

Justice Stevens: May I just ask quickly for you to comment on the plain language argument of the opponent--

Mr. Fleming: --Yes.

Justice Stevens: --because the language does seem to read rather plainly in his favor.

Mr. Fleming: I have two points if I could, Justice Stevens.

One is any person, which is what I believe it says, is plain language, but plain language which has not made sense in the application of a statute has been disregarded by this Court where appropriate.

It was just--

Justice Stevens: Well, why doesn't it make sense?

Any person... so you get an enterprise that's violate... you know, meets all the definitions, and this statute says any person who participated as an associate or employee, and that work is covered.

Why doesn't it make sense?

It says that not only the corporation's liable, but the individuals who perform these foul deeds are equally liable.

Mr. Fleming: --It can... it can be read as literally meaning that, but there is an inherent ambiguity when you look at the interpretation of 1962(c).

The courts have not only required distinctness--

Justice Stevens: Well, it had to be distinct.

I mean, obviously it's, one of them is General Motors, the other is the President of General Motors.

They're distinct people.

Why... why doesn't the plain language just apply?

I don't get it.

Mr. Fleming: --Because the courts have also held that the enterprise shall not be liable, so--

Justice Stevens: But this statute of this section doesn't purport to impose liability on the enterprise--

Mr. Fleming: --Exactly.

Justice Stevens: --but to impose liability on people who work for it.

Mr. Fleming: That's my point, if Your Honor please, and if you think about the common law principles in this Court in Proup has said common law does implicate the interpreta... or is implicating the interpretation of RICO, the only time a corporation is not financially liable for the wrongdoing of its employees is when the employee is acting for the employee's benefit and not for the benefit of the corporation, and that is exactly... that is the ambiguity in this statute which we think takes away from applying meaning.

This statute says, as interpreted, says any person... but it also says the enterprise shall not be liable for that person's conduct, and we believe the only fair inference from that, which is also consistent with what Congress was talking about overall and its dominant purpose of RICO, the only inference which can be taken from that is that Congress intended the persons to be liable when they acted within a corporation for their own personal benefit.

Justice Scalia: Where does it say that the corporation shall not be liable for that person's conduct?

Mr. Fleming: Said judicially.

I can only say that, Judge Scalia.

All of the circuits in connection with the distinctness rule have felt that the corporation shall not be... there is no respondeat superior in RICO.

And that's how we look at it--

Justice Stevens: Going through Section (c), it doesn't impose any liability on the corporation.

Mr. Fleming: --Excuse me?

Justice Stevens: And certainly you're dead right that Section (c) does not impose liability on the enterprise.

It's focused on the persons.

Mr. Fleming: And we think that you have to look... we think you have to look at that when you're trying to say what did Congress mean here?

You have an (a) section which we believe implicates the renegade corporation and its renegade people.

You have association in fact which was created for the purpose of getting the renegade organization.

You now have (c).

I think everyone agrees that (c) is absurd when it exposes all commercial America to the threat of RICO.

We don't rely on that.

We don't think the Second Circuit relied on that.

I think the Secretary was saying a very simple thing.

They were saying when employees and officers are working together for the benefit of the company, they happen to commit acts of alleged fraud, they are not distinct from the company.

They are the enterprise, and there is no RICO person.

Now, I answer the plain language argument in two ways, The Sherman Act said every person who contracts and combines, and the single actor model is imposed upon that quite correctly.

I look not only at that, but I also look at what I've just described, and that is the absence of derivative liability.

You cannot properly interpret this statute and its application without considering why Congress targets a person employed but eliminates respondeat superior.

The only time at common law where that occurs, we think you have to presume that Congress acts with a view toward the common law is when the person acting--

Justice Stevens: I don't think you can really say it eliminates respondeat superior.

It simply didn't apply respondeat superior to the activities of these individuals who are themselves violating the statute because they're assisting in enterprise doing, engaged in a pattern of racketeering activity.

Mr. Fleming: --Our position... we believe the Second Circuit's position is that the individual who's targeted under 1962(c) is like the infiltrator.

He happens to be in the corporation, and he acts for his own benefit.

And we think that's totally consistent... I really, you now, I read the book and said never ask the Court a question so I will not, but I think we have to consider this... is it conceivable... is it conceivable that Congress intended the absurdity that I think this Court has recognized with regard to the application of--

Justice Breyer: Well, you have the same doctrine in (a).

I mean, on your reading of (a), whatever we do about (c), exactly the same thing would happen.

My example... why wouldn't it?

Mr. Fleming: --Because there the corporation is corrupt.

Justice Breyer: No, no, no.

No, going back to the first example of the bank that has the supervisor with the two... I mean, by innocent example.

The innocent example, you get... there... you see, there were two instances of exaggerating or lying about the qualities of our vacuum cleaner.

We said it picked up mice and it doesn't.

Thy don't fit through the hole.

Mr. Fleming: All right.

Justice Breyer: So... so now twice they've said that, and it was planned, and of course they sold two vacuum cleaners as a result, and they obtained a thousand dollars for that, and the money was thereby obtained through a pattern of racketeering activity, and they used that thousand dollars to pay expenses of the corporation, etcetera, and therefore it was used in the operation of the enterprise.

So all the absurdities are just as great in (a) as they are in (c).

Now, am I right or not?

Mr. Fleming: No, I think probably not.

Justice Breyer: I'm not?

Mr. Fleming: I think not.

Justice Breyer: Because?

Mr. Fleming: I think (a) looks more at the corrupt enterprise, and I think we will all accept the idea that corrupt enterprise is a potential RICO target.

You know, we're not talking about a no liability situation when we eliminate some... when you protect... when there is some protection afforded under 1962(c).

If there is anything to Mr. Kushner's claims, he has single damage remedy against not only Mr. King individually, but Don King Productions.

It also, you know, when I, you know, I think we have to ask this question, Unless the individual... the person who is the target of 1962(c) is a person who has been acting for his own personal benefit and not for the benefit of the corporation, unless he's that person, why should that person be subjected to treble damages for his conduct?

Put it another way, if that person engaging in tortious conduct on behalf of his company... on behalf of his company... why should that person be target for treble damage liability when the company's liability... the beneficiary... is limited to single?

Justice Stevens: Well, the answer to that is very simple.

The statute says so.

That's exactly what the statute says.

It's true of collection of an unlawful debt.

If he collects the debt... we're interested in the individuals who do these wrongful things.

That's what the statute says.

Mr. Fleming: Mr. Justice Stevens, I don't believe that--

Justice Stevens: I don't think it's absurd at all.

Mr. Fleming: --We've been sitting around here for a month, and we've asked ourselves what happens if we are asked doesn't the statute say exactly that?

And we say in a sense... in a sense--

Justice Stevens: --rule of reason in is... could be a rule of reason under this statute.

Mr. Fleming: --In a sense it does, but we believe that the exemption from corporate liability introduced an ambiguity which does not allow a plain language reading.

Second, you know, this Court... this Court in Copperweld said every person does not mean every person.

In Pierson it said any person except a judge because it implicated the common law.

In the Bach Laundry case, defendant was defined as any party.

I think Justice Scalia defined it as a criminal defendant in a concurring opinion.

In 42 U.S.C. 1985, which is conspiracy to violate civil rights, a number of dist... a number of circuit courts and district courts have held that two or more persons does not mean two or more persons if they're employed by the corporation.

So this single actor... this unity of conduct which the Second Circuit focused upon... is not foreign to the jurisprudence of this Court, and we believe it is the only appropriate way to harmonize the absurdity of this statute applied on a plain language basis, and RICO's purpose of punishing the... call them racketeer... person engaging in racketeering and, in this case, the quasi infiltrator, the employee who goes bad and uses his job as a means of feathering his nest.

The department talks about... Solicitor General, I'm sorry.

I'm always used to saying the department.

The Solicitor General says they need RICO to get unions... to bring injunctive action against unions.

Think of that.

What they are trying to do is to get rid of the union officers who, at the expense of the corporation, are feathering... stuffing their own pockets, feathering their own nests.

We think that's what Congress was looking at when it's talking about 1962(c), and the one thing we surely think Congress was not looking at was IBM against IBM, which is the effect of the any person analysis.

A question was asked about the use of it; I think in the Sedima case, we do not have the appropriate, we did not get the up to day statistics.

In the Sedima case, the ABA reportedly cited that said that nine percent... nine percent of the civil 1962(c) lawsuits were... had to do... had anything to do with organized crime, and the other ninety one percent were commercial disputes.

I go back to Justice Marshall's dissent in Sedima, as I go back to Justice Marshall in the Second Circuit.

I think there is another consideration which he posed.

The broad application of 1962(c) for which they contend is based principally, if not entirely, upon a quote, unquote, plain language, with all respect, Justice Stevens, with no real analysis and no answer to all to our point with regard to the absence of true liability.

No answer at all.

The application of their quote, unquote, plain language approach in essence does turn federal jurisdiction on its head because not only do you have people being threatened with treble damage liability where that should not exist, but you have federal jurisdiction being obtained where everything else lacking, you're in State court in a common law fraud case, or in this case in a supposed tortious interference with--

Justice Stevens: The problem with that argument is that I was involved in some of these decisions, we thought, well, if we really read it finely, Congress will straighten it out because they couldn't have meant this vast extent.

But Congress has let it sit there.

Mr. Fleming: --Am I allowed to... am I allowed to comment on what Congress will straighten out?

Justice Stevens: Sure, yeah.

Mr. Fleming: They took out securities fraud, and I assume that's because there is a strong securities fraud lobby.

Mail and wire fraud will never disappear from this statute, never.

First of all, it's needed for criminal purposes, so it will never disappear as a predicate act.

Chief Justice Rehnquist: Thank you, Mr. Fleming.

Mr. Fleming: I saw it.

Thank you.

Rebuttal of Richard A. Edlin

Chief Justice Rehnquist: Mr. Edlin, you have four minutes remaining.

Mr. Edlin: Mr. Chief Justice, unless there are any questions, we are prepared to waive rebuttal.

Chief Justice Rehnquist: Thank you, Mr. Edlin.

The case is submitted.

Attribution:

The Oyez Project

Featured:

Cleveland v. United States - Oral Argument

Fri, 09 Jan 2009 14:50:34 +0000

Case:

Cleveland v. United States

Media File:

99-804_20001010-argument.mp3

Related Transcript:

transcript.xml

Transcript:

Argument of Paul Mogin

Chief Justice Rehnquist: We'll hear argument now in Number 99-804, Carl W. Cleveland v. The United States.

Mr. Mogin.

Mr. Mogin: Mr. Chief Justice and may it please the Court--

The issue in this case is whether for purposes of the Federal mail fraud statute a State or municipality parts with property when it issues a license.

In this case, the Fifth Circuit has used a novel concept of property to give the Federal Government the power to police State and local license applications under the mail fraud statute when State and local governments are fully capable of administering and implementing their own licensing schemes and punishing misconduct involving licensing schemes when it occurs.

Justice Scalia: What would they be punished under?

What kind of State laws would cover--

Mr. Mogin: Well in this case, for example, there's a false statement provision in the Louisiana video poker statute.

Justice Scalia: --And that's fairly standard in State licensing schemes?

Mr. Mogin: I think it is, that there be a... that false statements are ordinarily punished... punishable by criminal provisions.

I can't say that we've undertaken a survey of that.

In addition, in the area of gambling, Justice Scalia, 18 U.S.C. 1955 is available for conducting an illegal gambling enterprise and, in fact, that was one of the charges here.

Petitioner was acquitted on it, and the very theory was that the gambling operation was illegal because of alleged false statements in the license applications, so... and that had also been the charge in the Salvatore case, so that would be--

Justice Ginsburg: Is it the case that the same would apply to a Federal agency?

This is not... the statute is not peculiarly directed at State agencies.

Mr. Mogin: --That's correct, Justice Ginsburg.

Most of our argument would apply if this was a Federal agency, although in this case we have the United States v. Bass and the principle about not lightly interpreting statutes to reach--

Justice Ginsburg: But in any case it would be... any application for a permit to a Federal authority would be susceptible to the same argument.

There's no distinction that's being made, a Federal power against the State as against the Federal Government.

Mr. Mogin: --Under the Fifth Circuit's analysis I think it would be possible that a Federal license application perhaps could be prosecuted if it met the Fifth Circuit's test, which is somewhat difficult to discern from the opinion, but there's nothing in what the Fifth Circuit says that would confine it to a State application, if that answers your question.

Justice Ginsburg: Or in the statute.

Mr. Mogin: Right.

Justice O'Connor: Mr. Mogin, I think it would be helpful if we focused somewhat on the statutory language in this case to figure out what it covers, and we have to read it, I suppose, in light of this Court's decision in McNally, which does appear to suggest that it... the statute covers only the scheme to defraud the victim of money or property, although the statute doesn't say so in so many words.

Now, let me ask you this.

Here, I take it the State did more than just issue a license.

It issued a license with an ongoing substantial revenue component for the State.

It wasn't just a one time payment of a license fee and then you have this forever.

It contemplates, does it not, the payment of substantial amounts of money to the State thereafter, and does that distinguish it, or make it somehow more of a property interest than otherwise might be the case?

Mr. Mogin: Justice O'Connor, there is no question the State is taking a substantial share of the revenue from video poker operations in Louisiana, but we don't see how that gives rise to any property interest.

Certainly, under the analysis in College Savings Bank, cited by this Court in 1999, the fact that there's a pecuniary interest involved would not establish a property right.

Justice O'Connor: Well, taking money from the victim is covered, according to McNally, so is it taking money from the State, in a sense, because of this revenues--

Mr. Mogin: No, Justice O'Connor, we would say it is not.

To the contrary, the State views video poker operations as a source of revenue for the State, and it has been a very significant source of revenue for the State.

There was no allegation in this case that anything was not paid that shouldn't have been paid in terms of the State's pro rata share and, really, the States here--

Justice Kennedy: --Did the State ever argue that it has an interest in assuring the users of these machines that the operators are honest and that by this alleged misstatement the goodwill, the confidence that the State has in its own licenses is somehow diminished, and that that's a taking of property, and of course you might say this is intangible property, but did they ever make that sort of argument?

Mr. Mogin: --No, I don't believe that that argument has been made by the Government and, of course, there's no question that the regulatory scheme is designed to ensure the honesty and suitability of licensees.

That argument was not made, that I recall.

I mean, there's been no question that the licensing process serves a legitimate purpose to identify appropriate licensees, but it's hard to see how that would be a property--

Justice Kennedy: Are the licenses limited in number?

Mr. Mogin: --No, they're not, Justice Kennedy.

Justice Kennedy: Would that have made a difference?

It would be like a taxi cab medallion in New York or something?

Mr. Mogin: Well, it's our position that even if there were a limitation to some large number of licenses, that the same analysis would apply, but certainly that would be a factor to consider, and when you get to a very limited number of licenses, you may have a different analysis, because then there's... people are actually competing with each other for a license, and something important is being given away by the State.

Justice Souter: Well, but even in that case, how would it affect any property interest of the State, unless you could show that the person who got the license somehow intended to exercise the rights under it, less than some other holder might have done, and thereby produce less revenue from the State, which is at least on the face of it counterintuitive, because the State and the licensee has the same interest in maximizing the amount of gambling that goes on, but save in that odd situation, how would a limited number of licenses affect your property analysis?

Mr. Mogin: Well, I think that you're right, the mere fact that there's a limitation on the number would not, in our view, give rise to a property deprivation.

It's one factor to consider, and--

Justice Souter: Would it be a basis for saying that there is a property interest at all, where there is not, as you argue, under these circumstances?

Mr. Mogin: --Well, we think the term license is used in many different contexts, radio licenses, whatnot.

There may be situations in which the State is giving away only one or 5 or 10 licenses, and our analysis doesn't foreclose what would happen in such a case, but here there's a mere grant of Government permission.

There's nothing in what the Government is doing that can be analogized to giving away an easement.

The applicants are not competing with each other, so I simply--

Justice Scalia: That would be true if there were just one license being given away, if there were only one gambling casino allowed in the whole State.

I mean, you know, do you stand by your analysis or not?

It seems to me if you stand by your analysis you have to say... it would be a more appealing case, I suppose, if there were only one license, but on the analysis that you've brought us, even if there's only one license, there's no property involved, isn't that right?

Mr. Mogin: --That is our position, Justice Scalia.

The one... the difference is, if there were only one license, then the State really would be losing something in giving away the license.

We still would not think that that's a property right, but there's certainly no clear definition in the cases of what property is.

Justice Breyer: Well, I don't--

Chief Justice Rehnquist: --How does the State lose something giving away one license, but not lose something giving away a number of licenses?

Mr. Mogin: Well, if... Mr. Chief Justice, if there were only one license available, and if it were understood that once given it couldn't be taken back, then perhaps it could be said that the State was losing something because by giving the license it lost the ability to give it to anyone else.

Justice Souter: But that's true if it gives away 10 licenses or 100 licenses, doesn't it?

Mr. Mogin: Well, in this scheme, if 10 licenses are given out for video poker--

Justice Souter: Oh, I see.

If it's an infinite number, sure, they can always create one more license, but I don't see how that affects the property analysis as opposed to a regulatory analysis.

Mr. Mogin: --And we don't disagree.

The additional point we'd make is that there's no reason to stretch the concept of property, as the Fifth Circuit did in this case.

State licensing schemes, of course, are designed, drafted, implemented by State and local officials.

Those are the officials that are in the best position to interpret them, to decide whether they've been violated in a particular case.

This case, in fact, arose during the early years of the Louisiana video poker scheme, and State and local officials can decide the appropriate sanction, if there is misconduct.

Now, the Government argues that this license is special because the State has a substantial economic stake in the... in video poker operations.

We would respond, since when has the existence of a property right depended on something as amorphous as whether there's a substantial economic stake, or the reach of a criminal statute?

That's not an appropriate test for defining criminal liability.

There would be a whole host of questions that would be raised under the Government's theory.

How much is substantial?

Is it a dollar amount that counts?

Should it be the percentage?

Does it matter what other revenues the licensing authority has, so that it might have a different situation if the license was issued by a poor rural county as opposed to a wealthy, suburban county.

Justice Stevens: Mr. Mogin, what do you do with the Government's argument that under the second clause of the statute you don't need a victim?

They obtain money pursuant to a scheme to defraud, and so forth and so on.

Mr. Mogin: Justice Stevens, we have a number of responses to that.

Passing over the procedural point which is made in our brief, that is not before the Court, because it wasn't raised until the brief on the merits.

Justice Stevens: An alternative basis to affirm.

Mr. Mogin: Right.

We've argued in our brief that under the Tuttle decision and other decisions this Court has only rarely considered issues raised by the respondent for the first time in the brief on the merits, but on the merits of the point, the Court was unanimous in McNally that the 1909 amendment merely codified Durland, and McNally held that the statute is limited in scope to the protection of property rights, and that when the Government is the alleged victim, and I quote, any benefit which the Government derives from the statute must be limited to the Government's interest as property holder.

So that was then reaffirmed... the basic holding was reaffirmed in Carpenter, and I think it was a premise of Neder, the Neder decision in 1999 as well, as we've explained in our brief, and we've also covered the background of the 1909 amendment in our brief, the commission report, which there's really no suggestion that Congress was attempting to create a new basis of liability.

Justice Ginsburg: How many years since McNally?

Mr. Mogin: 13 years.

That was decided in 1987.

Justice Ginsburg: So we can assume that someone in Congress knew of this Court's interpretation and could have done something about it if it disagreed.

Mr. Mogin: That's right, Justice Ginsburg, and in fact in 1988 the statute was amended to deal with honest services cases, which had been thought to be the most important application of intangible rights doctrine, and those were brought under the statute if there was a deprivation of honest services.

Even today, just acquiring someone's services is not enough.

You have to have a scheme to deprive another of honest services, but Congress in 1988 did not otherwise change the McNally ruling, even though it was fully aware of it.

Justice Souter: Would you give me an example... maybe the most obvious example you can think of... of the deprivation of honest services?

I may not understand what that term refers to.

Mr. Mogin: Justice Souter, that refers to the principle that an employer has a right to expect that an employee will provide honest services, and so--

Unknown Speaker: What kinds of acts would be forbidden?

Mr. Mogin: --A scheme involving kickbacks, for example, where the employee is paid a kickback to divert business.

Justice Souter: Basically any kind of corruption on the part of the employee.

Mr. Mogin: Yes.

Justice Souter: Yes.

Mr. Mogin: The theory that the Government has presented of substantial economic stake, if adopted, would raise all kinds of thorny applications, thorny questions in application, which would be particularly troublesome, because it's a criminal statute, so the trial judges would be required to explain the standard to the jury so the jury could apply it in a particular case, and that makes the situation particularly intolerable.

The State's expectation of receiving revenue simply does not mean that when the State issues a license it parts with property.

To go back to the College Savings Bank case, I think that makes it clear that even business in the sense of... the Court said business in the sense of the activity of doing business and making a profit is not property, so the State's mere expectation of obtaining revenue after a license is issued.

Justice Ginsburg: Are there other licenses, State licenses where the Government's revenue is a percentage of the proceeds of the business, as distinguished from the tax on the income?

Mr. Mogin: Well, yes, in the area of hotels, of course, rooms are taxed generally based on occupancy, so that in New York City, for example, the city would obtain very substantial revenue from the occupancy tax.

Formerly it was over 20 percent.

In the mid nineties it was reduced to about 15 percent.

Now, that's called a tax.

Chief Justice Rehnquist: Some States administer their sales tax by issuing licenses to do business, don't they, and all it means is that you have to pay a sales tax on your gross receipts.

Mr. Mogin: That's common, and taxes can be quite substantial, and the Governments raise money, of course, through fees and charges of all sorts, not merely assessments that are called taxes, so the fact that the State is getting significant revenue here... I don't know why that indicates that it's losing property when it issues the license.

Justice Stevens: Mr. Mogin, I can probably find this out myself, but on this issue, had this issue arisen before McNally was decided?

I know there were a bunch of post McNally cases.

Mr. Mogin: Well, there were limited instances, and there was case called United States v. Green, brought in California, a prosecution involving obtaining a driver's license, and the State prosecuted that under the intangible rights theory.

That's really the only clear case that I'm aware of.

There are a couple of cases involving licenses, and because the intangible rights theory had been widely accepted in the courts of appeals, that was the doctrine that was generally relied on when a license was involved.

So it's our submission--

Chief Justice Rehnquist: What about an automobile license, a vehicle license?

Supposing there's a fraudulent application for a vehicle license and the Government says, well, we did part with property, it cost us 76 cents to make that license, although they get 300 for it.

Mr. Mogin: --Well, the courts of appeals at least I think have been in agreement that the mere cost of printing the paper for the license is to de minimis to support a charge, and so the analysis has focused on whether some other... on some other basis it can be said that the State is losing property.

We think the Government's theory of liability in this case is contrary to traditional law, is not supported by any established concept of property, and of course the Government is doing this in a criminal case.

Civil RICO plaintiffs, of course, could take advantage of the theory if it were endorsed by the Court, and the very novelty of the theory makes an inadequate basis for injecting Federal law into the area of State laws, local licensing, so for that reason we submit the petitioner's conviction should be reversed.

If there are no further questions, I reserve the balance of my time for rebuttal.

Argument of Michael R. Dreeben

Chief Justice Rehnquist: Very well, Mr. Mogin.

Mr. Dreeben, we'll hear from you.

Mr. Dreeben: Mr. Chief Justice, and may it please the Court--

A video poker license is property both in the hands of the State and in the hands of the licensee.

Petitioner's scheme therefore violates both the first and the second clauses of the mail fraud statute.

I'll address first why a video poker license is property in the hands of the State.

A video poker license represents the State's right to a stream of payments from an enormously lucrative business, a business that the State has absolute power to conduct itself.

Instead of conducting the business itself, the State franchises that opportunity to private individuals while asserting control over every aspect of the business and retaining a right to a large share of the revenues.

By--

Justice Souter: How has that property interest been infringed in any way, because there's no claim, as I understand it, and I don't know whether your argument suggests that there was any intent here to deprive the State of its licensing fees, and no intent here to deprive the State of its percentage, and no intent here, in effect, to conduct less gambling than would otherwise be possible in order to minimize revenue, so even if we accept your theory that there are property interests that the State can claim, how have any of them been infringed on the allegations of this complaint?

Mr. Dreeben: --Justice Souter, I would agree that if there were a direct fraud at money or property of the State in a tangible form or in a financial form, that would be an easier case than this one.

This case, I suggest the best way to look at it is to start from the premise that the State is to be treated as any property owner under the mail fraud statute.

It is to be no less and no more protected than a private individual similarly situated, and to understand how the State loses property, you have to compare the State to a similarly situated private individual.

Now, the two analogies that most readily show how the State loses an intangible property right are a private franchise business, which has the right to exercise franchises and grant franchises to private parties, and has a contract right not to be defrauded in choosing the franchisees that it chooses.

Justice Souter: But I don't see where the fraud comes into it.

In other words, the only basis upon which I can see any fraud here, if we start with the assumptions that I made, that there's no claim that they were minimizing business or skimping on the percentage or whatnot, the only basis to say that there has been... that the State has been defrauded of something is to say that the property right must be some kind of metaphysical entity that somehow goes beyond the right to receive the fees, and the right to receive the percentage, and I don't know why we should take that step and recognize some kind of a metaphysical property right in addition to these quite easily defined property interests.

Mr. Dreeben: Well, it's not a metaphysical property right.

It is an intangible property right, and under this Court's decision in Carpenter v. United States, intangible property rights are just as protected as tangible ones.

Now, the way that an intangible property right is identified is by looking at the legal scheme that creates those rights, and Louisiana created a legal scheme under which it has the exclusive right to determine who may engage in the video poker business.

Justice Souter: Okay, but as I understand it, then, the... what I was sort of disparaging as the metaphysical right is basically the State's regulatory interest.

It has nothing to do directly... well, strike that.

It is a right of... to dispose of licenses conceived of as something connected to but nonetheless distinguishable from the right to receive the fee, the right to receive the percentage and so on.

Mr. Dreeben: It is both a regulatory and a proprietary interest.

Justice Souter: But if we were to say, we're going to distinguish for purposes of this statute between the State's regulatory interest and the State's property interest, then you'd have to lose, wouldn't you?

Mr. Dreeben: No, because I would define the State's property interest more broadly than simply the actual currency that is received under the license.

Chief Justice Rehnquist: Did the State lose any revenue here because of the fraud?

Mr. Dreeben: No.

We didn't charge or attempt to prove that the State lost revenue and, in fact, Louisiana connects the gambling, the video poker terminals to a central computer to ensure that skimming of revenues does not occur.

Chief Justice Rehnquist: Well then, why isn't Justice Souter's question correct, that you're not talking about any orthodox property interest here that was lost to the State.

You're talking about a loss of its regulatory authority.

Mr. Dreeben: No, I think we are talking about a property interest that in the private sector would clearly be recognized as such.

It would be analogizeable most closely to a contract interest of a party that runs a franchise business and selects its own franchisees, and if it is lied to by the franchisees, it is defrauded in its act of letting a contract to that franchise holder.

Chief Justice Rehnquist: But in a private action you have to show money damages.

Mr. Dreeben: That is true, but under the mail fraud statute we do not.

Chief Justice Rehnquist: Well, I know.

That's why I think your analogy is quite imperfect.

Mr. Dreeben: I think that the analogy is an analogy which attempts to compare the State to a private party, and the difference is that the State can always be said in some sense to be acting as a regulator.

Justice Kennedy: Were there money damages in Carpenter to the Wall Street Journal?

Mr. Dreeben: No.

There were no money damages in the Wall Street Journal case at all, because all the Wall Street Journal lost was its exclusive right to determine when to publish certain columns, and Winans and Carpenter were accused in that case of having taken from the Journal their right, the Journal's right to decide when to disclose the contents of that column.

It was highly intangible.

It's an interest only created by law, and by direct analogy here the interest that is created is Louisiana's interest in deciding which proprietary parties will work with it in the video poker--

Justice Breyer: Well, does, under Louisiana law, under the statutes of Louisiana, can the State of Louisiana give itself a license and go into the video poker business?

Mr. Dreeben: --Under the Louisiana law, the answer is no.

Justice Breyer: Okay.

Under Louisiana law, could the State of Louisiana sell to Mr. Joe Smith, a private citizen, the right to give out franchises to others?

Mr. Dreeben: Under Louisiana law--

Justice Breyer: Yes.

Mr. Dreeben: --I don't believe that the State has that authority.

Justice Breyer: No, I don't think so, either.

Therefore, it doesn't sound like McDonald's at all.

Mr. Dreeben: Well, it would be--

Justice Breyer: I mean, McDonald's can give the right to sell to others.

McDonald's has something that's valuable because it could go into business itself.

It can do what it wants.

Mr. Dreeben: --The State--

Justice Breyer: --I mean, that's your analogy.

Mr. Dreeben: The State could choose to operate in precisely that manner.

The State could have--

Justice Breyer: Oh, of course, under the Constitution it could, of the United States, but the question is, what is the scheme that Louisiana has set up under positive law.

Mr. Dreeben: --But I think--

Justice Breyer: And under positive law, I'm just saying in the two respects I mentioned it does not sound like McDonald's.

Mr. Dreeben: --Justice Breyer, I agree with you that the State has not assigned to itself the right to sell video poker licenses.

Justice Breyer: Could not.

It could not.

Mr. Dreeben: No, I don't see any reason--

Justice Breyer: No, it could under the Constitution.

It couldn't under the statute.

Mr. Dreeben: --Under its own statute, but if you're looking at the legal rights that it has invested in itself, it is as if Louisiana has made the State the exclusive holder and determiner of who may participate in the video poker industry with a substantial revenue share being assigned back to the State.

The State could have done the exact same thing in a different manner.

It could have said, you, the State, shall select someone who will choose all these State franchise holders who will do the video poker business and it could have sold that interest, could have said, a private party can take over the role of deciding who gets a license and collect all the money and give some of the money back to the State, but it did not do that.

Instead, it retained those legal rights in itself, and those legal rights would have been viewed as property had a private property holder exercised them.

Justice Ginsburg: Mr. Dreeben, how does that differ from giving out liquor licenses, or giving out taxi medallions?

My question is, how far this theory of yours spreads, and as I read it in your brief it seems very far.

Mr. Dreeben: Justice Ginsburg, it spreads only to those licenses and those State activities that are generically speaking more in a proprietary mold than in a regulatory mold, and there is a classification question that arises.

Both liquor licenses and taxi medallions share some features with the Louisiana scheme and, therefore, arguably both of those would fall on the property side of the equation.

Justice Ginsburg: Well, tell me, what is the Government's position?

What falls, what licenses would fall under the Government's theory, and which ones would be left out?

Mr. Dreeben: Our position is that a purely regulatory license, such as a license to practice medicine, or a driver's license, is not encompassed within this theory of property, but a license, or a regulatory proprietary scheme such as a franchise scheme, or a license that is very closely linked in the revenue stream that goes back to the State and in the regulatory component is.

Justice Ginsburg: Well, suppose there is, like with the example of the hotel and the occupancy tax that Mr. Mogin raised, or people who run liquor establishments get a much higher tax than people who are in other businesses.

That's special to that business.

Do those qualify?

Mr. Dreeben: I think that they do under a strict analytical approach, but I also think that there is a component to the analysis that is narrower than assuming that all such licenses fall within the scope of the mail fraud statute, and--

Justice Stevens: Mr. Dreeben... if you answered the question... it seems to me that you really... the property right that I would think of in terms of normal usage would be the right to exclude as one of the bundle of rights, but you don't claim the right to exclude is sufficient, because you would not include the bar, the control of the membership in the bar, is that right?

Mr. Dreeben: --That's correct.

Justice Stevens: You are not claiming... every right to exclude is not a--

Mr. Dreeben: That's correct.

Justice Stevens: --But then I don't... I really don't understand why it makes any difference that the State shares in the revenues.

I don't see why it would be a different case if they didn't, they just taxed the video people on some income basis, rather than sharing in the revenues.

Mr. Dreeben: Well, I think if there was no linkage between the taxation and the licensing scheme, then it's harder to say that the State is acting in a proprietary than in a regulatory--

Justice Stevens: But even if it's acting in a proprietary way, it's not deprived of any revenue.

It's not deprived of anything, except the right to exclude these people, and that's not itself sufficient.

Mr. Dreeben: --It's not itself sufficient, but in combination with a scheme such as this, that creates in the State the power to participate in a particular industry, and to select, in effect, the participants in the industry, the agents who will carry out the work, the State has acted in a way that far more closely resembles a franchise business than it does a pure, sovereign regulator, and that is the question that has to be asked under the mail fraud statute.

Justice Scalia: I don't--

Justice O'Connor: --Mr. Dreeben, you seem to be... the Government's position seems to be somewhat of a shifting target.

You appear to be arguing today that the State itself is deprived of property under this scheme, and when it's a proprietary licensing scheme that is the situation.

I thought in your brief the focus was an argument to the effect that the statute is satisfied so long as the licensee gets some kind of money or property.

It doesn't matter if the victim, here the State, is deprived of property.

Are you abandoning that argument now?

Mr. Dreeben: No, Justice--

Justice O'Connor: It was new.

I don't think it was pressed below.

Mr. Dreeben: --Correct.

Justice O'Connor: But do you still adhere to that as well?

Mr. Dreeben: Yes, I do.

It is our alternative theory of why--

Justice O'Connor: Is there any reason why we should address it, since it came so late in the day?

Mr. Dreeben: --Well, the Court has discretion to address it.

It certainly isn't required to address it.

We did not argue it below.

But I will say that in favor of the Court addressing it and resolving it is that it is a purely legal argument that the Government made in McNally, that the Court did not squarely address in McNally for a variety of--

Justice O'Connor: Well, by implication McNally seemed to assume that it was... the statute covers only money or property obtained from the victim.

I mean, that's how the opinion seems to be focused, anyway.

Mr. Dreeben: --Well, there is language in McNally, without doubt, that reads that way, but that language could not have announced a holding in McNally, because the actual holding of McNally was, in addition to the well known part of McNally that an intangible right to good government is not a property right, the Court also held that there was no deception of the State and there were no false statements made to any third party, so there was no factual predicate in McNally itself for deciding whether the second clause applies.

Chief Justice Rehnquist: I suppose one argument in favor of exercising our discretion here is that we took the case to construe the meaning of a statute, there's a conflict in the circuits, and to say, you know, we're construing it this way but there's another argument that we might accede to in some other case wouldn't be the best use of our resources.

Mr. Dreeben: I agree, Mr. Chief Justice, particularly--

Justice Scalia: But you say that's what we did in McNally.

You said this argument was available there and we chose not to address it, and to leave everything sort of up in the air.

Mr. Dreeben: --Well, there is--

Justice Scalia: I mean, I was here in McNally.

I didn't realize we had done that.

Mr. Dreeben: --Well, there is actually no discussion in the opinion itself of the theory that the Government raised that the false statements alone, when the defendant obtains property, are sufficient.

Justice Scalia: Oh, you're saying we did in McNally what you are now arguing it would be irresponsible for us to do now.

I don't think we did that in McNally.

I thought we had addressed the statute.

Mr. Dreeben: Well, as I said, Justice Scalia, there... the square holdings of McNally did not require the Court to come to a definitive answer to it, and if you read the McNally opinion, which is fairly brief, it doesn't identify and reject in terms this theory.

What the McNally opinion does do is point out that the second clause of the statute, which was added in 1909, has the effect of codifying this Court's decision in Durland v. United States, which held that--

Justice Breyer: If--

Mr. Dreeben: --false promises come within the mail fraud statute.

Justice Scalia: --That's contrary to your interpretation of what the amendment did.

Mr. Dreeben: No, it's not contrary to it.

I think that the amendment did more than that.

It clearly at least codifies Durland.

There's no question about that.

But the plain language of the statute does not require that there be a deprivation of property.

Justice Scalia: But if it did more than that, we should have said that in McNally.

We shouldn't have said, it just did this, which would have reached the result that we reached in McNally, and simply ignored the fact that it did more than that, which would have produced a different result in McNally.

Mr. Dreeben: It would not have produced a different result in McNally, Justice Scalia, because the Court made quite clear in footnote 9 of its opinion that there was no deception of the State at all.

The Government's theory in McNally was that State officeholders who have an adverse interest to the State are required to disclose it to the State, and this Court said in footnote 9 of McNally that we should not assume that there was any such duty of disclosure, and without a duty of disclosure, there could have been no fraud that would have triggered the second clause of the statute.

Justice Scalia: You also would never reach the principal holding of McNally if you're going to put all of the weight on that footnote.

Mr. Dreeben: The Court could have decided the case based on that analysis, but it decided it on a broader analysis, which is--

Justice Scalia: Right.

I don't think footnote... what note was it?

Mr. Dreeben: --Footnote 9.

Justice Scalia: --9, I don't think footnote 9 was meant to preclude the question that's before us here, any more than it was meant to preclude the question of whether intangible services can qualify under the statute.

Certainly everybody assumed that's what the case decided, despite footnote 9.

Mr. Dreeben: What I think is evident from McNally is that the Court at various points in the opinion wrote broadly about the mail fraud statute.

But there is a distinct theory of liability that we briefed before this Court in McNally and that was not addressed in terms, and I think that there is an explanation for why that theory was not addressed, which is that there were no false representations to anybody that were charged in the jury instructions that could have supported that theory.

Justice Breyer: If we did have that, if that theory's in front of us, it seemed a little broad.

It seemed that it would make guilty of mail fraud... I was thinking, you know, Richard, on the Survivors program--

Unknown Speaker: [Laughter]

Justice Breyer: You don't know that.

But I mean, he seemed absolutely guilty under your interpretation--

Unknown Speaker: [Laughter]

Justice Breyer: --and then I thought that probably... probably any competitor, by the way, in a commercial context, anybody who lies to his competitor, any boss who lies to his subordinate, any subordinate who lies to his boss or a coworker, they're all out to get money, and they're telling lies or scheming to get money, just like Richard on the Survivors program, and I was a little surprised that the Government is suddenly going to make criminal under the mail fraud statute... I mean, bring back Cotton Mather.

I mean, this is... any lying in a commercial context where you're trying to get money out of it is now mail fraud.

Is that right?

Mr. Dreeben: Well, I don't want to speak to Richard in the Survivors, since--

[Laughter]

--we haven't charged that case and I'm not familiar with it.

Justice Breyer: I hope not.

Unknown Speaker: [Laughter]

Mr. Dreeben: But as far as the breadth of the theory, it is a broad theory.

I'm not sure, Justice Breyer, whether it covers all of the hypotheticals in your question, but it is a broader theory than the license as a proprietary activity theory, because it would apply whenever an individual lies for the purpose of obtaining property--

Justice Breyer: So what I'm most worried about in that, of course, is that it is possible, you know, that competitors in a commercial context may tell each other lies sometime.

I'm going to the trade show, and then when your competitor goes you stay home and take his customer away.

Well, each one of those is a RICO suit, and I--

Mr. Dreeben: --I don't think so.

Justice Breyer: --No?

Mr. Dreeben: No.

I think there is a materiality component in the mail fraud statute that this Court described in Neder v. United States--

Justice Breyer: It's material. You get your competitor to go to the trade show and then while he's away you take his customer.

There was quite a lot of money there.

Mr. Dreeben: --I haven't tried to frame this as an application that would sweep in routine commercial conduct.

Justice Ginsburg: But you said you were going to treat the Government just as a private person would be treated under this statute that was... but are you saying that's true of the theory that it's property in the hands of the Government as well, and not true under this alternative theory?

Mr. Dreeben: No, Justice Ginsburg, but in this particular case what the defendant did was lie to the State, concealing adverse facts about his background in order to obtain a valuable license, which--

Justice Ginsburg: Well, that could apply, at least in the cases you excluded from your first theory.

That is, the license to practice law, the license to practice medicine, those are very valuable in the hands of the recipient.

Mr. Dreeben: --That is true.

Justice Ginsburg: And I think sometimes when they divide property on termination of marriage those are attributed a monetary value.

Mr. Dreeben: That is true, and there is yet another theory of the mail fraud statute which we have not raised in this case and we haven't briefed in this case, which holds that lying to, for example, the State in order to obtain a regulatory approval that will then allow someone to obtain money from a third party fits within even the first clause of the mail fraud statute.

Justice Ginsburg: Well, my problem with your large interpretation, Mr. Dreeben, is you're essentially making the Federal Government monitors of what would be a false statement to a Government agency.

18 U.S.C. 1001, that operates on the Federal level.

You're just saying, well, we do the same thing with overall monitoring, of making a false statement to a Government official, State or Federal, and that's the kind of thing, if Congress meant to do, shouldn't it be required to speak clearly?

Shouldn't a clear statement rule apply to that level of monitoring, false statements made to State agencies?

Mr. Dreeben: I think, Justice Ginsburg, that Congress has attempted to speak very clearly and comprehensively in the mail fraud statute.

When this Court ruled in McNally that it did not apply to the intangible right to honest services, Congress came back and amended the statute to make clear that it did want the Federal Government in that line of business.

Justice Scalia: Well now, wait.

It was a later Congress that decided that's what they wanted to do.

That doesn't have anything to say about what the earlier Congress intended when they passed this fraud statute.

Mr. Dreeben: I don't suggest that it does, Justice Scalia.

Justice Scalia: These were different people in Congress, after McNally, and they decided that they agreed with the Government that there should be a way to get these people, but that says nothing at all about whether the statute, as originally drafted by another Congress many years ago, all of whom are gone, meant what we said it meant in McNally.

Mr. Dreeben: Even taking the Court's own holding in McNally, the Court's holding is that the State is not to be less favored than a private party insofar as it's a property holder.

It's to be treated on the same footing if the defendant uses a Federal jurisdictional means which subjects him to a Federal regulatory system, and there are lots and lots of defendants who make false statements to Governments in connection with obtaining money or property or even defrauding a State of tax revenue, which some people might think are quintessential things for the States to handle all on their own.

Chief Justice Rehnquist: I don't know whether one... 18 U.S.C. 1001 was passed before or after the mail fraud statute, but the Government, intimated by Justice Ginsburg, really doesn't need 1001 if you're right about the mail fraud statute.

Mr. Dreeben: Well, the elements of the two statutes are different, and there are many applications where 1001 would fit where we wouldn't necessarily be able to establish a scheme to defraud under the mail fraud statute, so the--

Chief Justice Rehnquist: Well, can you give me perhaps one of those?

Mr. Dreeben: --Well, you'd... under our second theory, we do not need to show that there is an intent to deprive the State or the Federal Government of a property interest, whereas--

Chief Justice Rehnquist: So you say basically the mail fraud is much broader than 1001.

Mr. Dreeben: --In some ways it's broader, and in some ways it's narrower.

Chief Justice Rehnquist: In what way is it narrower?

Mr. Dreeben: Well, mail fraud requires a use of the jurisdictional means that you have mail fraud, and it also under the scheme to... you need to have proof of the mails in other words, which is not true for 1001.

1001 involves any Federal agency, any false statement in a matter within the Federal agency's jurisdiction, and it need not involve any money or property loss or gain.

So the two statutes have a substantially different sweep.

Justice Ginsburg: If it's only the jurisdictional peg, I guess the wire... isn't there... there are parallel statute that deals with use of wire communications?

Mr. Dreeben: Correct.

Correct.

Justice Stevens: Which--

Justice Ginsburg: --It seems to me there's hardly any application for anything that wouldn't use one or the other, a telephone or the mail.

Mr. Dreeben: That may be true, and there's also an intent element, though, in the mail fraud statute of an intent to defraud, which is not present in the 1001.

1001 simply applies to a knowing false statement within the jurisdiction of a Federal agency.

Justice Stevens: Would your theory apply, assuming there's a mailing, of course, to false statements in an employment application?

Mr. Dreeben: To the State?

Justice Stevens: Yes.

You want to get a State job, and you lie about your background in some way, misstate your age, or you say you were never caught speeding or something like that.

Would it apply?

Mr. Dreeben: Well, certainly the second clause as we have construed it would apply in such a case, because the employment applicant seeks employment.

Justice Scalia: What about a misstatement in a tax return, State filed tax return?

Mr. Dreeben: A misstatement that is intended to result in a greater tax--

Justice Scalia: Greater deduction, or lesser tax.

Mr. Dreeben: --Yes.

But Justice Scalia, that would be covered under anybody's interpretation of the mail fraud statute, because it's a scheme to acquire money or property that should belong to the State, and that's fundamentally--

Justice Scalia: It's a scheme to keep your own property, which you're supposed to give to the State.

I'm not sure that anything is being taken from the State.

Mr. Dreeben: --No, the State has a right to--

Justice Scalia: You don't read the statute too closely, do you?

Mr. Dreeben: --I think that I read the statute broadly in respect of money or property losses to the State, and apply it in a way that makes it congruent with what a private party would be subjected to.

Justice Souter: Mr. Dreeben, I have, I guess, a basic problem with how we even get to your second theory, because as I understand it the trial judge in this case charged the jury simply on the theory of depriving the third party of property, so I don't see how we could even get into this if we wanted to.

Mr. Dreeben: The trial judge combined the first clause and the second clause of the statute which were charged in the indictment.

He combined them by saying a scheme to defraud by making false or fraudulent representations to the State.

Justice Souter: But he did it on a theory of defrauding, i.e., getting the other person's property, didn't he?

Mr. Dreeben: He did, but a jury that found guilt on those instructions necessarily found that the object of the scheme was to make false statements to the State to obtain the license and, indeed, the charged mailings were the mailings of the license to the defendants.

Justice Souter: So you're saying it's like lesser included?

Mr. Dreeben: It's exactly included within what the jury had to find in order to render the conviction on the instructions that were given.

Justice Ginsburg: Mr. Dreeben, your alternate theory is admittedly very broad.

You gave a yes answer to the employment application.

Is there any guidelines that are given to Federal prosecutors, given the tremendous potential sweep of the statute as you construe it?

Mr. Dreeben: There are no guidelines beyond the legal requirements for charging mail fraud that are given to Federal prosecutors.

Justice Ginsburg: So the individual prosecutor can decide if he or she would like to go after the would be employee who lied on an application for State employment?

Mr. Dreeben: In theory.

In theory, Justice Ginsburg.

I would also say that under the property prong of mail fraud individual prosecutors have discretion on what level of case they are going to bring, and the competing obligations and case loads of Federal prosecutors tend to send those cases to the wayside, but there are small cases brought even where the State is defrauded of a relatively small amount of property.

And one of the reasons why that is is because frauds against the State often involve State actors in collusion with the private parties, and the Federal Government there serves a very valuable role in coming in and being able to prosecute when the States themselves seem to be less able to do so, and this case itself had a corruption component in it involving charges against State Senators, which the jury ended up rejecting, but there was a reason why the Federal Government was involved in this case in the beginning.

Chief Justice Rehnquist: You don't think the people of Louisiana deserve the kind of government that they elect.

Unknown Speaker: [Laughter]

Mr. Dreeben: I think the people of the State of Louisiana are actually benefited by having the Federal Government available as a supplementary prosecutorial tool.

Thank you.

Rebuttal of Paul Mogin

Chief Justice Rehnquist: Thank you, Mr. Dreeben.

Mr. Mogin, you have 11 minutes remaining.

Mr. Mogin: Mr. Chief Justice, we will waive rebuttal unless there are questions.

Justice Kennedy: How do you distinguish the Carpenter case, because the Carpenter case held that the confidential information of the Wall Street Journal was traditionally protected as property because it would be subject to protection in equity, et cetera.

Mr. Mogin: The key distinction is that there this Court was able to find prior law that recognized confidential business information as property.

The Ruckelshaus case in this Court, a case from... the International News case I believe it is, a treatise was cited in the opinion.

There was substantial prior law indicating that confidential business information was protected as property under the civil law, so the Court was not required to announce a new theory of property in that case.

Justice Stevens: May I ask this, Mr. Mogin.

The right to exclude is mentioned over and over again in property cases as one of the bundles of rights that's a property right, and so forth.

I know the Government doesn't press this to the extreme it would go, but why isn't... why couldn't one view the video poker industry as an industry that is controlled by the State and they have the right to exclude newcomers, oldcomers, and that's just an old fashioned property right?

Mr. Mogin: Well, this Court has pointed out that there's no precise or universal definition of property.

That's been said in some bankruptcy cases, and--

Justice Stevens: But isn't it true that the right to exclude is referred to in many, many property cases as a strand of property right?

Mr. Mogin: --Yes, but I don't think that from that one could conclude that every right to exclude is a property right, because here you have the breadth of it, that the licensing and approvals and permits and certifications and registrations that the Government issues is truly extraordinary.

It's never been thought that those are property rights that the Government is exercising, and property law has been formed... is based a lot on history and tradition, and not merely on characteristics.

There's no one characteristic, such as the right to exclude, that can be focused on and is the be all and end all of whether there's a property right.

Justice Souter: Well, because in this case or in any regulatory case, as distinct from the case of private ownership or private property, there are two capacities, I suppose, on the part of the supposed property owner, and one is a regulatory capacity and one is arguably a proprietary one, and I suppose... I mean, wouldn't it be your argument that the right to exclude would have to be classified on the regulatory side rather than the property side?

So in other words, the right to exclude is here, but the reason it isn't property in the case of the Government is that the Government holds it in a different capacity as regulator, which is a capacity that the private property owner doesn't have.

Mr. Mogin: I think that's exactly right, and that's why the Government prohibits all types of things, excludes people from all types of activities.

The mere fact that the Government is excluding something does not mean it's exercising a property right.

One has to look at the nature of the decision and see whether the Government is acting in a regulatory or proprietary capacity.

As we cite in our briefs, the courts have always viewed licensing decisions and revocation decisions as regulatory rather than proprietary.

Chief Justice Rehnquist: Thank you, Mr. Mogin.

The case is submitted.

Attribution:

The Oyez Project

Featured:

Bates v. United States - Oral Argument

Fri, 09 Jan 2009 14:50:04 +0000

Case:

Bates v. United States

Media File:

96-7185_19971007-argument.mp3

Related Transcript:

1997_96_7185_argument.xml

Transcript:

Argument of C. Richard Oren

Chief Justice Rehnquist: We'll hear argument now in No. 96-7185, Garrit Bates against the United States.

Mr. Oren.

Mr. Oren: Mr. Chief Justice, and may it please the Court:

This case comes before you today as a result of the dismissal of an indictment by the District Court in the Northern District of Indiana in April of 1995, prior to the taking of any evidence in the case.

However, the challenge to the sufficiency of the... of the indictment actually began many months prior to that in an official conference I had with Mr. Bates in my office.

At that time we went over the indictment paragraph by paragraph.

At the end of that process, Mr. Bates thought for a minute; he looked at me, and he said: Yes, but what is it they're telling me I did wrong?

And I said: Well, Mr. Bates, I believe that they're saying that you misapplied Federal student loan funds.

Mr. Bates thought about that for a minute and then he said to me: Yes, I understand that, but what is it specifically they're saying I did that was illegal?

And I went back and I looked at the indictment and I found that I could not really answer that question for him.

I believe that exchange underscores the importance of this Court's standard for judging the sufficiency of an indictment.

That being that all elements of the offense charged must be stated and that the indictment should fairly inform the defendant of the charges against him, as well as be sufficiently specific to stand as a bar to further prosecutions should there be a conviction or an acquittal.

So what I'm asking of this Court is to strictly examine the indictment that was brought before Mr. Bates... that was brought against Mr. Bates.

Unknown Speaker: When you... you say strictly examine, Mr. Oren, are you suggesting some extremely skeptical scrutiny of the language of an indictment?

Mr. Oren: No, not extremely skeptical, Your Honor.

I... I believe I'm using that in the sense that prior to evidence being taken, the only thing we have to look at is the indictment.

If... if there was dismissal after evidence had been taken, then I think that if there was no prejudice shown, then if the indictment was not sufficient, it would still not really--

Unknown Speaker: So here you're saying all we have to look at is the indictment and nothing more than that?

Mr. Oren: --That's... that's correct, Mr. Chief Justice.

The indictment here is set forth in the joint appendix at pages 2 through 12.

It is actually structured in two portions.

The first portion is a series of basic background factual allegations.

And the second portion are 12 specific charging counts, if you will.

Directing the Court's attention to the first, the factual allegations, it provides, first of all, various background information and then some specific allegations of conduct against Mr. Bates... or by Mr. Bates.

As a background information, it... it alleges that a James and Laurenda Jackson owned the Ax... Acme Institute of Technology.

Unknown Speaker: Now... now, Mr.... Mr. Oren, the question presented here in the petition for certiorari is whether intent to injure or defraud the government is an element of the offense of knowingly and willingly... willfully misapplying Federal student loan funds, in violation of the statutory section.

And I... I think the... the government apparently agrees that the indictment does not contain any allegation that it was done with an intent to injure or defraud the United States.

So the question we have before us, as I would understand it, is: Is that an element of... of the offense?

And I don't see why we need to be concerned with the various detailed allegations of the indictment.

Mr. Oren: My reasoning for bringing this to the Court's attention is that the... again, the sufficiency of the indictment depends, I believe, on the actual setting forth of the elements of the offense in the indictment.

And--

Unknown Speaker: Yes, but we're... we're not canvassing the indictment for some shortcoming.

It's a very precise issues that's... that you have presented in the question for certiorari.

Mr. Oren: --Yes, all right.

Assuming, then, that the government is agreeing that there is no factual allegations alleging... of the elements of the... of the offense, as we believe it to be--

Unknown Speaker: Well, there's no agreement on whether it's an element of the offense.

I mean, whether fraudulent intent is an element, is there... there's no agreement?

Mr. Oren: --No, there is not.

It is my understanding that, at least in the courts below, the government has agreed that conversion, or un... unauthorized use of property to the benefit of the defendant or a third party, is an element of the offense.

But where there is no agreement between the government and Mr. Bates is that... whether or not fraudulent intent or criminal intent is an element of the offense of knowingly and willfully misapplying student loan funds.

Unknown Speaker: Well, it doesn't say it's... here's the statute, 1097(a)... it doesn't say

"with intent to defraud the United States. "

Why should we read that into it?

Mr. Oren: Well, this does present an issue of statutory construction, Justice Ginsburg.

I believe that there are four principles that... of statutory construction that would support this reading.

The first of that is... the first principle would be the actual language of the statute itself.

I believe there are indications in there that... of the scienter element.

That being the words of the term "knowingly and willfully", as modifying "misapplies".

Unknown Speaker: Well, he was charged with that... several counts of knowingly and willfully misapplying Federal money, was he not?

Mr. Oren: Yes.

Unknown Speaker: That was the language used.

Mr. Oren: That... that is correct.

Unknown Speaker: And your argument, as I understand it, is that "knowingly and willfully" somehow incorporates a fraudulent intent, even though the statute otherwise, in describing not merely the... in describing not the... the... the offense of misapplication, but a different kind of offense, of obtaining, refers expressly to fraud as one forbidden means of obtaining property.

And... and isn't that the nub of your problem?

The statute refers to fraud elsewhere, but you want us to import the concept of fraud into... into a term which, on its face, has no apparent reference to fraud?

Mr. Oren: I am using the term "fraudulent intent", I believe, as synonymous with or indicative of what would be called specific intent of the common law or illegal purpose.

I think fraudulent intent is actually very descriptive of specific intent when it comes to the use or misuse of money.

So what I am suggesting is that fraudulent intent is specific intent or illegal purpose, and that that is in fact an element of the offense of misapplication of funds.

Unknown Speaker: Well, leaving aside whether you are entitled to or not, didn't you get... didn't the Seventh Circuit take the position that the government would have to prove... under the... the concept of "willfully", that the government would have to prove that the misapplication was made with an understanding of... of... of... that it violated the law?

Wasn't that the Seventh Circuit's definition of "willfully"?

Mr. Oren: The Seventh Circuit, in my estimation, issued an opinion which was slightly confusing.

Because, in one part, they did refer to the burden of the United States to actually prove some knowledge of wrongdoing.

Yet, on the other hand, they said that the offense of willful... of willful... knowingly and willfully misapplying funds did not include the... the element of fraudulent intent.

Unknown Speaker: Yeah, but fraudulent intent, as we normally use the term, is something different from an intent to misuse property with knowledge that the misuse is in fact forbidden by a Federal statute.

Those are two different concepts.

And I don't see any inconsistency between those two aspects of the Circuit opinion.

Why are they inconsistent?

To obtain by fraud, as we normally mean it, is to... is to make a... a misrepresation... misrepresentation of fact to someone as a means of getting that person's property.

Mr. Oren: Yes.

Unknown Speaker: And that's something entirely distinct from committing an act, whatever the act may be, with the knowledge that there is a statute that forbids the act.

And it seems to me that that's the... that's the distinction, certainly, inherent in the Seventh Circuit opinion.

And I don't see why it's a distinction that isn't a perfectly valid one.

Mr. Oren: I would... I... I guess, rely on the Morissette case, where the... this Court held that a knowing conversion of government property included a criminal intent, which would require the government to show that the defendant, Morissette, had knowledge of all the facts, which would have made his conduct a conversion.

And I do not believe that that holding is exactly what was being stated by the Seventh Circuit.

Unknown Speaker: It seems to me that... it seems to me the equivalent of that in the current context would be knowing all the facts that renders the... the action a misapplication.

Wouldn't that be the precise equivalent of what went on in Morissette?

Mr. Oren: Yes.

Unknown Speaker: And... and do you think the... do you think the holding here did not require him to know all of the facts that... that rendered this a misapplication?

Unless I'm mistaken, you're... you're demanding that he know more than the facts that rendered a misapplication.

You're demanding that he not only knew all those facts, but that he also had some... what should I say... criminal motive in the misapplication.

And I thought that's what we're fighting about.

And I don't see that Morissette speaks to that at all.

Mr. Oren: I believe that Morissette speaks to this issue in this way.

Morissette referred to a species... or it referred to every stealing being a conversion, yet not every conversion being a stealing.

What Morissette, I believe, was doing was distinguishing between the tort of conversion as opposed to a criminal conversion.

And in... in... again, in Morissette, they referred to a type of conversion which could occur when the property first came into possession of the defendant in a lawful manner, but was later misused.

And I believe that that type of conversion, that species of conversion, is exactly what misapplication is.

Unknown Speaker: Well, Mor... Morissette was a statute which didn't contain any requirement of intent, wasn't it?

Mr. Oren: I believe that it stated the modifying term of "knowing conversion" in... in the statute.

To that extent, it... it did indicate that there was an element of tent... of intent present.

Unknown Speaker: The words of Morissette are... are these: A knowing conversion requires more than knowledge that the defendant was taking property into his possession.

He must have had knowledge of the facts, though not necessarily of the law, that made the taking a conversion.

Now, if you apply that same text to the present case, I think you'd say... you'd say, knowing misapplication requires more than knowledge that he was applying the property; he must have had knowledge of the facts, though not necessarily the law that made the application a misapplication.

And... and there's no quarrel that that's properly charged, is there?

Mr. Oren: No.

That... I... I believe that would be a proper statement as to the offense of misapplication.

And I don't believe that I was trying to suggest anything more than that in my use of the term "fraudulent intent".

Unknown Speaker: But the... the Seventh Circuit would give you even more than Justice Scalia just suggested that you were entitled to.

Under the Seventh Circuit opinion, you would... you would be entitled to an instruction that the government had to prove that you knew you were violate... your client knew that he was violating the law.

So you're getting more, in fact, than... than... on your... on your own theory, Morissette would give you.

Mr. Oren: I really do not know how to answer that.

I did not read the... the Seventh Circuit opinion in that... in that manner.

Unknown Speaker: What do you do with the... the 1097(d), which states, in so many words, that there must be an intent to defraud the United States, with intent to defraud the United States?

That very language in the same section, in (d), is omitted from (a).

So if it's in (d) and it's not in (a), wouldn't one infer that Congress didn't mean it to be read into (a)?

Mr. Oren: I believe that, first of all, they're talking about two separate types of actions in (a) and in... and in (d).

I think the... and in subsection (d), they're talking about destroying or concealing property with fraudulent intent.

In those words, in normal usage, would not be... destroying and concealing property would not ordinarily have a criminal consequence.

Unknown Speaker: Didn't you win this?

I mean, I... I'm trying to put your argument in a way that, to me, was the strongest.

And maybe you don't mean it this way.

But... but there seem to be two parts.

One, in the "willfully" part... and I take it you won that... that the government is going to show that your client knew that what he was doing was unlawful.

Didn't you win that part?

Mr. Oren: I believe perhaps we did, yes.

Unknown Speaker: All right.

So the government would have to show, whatever your client did, he knew it was unlawful, as far as the lower opinion goes.

All right.

Then there seemed to be a second part, what you're calling fraudulent intent, which doesn't have to do with the first part.

Now, in reading the opinion, but not your brief, I thought they were... the words "fraudulent intent" covered two separate things: intent to defraud, which isn't involved here because there isn't a misrepresentation, or intent to injure.

They worked with that second part, "intent to injure or defraud": intent to injure the government or to defraud the government.

And, of course, the government would show intent to injure, in that it would be the known consequence of what your client allegedly did.

He deprived the government of the use of some money.

That injures the government.

I took the Circuit as saying the issue is whether there has to be a specific intent to injure; i.e., do they have to show that your client wanted, in the sense of purpose, to hurt the government?

Mr. Oren: Yes.

Unknown Speaker: Now, if you're going to tell me this argument is not in the case, I'm prepared to forget it.

And I don't want to make an argument for you, but I... I... I want to... when I read the... not necessarily the brief, but the opinion below, I thought maybe you were talking about specific intent to injure the government.

If you're not, if you're talking about specific intent to defraud the government, I agree with Justice Souter; I don't see that it's here.

Mr. Oren: Right.

I believe I was using the term "fraudulent intent" to refer to specific intent and illegal purpose.

As that relates to this indictment, I do not believe that the Seventh Circuit opinion would have provided us with any greater information about what use the government was alleging was the problem with Mr. Bates' conduct.

Unknown Speaker: Do you agree that, if all of the facts in the indictment are established, that there was a misapplication?

Mr. Oren: No, I do not.

I do not agree with that.

I do not believe that the indictment states facts that show a misapplication, nor--

Unknown Speaker: Well, is... is... is that the problem, then, and... and not the precise formulation of the scienter that's required, since we have "knowing and willful"?

Why was there no misapplication, in... in your view?

Mr. Oren: --The indictment does not state any factual allegation of any use of the funds by Mr. Bates.

It does... it states, I believe--

Unknown Speaker: Wait a minute.

Does... does he have to use the funds, if he... if... if one diverts funds from, say, a trust fund... I know that that wasn't what this was... but if one diverts funds for an unauthorized purposes, that's a misapplication, is it not?

Mr. Oren: --Yes.

But--

Unknown Speaker: So it doesn't have to be for his own use.

Mr. Oren: --The allegation is not in the indictment that Mr. Bates did anything with the funds.

Unknown Speaker: But what are the allegations as to Bates' conduct were sufficient to state an offense?

That's not the basis on which the District Court dismissed the indictment and that's not the basis on which the Court of Appeals reversed the District Court.

And that's not presented in your question here.

Mr. Oren: The argument that I have presented consistently from the District Court's opinion was that there were no factual allegations setting forth the elements of the offense.

And if you look at the--

Unknown Speaker: You're... you're limited, Mr. Oren, to... to the question presented here.

And the question presented in your petition is whether intent to injure or defraud the government is an element of the offense of knowingly and willfully misapplying Federal student loan funds, in violation of the statute.

Mr. Oren: --Yes.

Yes.

I agree that is the question presented.

The reason we got to that point as being the question presented is because there was nothing in the factual allegations to suggest the elements of the crime.

And if you look at the actual charging counts, it states the words of the statute.

And it's our position that the term "misapplies" is intrinsically vague.

Unknown Speaker: Well--

Mr. Oren: And--

Unknown Speaker: --But, now, it does allege that he did knowingly and willfully misapply; there's no doubt about that, right?

Mr. Oren: --That's... that's correct.

But it is intrinsically vague.

Thus, I believe that to meet the standards of actually setting forth the elements, the... the indictment should have stated at least the conceptual elements of the--

Unknown Speaker: But that... that's not the question you've brought here.

The... you know, I don't want to repeat it again.

Mr. Oren: --Yes.

Unknown Speaker: But we granted certiorari on a particular question, and it's not that one.

Do you understand what I mean?

Mr. Oren: Yes.

Yes, I do, Your Honor.

Unknown Speaker: Would it help if I asked what do you think they should have added... maybe that would... in terms of purpose of fraudulent purpose?

What I read is that they say that Mr. Bates was the treasurer; that by March '89, the refund liability had grown to 85,000; that there was a report which said that the institution of which he was the treasurer didn't make the refund to the government, and instead loaned a lot of money to the chief trustee and other institutions.

And in light of that, I take it, he... they charged that the defendant knowingly and willfully mis... misapplied the money, or some of that money.

All right.

Now, what, in your opinion... what word should have been added to this indictment that would help, from your point of view?

Mr. Oren: Well, I think, at the very least, that the... the indictment should have stated that it... that the defendant did knowingly and willfully misapply funds, in a certain amount, by converting those funds to his use, with--

Unknown Speaker: By what?

I'm sorry, I didn't hear.

Mr. Oren: --By converting those funds to his use, or the use of a third party, with intent to defraud.

That, I believe, would have made this indictment barely sufficient, so that Mr. Bates would have at least known the essence of the charges against him.

Unknown Speaker: Well, he knew the charge was... was that he knowingly and willfully misapplied.

If I understand your position, he knows that the statute requires you to use the funds for X.

He knowingly and willfully uses the funds for Y, and, according to the Court of Appeals opinion, knowing that that's a violation of the law.

He not only knows that he's using it for Y instead of X, but he knows that that is a violation of the law.

You say that that's not enough, right?

You're saying he must, in... in addition to misapplying it, intend, by the misapplication, to defraud the government?

Mr. Oren: I really did not intend for the... I... fraudulent intent... I did not mean to convey the thought that... that fraudulent intent was specific as against the United States.

That, I believe, was the--

Unknown Speaker: Or to defraud somebody.

Mr. Oren: --To defraud someone.

Unknown Speaker: To defraud... defraud someone.

It's not enough that he knows the statute tells me to use the money for X; I'm going to use it for Y.

And you say he can do that without violating this statute so long as, in ignoring the command to use it for X, he was not trying to defraud anybody.

He's just... he just... I don't know... he thought the statute was silly or inconsequential, so he said, I'm not going to use it for X, I'm going to use it for Y.

And you say that's okay; that... that maybe... maybe they can get that corrected, but it's not a crime.

Mr. Oren: I believe my point was that we are not informed of what the factual misuse is.

Unknown Speaker: No, now you're back to the pleading question--

Mr. Oren: Right.

Yes.

Unknown Speaker: --that the Chief Justice keeps telling you is not in this case.

It's really not in this case.

I mean, you've got to get back to tell us what you... what it... what it is.

Anyway, they do say what the factual thing is.

They say that it went to the... he used the money for these other people.

He... he gave it to the... he loaned substantial amounts of money to the chief trustee and a non-related profit-making institution.

Mr. Oren: In which paragraph of the indictment?

Unknown Speaker: In... in paragraph 13.

Mr. Oren: That statement, or allegation, does not say anything about Mr. Bates' conduct.

They... there are a lot of allegations in this about other people; that doesn't inform us about Mr. Bates' conduct.

And the reason that I have used the term "fraudulent intent" is that I was using it in the sense that it was used... in the sense that it is a specific intent, an illegal purpose, to distinguish the same type of... of behavior in a misapplication scenario, as was distinguished in Morissette, a... the tort of conversion from the crime of conversion.

I believe this is just a subset of that, and that, at the very least, that element of fraudulent intent should have been set forth in the indictment, inasmuch as that would have--

Unknown Speaker: Well, it really boils down to what does the word "misapply" or "misapplication" mean.

They said "knowingly misapply", and you say, when you say "misapply", it includes a lot of other stuff other than doing the wrong type of thing with the funds... knowing what the right thing was.

But this all turns on what the word "misapply" means, doesn't it?

Mr. Oren: --Yes, it does.

Unknown Speaker: You read a lot into it; they read very little into it.

They wouldn't even read the... as I read their brief, they wouldn't even require you to know that it was a misapplication.

All you have to know is what you did with it.

Which seems a little extreme to me.

Mr. Oren: Yes.

Unknown Speaker: Yes.

Thank you, Mr. Oren.

Mr. Oren: Thank you.

Unknown Speaker: Ms. Blatt, we'll hear from you.

Argument of Lisa Schiavo Blatt

Ms Blatt: Mr. Chief Justice, and may it please the Court:

The decision below is correct, because both the text and structure of Section 1097 compel the conclusion that an intent to injure or defraud is not an element of the misapplication offense.

Unknown Speaker: But would you agree with the... with the Circuit that the misuse has to be knowing, that it's an exercise of control or dominion that's a violation of the law?

Ms Blatt: No... I mean, yes, we disagree.

In our view, the word... all that's required is that the defendant know that his use of the money is unauthorized.

The defendant does not also have to know the source of the prohibition or that using the money in an... in an unauthorized manner was a violation of the law.

Unknown Speaker: If the term "misapply" is not clearly established in the law, then does not that argue in favor of... of interpretation of "willful and knowingly" such as the Circuit gave, knowing that is a violation of the law?

Because "misapply" is... is, I take it, not a well-settled term in... in our jurisprudence... or is it?

Perhaps.

I don't know.

Ms Blatt: The Court said in United States v. Britton, in 1883, that misapplication was not a technical or a word at common law; it was a word created by statute.

And in that case, the Court gave it a definition of misapplication to one's use or the use of another of someone else's funds.

And that meant it was a conversion.

Unknown Speaker: These funds did not have to be segregated at... at the time of the conduct here, did they?

They didn't have to be put in a segregated account, did they?

Ms Blatt: That's correct.

Unknown Speaker: Could a third-party creditor have levied on them?

Ms Blatt: I... I don't know the answer to that.

I don't.

Unknown Speaker: Ms. Blatt, let me... let me just raise the difficulty that I have with... with the government's position that the... the source of the prohibition need not be shown; that the knowledge of specific illegality need not be shown.

The mens rea requirement is knowingly and willingly.

Willfully.

And if... if we exclude from the possible meaning of "willingly" this intent to defraud... and I... I will so assume, what's left for the meaning of "willingly" as... or "willfully"... I'm sorry... as something in addition to "knowingly"?

The... the Circuit, I thought, made a pretty good... good guess at it.

And I realize that our prior cases that have construed it that way have been tax cases, but what else could it plausibly mean?

Ms Blatt: Well, we think here it means what it means in almost every case.

And that is "deliberately".

Which is... which is how the Court construed the words v. Browder.

And the... and so the common understanding of the word "willfully" is intentionally.

And--

Unknown Speaker: What... what is "knowingly", then?

Yeah, that's the... that's the trouble.

Because--

--It just repeats "knowingly".

I mean, surely "knowingly" means "intentionally", you know.

Ms Blatt: --Sure.

Let... let me address that in... in several parts.

This Court, in Morissette, said... used the words, both "intentional" and "knowing".

And you could certainly have a knowing act that's not deliberate.

I agree that it would be very difficult to have a deliberate act that's--

Unknown Speaker: Well, you could have a knowing act that is not purposeful, in the sense that the model penal code makes the distinction.

But how can you have a knowing act that is not deliberate?

Ms Blatt: --I... I push you into someone and you knowingly hit that person, but you're not deliberately hitting that person.

Unknown Speaker: It's not voluntary.

Ms Blatt: Right, it's not vol... right--

Unknown Speaker: So that that's--

Ms Blatt: --right.

In our view, the word "willfully" means voluntary, deliberately, in the sense that the act is... is done voluntarily.

Unknown Speaker: --But when you--

--Excuse me.

I'm sorry.

Ms Blatt: Which is, again, I think, the way the Court construed it in Browder.

But let me make one other point.

If you construe the word "willfully" to mean a voluntary, intentional violation of a known legal duty, as in Pomponio, I... I still think you have the same problem with the word "knowing".

Because it's hard to have an unknowing, intentional violation of a known legal duty.

Unknown Speaker: The government didn't cross-petition here, did it?

That's right.

Ms Blatt: No.

Unknown Speaker: So we really don't have to decide--

--Right.

--whether the Court of Appeals was right in what it said?

Ms Blatt: That's exactly correct.

We just wanted you to know our view.

And... and, in our view, the words "willfully and knowingly" would just require that the defendant know that his use of the funds was unauthorized.

Unknown Speaker: But you... but you... you do seem to say that he had to know that it was unauthorized.

So he has to have some knowledge of the duty, some knowledge of what his duties were.

Isn't that your position?

Ms Blatt: Yes, the defendant must know that the money in... in this case belonged to the... the lender after the student withdrew.

He did not have to know that the source of the... of the prohibition of holding on to the money when it belonged to someone else.

Unknown Speaker: But did he not, un... under your view, have to know that there were regulations out there that required him to use the funds in one way rather than another?

Ms Blatt: No, not in the sense of specific regulations.

No.

It so happens in this case that it is alleged that the defendant was familiar with the Department of Education's regulations.

Unknown Speaker: Well, at page 15 of... of your brief, you say the element requires that the defendant be aware that his use of the funds is unauthorized or wrongful.

Ms Blatt: That's correct.

And--

Unknown Speaker: I... I'm not quite sure how that squares with the answer you just gave Justice Stevens.

Suppose he doesn't know about the regulation?

Ms Blatt: --Right.

Well, he'd have to have some other way of knowing that the use was unauthorized, such as the school's manual required the refunds back to the lender in order to reduce the student's debt.

Unknown Speaker: So there... there's a... a felony if you violate the... the... the provisions in a school's guidebook or manual?

Ms Blatt: There's a felony if you knowingly and intentionally convert money when you know the money truly belonged to someone else.

And that's a... it's definitely... it's a property crime.

It's the crime of conversion.

And all we're saying here is that the defendant's acts must be deliberate and the defendant must know that this money belongs to someone else.

Unknown Speaker: Well, the ordinary person, I guess, knows when he takes somebody else's money and uses it to buy something that the other person doesn't really want him to do, that that's probably a crime... ordinary conversion.

Ms Blatt: Right.

And what this--

Unknown Speaker: And, all right, what about the 40,000 pages of... of rules that govern, in detail, how one is supposed to apply Federal money; anyone who violates any one of those rules is... is guilty of a crime?

Ms Blatt: --No.

I mean, there would have to be two things.

There'd have to be the requisite criminal intent, and there... there would also have to be the conduct of the conversion.

And just a... a technical violation of the rule... for instance, if the defendant miscalculated the amount of the refund, that would be a violation of the regulation, but you wouldn't have the requisite criminal intent.

Unknown Speaker: What do you mean by requisite criminal intent?

I don't understand.

Ms Blatt: That the defendant... that his conduct be deliberate, and the defendant know that the money should have been returned.

Unknown Speaker: For what reason should it have been re... just have some general hunch it should have been returned or must he know why it should have been returned?

Ms Blatt: In this case, and in most cases, the source of the knowledge is going to be the law, because it will be the Department of Education's regulations.

Our point is that the word "willfully" does not have this meaning of requiring knowledge of illegality.

Which is the way the Court of Appeals construed it.

Unknown Speaker: But do you... do you understand this indictment to require the prosecutor in this case to prove that this defendant knew that there were regulations that he'd violated?

Ms Blatt: No.

No.

The indictment just said he had to act willfully.

Which, again, in our view, would mean he had to act deliberately.

Unknown Speaker: But you also said with criminal intent... he could have criminal intent even if he did not know that the regulations prohibited what he did.

Ms Blatt: As long as he has another... some knowledge that his conduct was prohibited.

Unknown Speaker: But the only thing that prohibited the conduct was the regulations.

That's the... that's the source of his duty to do something else.

And you say he does not have to know... he has to know the duty.

How could he know the duty without knowing what the regulations require?

I don't understand.

Ms Blatt: He could have... the source of the duty could not only come from the school's manual, it could come from his boss--

Unknown Speaker: But... but it didn't in this case.

Ms Blatt: --Right.

Unknown Speaker: We're trying a particular case in which it... there was a misapplication, because what he did, did not conform to some regulations.

Ms Blatt: Right.

Unknown Speaker: You agree you must prove that he knew what he did was wrongful.

And the only reason it would be wrongful was that he didn't comply with the regulations.

But you say you don't have to prove he... he knew he was not complying with the regulations.

Ms Blatt: In this--

Unknown Speaker: Your position is inconsistent.

Ms Blatt: --In this case, Justice Stevens, I think the proof would come, and the indictment does allege, that the defendant knew of the legal requirement to pay refunds.

Unknown Speaker: So, then, you are... are agreeing that in this case you must prove that he knew he was violating the regulations?

Ms Blatt: No; I'm saying in this case we can prove that.

I'm not saying that we must prove it.

Unknown Speaker: Well, how else could you prove a knowing misapplication in this case?

Ms Blatt: Oh, in this case, if the defendant had read the manual or if the defendant had a discussion with the financial aid director and the financial aid director said the Department of Education requires this.

He would understand that okay, this money needs to go to a lender.

And he's intentionally engaging in a wrongful act by holding on to it.

Unknown Speaker: But that's because you would have proved that he knew that the regulations required it.

His knowledge may have come through an oral conversation; he doesn't have to read the regulation.

But I... I do think you either have to agree that you have to prove that he knew he was violating a government command or you don't have to prove it.

And I think you've admitted you do have to prove it.

Ms Blatt: No; I... I've admitted we can prove it.

I don't think we do have to prove it.

Unknown Speaker: But what other way could you prove know... knowing misapplication in this particular factual context?

Ms Blatt: If the school's manual set forth... which, in this case, it did... the duty to return money after a student's withdrawal.

You could also have a situation where the person--

Unknown Speaker: Do you think that would be a crime even if the government regulations didn't require it?

Ms Blatt: --No.

That wouldn't be a crime... not because of the intent, you just wouldn't have the crime of conversion.

If the money is in fact not used consistent with its authorized purposes, you would not have a crime to begin with.

Unknown Speaker: Yeah, but, Ms. Blatt, I'd... I'd really like to at least get a... a few of your thoughts on the issue that was actually brought up before us.

And... and if... if no one else thinks it's even worth talking about, I do anyway.

Let's assume... it seems to me it... it's... it's not as cut and dried as... as you make it out.

You... you have a list of words: embezzles, steals, obtains by fraud, false statements or forgery.

And in the midst of those words you have another word thrown in that... that doesn't have as much currency in... in the common law, "misapplies".

Now, it's a rudimentary canon of interpretation... it's called ejusdem generis... that when... when you have a general word that's in a catalog of other words, you give it the same... the same coloration that those other words bear.

That seems very extraordinary to me to find the word "misapplies", as you interpret it, just, you know, well, I know it ought to go in this account, but, you know, I'm going to put it... what... what's the difference, you know.

I'm not... I'm not stealing it.

It won't hurt the government.

I'm just going to put it in this other account.

I know it's the wrong account, but I think it's just as good, you know.

To find that word, as you interpret it, in the middle of these other ones... embezzles, steals, obtains by fraud, false statement or forgery... and then, you know, to have a... a 1-year--a 1-year imprisonment for it.

Why shouldn't I apply the... the... the canon of ejusdem generis and say, yeah, well, I know, you know, it's... it's a strange word, "misapplies"... but if it said "takes", I certainly wouldn't say, if... if you... if you took it without any intent of... of keeping it or anything like that, I... I think it's... it's very plausible that you have to have some wrongful intent in the misapplication, other than you just know you're putting it in the wrong account number.

I put it in account 1001 instead of 1008.

Who cares?

That's not embezzles, obtains by fraud and so forth.

Ms Blatt: Justice Scalia, we interpret the word "misapply" to mean convert.

Which is... in Morissette, this Court construed, in... in connection with similar words, such as "stealing" and "embezzlement".

And the Court said that there are distinctions between those terms.

And there's nothing innocent about using property in a way you're not supposed to use it.

And... and... and as long as you are performing an act that's deliberate and you know that you're use is unauthorized, it should be a crime.

You don't separately need to prove fraudulent or injurious intent.

And, again, not only do we have the... the text of the statute, where fraud is separately prohibited, but we have the words

"with intent to defraud the United States. "

in... in subsection 1097 (d).

And it's... it's those textual features and structural features that make it clear that an intent to defraud or an intent to injure is not an element of the misapplication--

Unknown Speaker: Suppose that... that you have a university where you're a financial officer and you are dealing with lots of money.

And there are probably rules that are... fill dozens of manuals.

And you perhaps know them.

And one day you say, my goodness, I'm going to pay the grounds men and not the professors for a week.

And the reason you're doing it is there's some kind of odd shortage and they're poorer, so you want to pay them.

Is it against the manual rule?

Yes.

You know it.

You'd never think it was a crime.

Now, on your interpretation of the law, they're guilty.

Very well.

On that interpretation of the law, looking at your statement of the question, which you thought was a rephrasing of his statement, why wouldn't you read the statute that there would not only have to be knowledge that your conduct was injuring the government, but that you would have to want to injure the government; i.e., you'd have to have a specific intent to injure the government before you would be guilty under such circumstances of a felony?

Now, that's... that's taking your... I don't know that I agree with your interpretation--

Ms Blatt: --Right.

Unknown Speaker: --but assuming that I did agree with your interpretation of 1 of 5,000 accounting manuals that are in a university, shouldn't that person at least have to want to hurt the government, rather than just knowing that the government will be deprived of 10 minutes use of some funds that he put in a different account?

Ms Blatt: We do not think an intent to injure is required.

And even under the common understanding of conversion and embezzlement, the law is quite well... well settled that an intent to replace the money is not a defense.

So you could take your employer's money--

Unknown Speaker: Your view, then, is what Congress intended is to take any person in a university educational institution anywhere, and all they do is have to know that somebody in the organization told them, put the money over here rather than there, they're guilty of a felony?

Ms Blatt: --Well, you still have to have the underlying conversion.

And in the example you gave, I don't--

Unknown Speaker: The underlying conversion, according to you, is to take some government funds and use them in any manner, for however short a period of time, contrary to what your boss told you should be done--

Ms Blatt: --Well, and... and--

Unknown Speaker: --and the regulation supports the boss?

Ms Blatt: --No.

And of course you have to convert it to your own use or the use of another.

Unknown Speaker: Well, the use told about was not necessarily your personal desire.

Ms Blatt: Right.

Unknown Speaker: You desired to put it in account A rather than account B.

It may--

Ms Blatt: Well, it still has to be for either your use or the use of a third party.

Unknown Speaker: --I suppose, under Justice Breyer's hypothetical construction, it would be a defense for a person to say, I knew I was taking $40,000 of the government's money, but I didn't intend to hurt them; they have millions back in Washington?

[Laughter]

Ms Blatt: Right.

And it's... it's not a defense to--

Unknown Speaker: That suggests that something is wrong somewhere.

Yeah--

Ms Blatt: --No--

[Laughter]

Unknown Speaker: --Just another--

Ms Blatt: No.

No.

You can't... I mean, it is... really, it is quite well settled that it's not a defense to either embezzlement or conversion to take money, hoping that the person is not hurt because you're going to give it back.

And here, the school cannot defend on the argument that, well, we didn't intend to hurt the government, because these students are ultimately going to repay the loan; the government is not going to be hurt.

Or we intended to pay the refund some day.

Unknown Speaker: --Well, this wasn't embezzlement, because the funds could be commingled and... and be used, I take it, for other purposes, provided some other funds were adequate, ultimately, to make up the shortfall; isn't that the rule?

Ms Blatt: The... the crime here, Justice Kennedy, is... is on the failure to refund on the 60th day.

And so the... how they spend the money up until the student withdrawal and the amount--

Unknown Speaker: So if... if a thief comes in and... and takes... and takes the money, it's still a violation not to refund it?

Ms Blatt: --Oh, if... if they can't... if it's... if they... if it's not a voluntary act, because someone stole the money--

Unknown Speaker: But I... I thought you said the vi... the violation is not making the refund within 60 days.

Ms Blatt: --With the requisite intent.

And that would have to be both a voluntary act and a knowing act.

And if someone stole other monies--

Unknown Speaker: Well, they don't have the money because they... A, somebody stole it; B, they paid some other account.

Ms Blatt: --Well, the distinction, again... and I think the words "knowingly and willfully" would take care of that and you wouldn't, in any event, need to read intent to defraud into the statute... but the issue would turn on whether the act is voluntary and knowing or if, for some reason, it was beyond the defendant's control.

And... but that would be the... the guiding principles.

And if a defendant is intentionally spending this money that's not theirs and that's not earned until the student finishes the term, and doesn't pay the refund obligation, knowing the money has got to go back to the lender within 60 days, you have a misapplication of Title IV funds.

Unknown Speaker: Suppose they think they're going to get other sums to make up the shortfall, and they just... and they... and they don't, something just happens?

Ms Blatt: They should not have been spending unearned money.

And if they're intentionally spending that unearned money... and... and these schools are fiduciaries with respect to this money as well... if they do not organize their affairs, or intentionally organize their affairs such that money is not available and students withdraw, in our view, the statute would cover it.

But... but... but, again, I mean, the issue is whether an intent to defraud or injure would be required, when there's nothing in the text or the history or the structure of the statute to suggest that it should be read into it.

I don't... in conclusion, if there are no questions.

Chief Justice Rehnquist: Thank you, Ms. Blatt.

The case is submitted.

Unknown Speaker: The honorable court is now adjourned until tomorrow at ten o'clock.

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Moskal v. United States - Oral Argument

Fri, 09 Jan 2009 14:49:39 +0000

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Moskal v. United States

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ORAL ARGUMENT OF DENNIS M. HART ON BEHALF OF THE PETITIONER

Chief Justice Rehnquist: We'll hear argument next in No. 89-964, Raymond J. Moskal, Sr. v. United States.

Mr. Hart: Mr. Chief Justice, and may it please the Court:

From the lofty world of holding companies to the more mundane world of a 1984 Ford, I'd like this Court to revisit section 2314 of title 18 and decide what Congress meant when it inserted two words into that statute 50 years ago.

Those two words are "falsely made".

As petitioner sees it, the question, really the bottom line question is whether the term falsely made means false in execution versus false in content.

The Government has asserted, and so far they have won that assertion, that the term should mean false in content.

They call this the broader definition of the two words.

The petitioner submits that this Court should reject that position, because in the final analysis the only good reason the Government can give for defining falsely made as false in content is that it catches more people, and we don't think that should be good enough for a criminal statute.

Unidentified Justice: xxx claim that you have to give some meaning to this provision, and it hasn't any meaning if it really... if we accept your interpretation of the statute it has really no meaning.

Mr. Hart: Yes, sir, that is their first argument, and if the tape could reflect that I am scratching my head, because I don't know why it must have an independent meaning.

Certainly courts, the lower circuit courts who have considered the question have often used the words forgery and falsely made interchangeably, and--

Unidentified Justice: Don't we usually follow the principle that each... each word or sentence or phrase of a law is supposed to be given an independent meaning so that it won't be simply superfluous?

Mr. Hart: --Yes, and that is the general rule.

I do agree with that.

But that is not a rule that covers everything, because, as I think anyone who reads these statutes can find that the words falsely made, forged, altered, or counterfeited are sort of a term of art, that are contained in dozens of Federal statutes.

And falsely made is never defined.

And that is why lower courts over many years have always concluded that falsely made equals forged, with the exception of one or two cases which the Government points out.

Yet the Government also agrees--

Unidentified Justice: Like this case.

Mr. Hart: --Yes, Your Honor, like this case.

The Government also agrees that that is not, number one, the common law definition of falsely made, and number two, they also agree that if you are to give this the independent meaning which they advocate, it is a much broader definition than what courts have normally accepted.

But even if we accept the United States' position that this must have an independent meaning, the term falsely made, we believe this Court can supply that meaning, that is, give an independent meaning to the word falsely made, yet still not necessarily include the conduct for which petitioner is charged with, that is the inclusion of false information in an otherwise valid document.

Now, the second position the Government advocates is that... if I can phrase this correctly... is that they agree that the common law definition of falsely made would not include what Mr. Moskal did.

They also say that Congress is usually presumed to know what the common law meaning was, and that it is the usual presumption that Congress used the common law definition when they wrote the words.

Yet they then argue that Congress cannot be presumed to use the arcane, or what they call the antiquated definition of the word.

And then they argue that what we posit as falsely made is arcane and antiquated.

And we submit they have never shown that.

We submit that the only reason they can suggest the broader definition is more modern is that it encompasses more conduct.

Yet the United States and petitioner both agree, number one, that there is nothing in the statute to indicate that Congress wanted to expand the common law definition of falsely made.

There is no legislative history that indicates Congress wanted to expand the common law definition of falsely made.

And there is no subsequent conduct by the Congress which reflects on that.

Now--

Unidentified Justice: Mr. Hart, may I ask whether there is any other statutory provision under which your client could have been charged for transporting these Virginia certificates?

Mr. Hart: --Certainly, Your Honor.

Unidentified Justice: What might that be?

Mr. Hart: He was also charged with section 513 violation, which is the possession of forged State securities.

There were two counts in the indictment for that.

But even if that... that were not permitted he could be charged under the mail fraud statute.

I think this Court last term decided a case, I am going to call it Schmuck, I can't remember exactly how it is spelled, where the operation was nearly identical to what Mr. Moskal did.

This Court affirmed that conviction.

But if this Court will remember, that man was not charged with section 2314 at all.

He was charged with mail fraud, criminal mail fraud.

Unidentified Justice: Could Mr. Moskal have been charged under section 2314 with regard to the Pennsylvania certificates?

Mr. Hart: Certainly, Your Honor.

Unidentified Justice: Just not the Virginia titles.

Mr. Hart: Certainly, and let me--

Unidentified Justice: But he wasn't charged with transporting those?

Mr. Hart: --No, Your Honor.

And that... that really... the crux of our argument, is that the Government argues that Mr. Moskal has found a loophole in this law and he is trying to squeeze through it.

And they say this with such force that it makes me even feel guilty when I read that.

But that is really rhetoric, because Mr. Moskal didn't determine the charges that were placed against him.

The U.S. attorney for the Eastern District of Pennsylvania decided to charge him only with the Virginia titles.

Unidentified Justice: Is this whole case just a tempest in a teapot then?

If we decide for you the Government isn't hurt, because it could have charged him with transporting the Pennsylvania certificates.

Is that it?

Mr. Hart: Well, to Mr. Moskal it's not a tempest in a teapot.

We submit that--

Unidentified Justice: And for you, if you win you are still... your client or people like him are still going to be subject to prosecution.

Mr. Hart: --Certainly, Your Honor, but not the type of prosecution that Mr. Moskal was.

Unidentified Justice: Not prosecution under a... under a regiment such as Virginia's.

Mr. Hart: Exactly, Your Honor.

Well, let me take that back.

I should add, in response to Justice O'Connor's question, that it also is a violation of State law.

Unidentified Justice: Yes, but not subject to Federal prosecution under a licensing scheme such as that of Virginia.

Is that correct?

Mr. Hart: I am not certain I understand the Court's question.

Unidentified Justice: Why can he be charged under your theory with the Pennsylvania titles but not the Virginia titles?

Mr. Hart: That's a... that's an important question, I think.

I would be happy to answer it in detail.

The Pennsylvania titles were physically altered.

They were changed.

They were changed in a number of ways.

They were changed in Pennsylvania by what in the title-washing business is called an artist.

The artist takes the titles, changes them, gives them to an office manager, who is Mr. Moskal.

Mr. Moskal sends them to another State, and in this case it was Virginia.

The titles come back clean.

Unidentified Justice: Now, in Virginia... how would you describe those washed certificates?

Forged?

Mr. Hart: No, Your Honor.

Unidentified Justice: Falsely made?

Mr. Hart: No, Your Honor.

Unidentified Justice: Altered?

Mr. Hart: No, Your Honor.

Unidentified Justice: Well, how could you be prosecuted under this statute?

Mr. Hart: Our belief is we could not be prosecuted under 2314 for those Virginia titles.

Unidentified Justice: No, no, not the Virginia, the Pennsylvania titles.

Mr. Hart: The Pennsylvania titles were altered.

Unidentified Justice: Yes, well all right, so he could have been charged under 2314--

Mr. Hart: Most certainly.

Unidentified Justice: --for sending those in interstate commerce.

Mr. Hart: Most certainly, Your Honor, most certainly.

Unidentified Justice: What you're getting down to then is merely prosecutorial error, aren't you?

Mr. Hart: I would be happy to call it that.

But the point is that we argued that both in the trial court and the appellate court and they disagreed with us.

They said it was perfectly all right to charge Mr. Moskal for those Virginia titles under 2314.

Unidentified Justice: Maybe we'll find out... excuse me, go ahead.

Did you indicate at the outset that you think the terms forged and falsely made may have a different meaning?

Mr. Hart: Well, we have two positions on that.

Unidentified Justice: Yes and no.

[Laughter]

Yes and no.

Mr. Hart: Yes, they can have different meanings.

Unidentified Justice: What is the different meaning?

Can you give me an example of where a document is not forged but it is falsely made?

Mr. Hart: Yes.

A document that's obtained, for instance, through bribery.

That is a valid vehicle title in this case, we'll take vehicle titles.

A vehicle title is obtained by someone passing a $50 bill to the title clerk to generate a title.

We recently tried a case down the street where someone stole a drivers license making machine, and just spewed out drivers licenses that were valid in every aspect.

Unidentified Justice: Well, those are forged, are they not?

Mr. Hart: Well, that wasn't the question, but they... they were valid in the sense that they contained the person's picture, his correct name, address.

Everything was valid, except it wasn't issued by the State where they stole the license-making equipment.

Such a situation can happen--

Unidentified Justice: I would be very surprised to see that that is not forgery.

And your bribery, I'm not quite sure how that works.

Mr. Hart: --Well, Your Honor, it would not be forged in the sense that anything was changed on the title.

It would be a correct title.

It may well reflect actual ownership of the vehicle.

Everything on the face of the title may be correct, but the point is it wasn't obtained through the State Secretary of State; it was obtained through illegal means, bribery or theft or something of that nature.

Unidentified Justice: I think what you are arguing is that falsely made, if it does not mean the same thing as forged, altered, or counterfeited, at least means that the person who makes it must know that he is falsely making it.

Mr. Hart: Yes.

Unidentified Justice: So the bribery doesn't have anything to do with it.

The point is that if the person who makes it is not being false, if he thinks it's accurate, you would not consider that falsely made.

Mr. Hart: I would agree with that.

Unidentified Justice: Whereas if the official himself knows he is writing down something that is in error, he would be making it falsely.

But how does that help you?

I'm sorry, go ahead.

And you assert that that helps your case by giving some different meaning to falsely made, if a different meaning is required.

And that is your other position, that a different meaning isn't required anyway.

Mr. Hart: I couldn't have said it better.

Unidentified Justice: Well, but Mr. Hart, the statute itself says

"knowing the same to have been falsely made."

as an additional requirement.

What is the sense of reading that language into one of the other provisions of the statute?

How does that help make it clear?

Mr. Hart: I am not sure that it does make it clear.

Unidentified Justice: Well, I thought you just said that you agreed with Justice Scalia's hypothesis?

Mr. Hart: Well, I... I do, but I don't think that necessarily makes it clear in Mr. Moskal's case.

Unidentified Justice: But the knowingly, knowing the same to have been so and so applies to the defendant in the criminal case.

Mr. Hart: Certainly.

Unidentified Justice: Not to some State official who may or may not know that this instrument is falsely made.

Mr. Hart: Yes.

Unidentified Justice: Because the Virginia people didn't know that there was anything phony about this whole deal, did they?

Mr. Hart: That's correct.

That's correct.

Unidentified Justice: But if they had... what if the Virginia guy was in on it?

Then I think you would think, you would say it was falsely made.

Mr. Hart: Yes, yes.

But the question then would be is Mr. Moskal guilty of the transportation of those facially valid titles from Virginia to Pennsylvania.

Unidentified Justice: They were falsely made.

Mr. Hart: No.

No, they... because there was nothing wrong with the execution of the document.

If the document accurately reflects what its intended purpose is, and that is the ownership of the vehicle, it is a valid title, and the transportation of that across a State line should not be against the law.

Unidentified Justice: Even if the official preparing and issuing the document has knowledge of the falsity and intends thereby that people be deceived by it?

Mr. Hart: I would say yes, Your Honor.

Unidentified Justice: Is that your position now?

Mr. Hart: Yes, I would say yes.

Unidentified Justice: So you have changed your position a little bit, I take it.

Mr. Hart: Yes, but I would make one distinction, because the case... that question has arisen before.

If the intention is to deceive ultimate consumers by the identity of the vehicle or the ownership of the vehicle, then we believe that that piece of paper, even if facially fine, is invalid as a document.

But that was not the case here, because ownership or identity of each vehicle was never questioned.

It was only the odometer.

Unidentified Justice: I don't understand why that makes a difference.

Mr. Hart: It makes a... well--

Unidentified Justice: Because the odometer reading is an important material part of the piece of paper, isn't it?

Mr. Hart: --Well, I disagree with that, Your Honor.

Unidentified Justice: You think that is just put in for the fun of it?

Mr. Hart: No, sir, but I don't believe it is any more important than say horsepower, or color, or make.

Unidentified Justice: Maybe not, or what about the name of the former owner?

Why is that important to a purchaser?

Mr. Hart: Well, it's important for title purposes, that is you would want to know the chain of title.

Unidentified Justice: Well, but if the statute on titles requires the odometer reading to be put in, I presume it wants an accurate one, doesn't it?

Mr. Hart: Yes, and there are laws that make that an offense to--

Unidentified Justice: Well, sure, and there are separate laws that make it an offense to forge documents, too.

We are talking about an offense of transporting certain kinds of documents in interstate commerce, documents that are equivalent to false documentary evidence.

And that is what this is, as I understand it.

Mr. Hart: --Well, yes, in some respects it is, but if I can pose the question would the title pass if the odometer was completely false?

And the answer to that--

Unidentified Justice: It would pass even if you had a forged signature of the owner, you had a forged name... you have all sorts of forgery on that title and it will still pass.

Mr. Hart: --It will still pass, but it's subject to challenge.

Whereas an odometer reading, it would not.

It would be no different than the wrong color of the car.

Unidentified Justice: You don't think if someone could come in and prove that the seller lied about the odometer reading he could rescind the transaction?

Mr. Hart: Not under the theory that the title did not pass.

Unidentified Justice: Are you telling me that it's important to have the name of the person who owned the car?

Mr. Hart: I believe that the State statutes usually require that.

Unidentified Justice: But is it important to the purchaser?

Mr. Hart: Well, I imagine that would vary from purchaser to purchaser.

Many purchasers--

Unidentified Justice: Because my next question is the odometer interesting to the purchaser?

Mr. Hart: --It certainly is.

It certainly is.

Unidentified Justice: And that was what was changed on this one.

Mr. Hart: I am sorry, Your Honor.

Unidentified Justice: That's what was changed on this one.

Mr. Hart: Yes, yes.

But we--

Unidentified Justice: I want to make sure that--

--[inaudible].

Are you talking about material misrepresentations when you are discussing, such as you could set aside the thing that is between the buyer and the seller, or something that would enable... enable a bona fide purchaser to prevail?

Mr. Hart: --No, I am talking about--

Unidentified Justice: Are you talking about materiality in the sense of is this particular representation important to a possible purchaser?

Mr. Hart: --Yes, and our answer to that is no.

I am sorry, our answer to that is yes.

Unidentified Justice: It would have to be.

That surely the representation of the odometer reading is important to a potential purchaser, if that means anything in construing the statute.

Mr. Hart: Yes, I certainly agree it's important, and it may be very important.

But the question is is that... is that document which contains the false odometer reading an invalid document?

And the answer to that is no.

Unidentified Justice: Well, the statute doesn't say invalid document.

Mr. Hart: It does not.

Unidentified Justice: Yeah, the question is is it falsely made?

Mr. Hart: Yes, yes.

Unidentified Justice: But is it your position that if in Pennsylvania they altered the certificate to show a different year of car, different odometer reading, different owner, and then it was washed in Virginia, that it is falsely made because there are some materials... misstatements?

It seems to me you are switching your argument, that all of a sudden you conceded that materiality is the test.

Mr. Hart: No.

We don't concede that materiality is the test.

Unidentified Justice: So that even if... suppose there's no car at all, and you have a Pennsylvania certificate that is forged, falsely made to show that there was, and then it is washed in Virginia.

And the title comes back, or the certificate comes back purporting to be an authentic Virginia certificate.

Falsely made?

Mr. Hart: No.

Unidentified Justice: That has to be your position.

Mr. Hart: Yes.

Unidentified Justice: So materiality has nothing to do with it.

Mr. Hart: No, as our back-up position, if I may point that out, a number of courts, lower courts have considered the question of materiality, and they have concluded, quite frankly, that odometers are a material part of the transaction.

But they have done that in the context of stolen cars and frauds in which the identity of the owner was concealed, in which vehicle identification numbers were changed.

A traditional fraud in which cars are... are stolen, in which cars are, the parts are interchanged, in which new vehicles are made and titles are created to reflect ownership of that vehicle, which is a fraud in itself.

So that is my problem with wholeheartedly embracing that position, is that the lower courts have always considered materiality as an important part, as what they call material, only in the context of stolen cars.

And that's not the case here.

The United States, as their final argument, believes that broad purpose of 2314 as an antifraud statute could only be upheld by a definition of the broad meaning of falsely made.

We don't believe that's the case.

We believe this Court has considered similar arguments, for instance when this Court considered the case of bootleg records, as whether they were counterfeit or whether they were stolen, under 2314 and rejected that.

Although this Court many years ago considered the prospect of the inclusion of aircraft as vehicles under the predecessor of the Motor Vehicle Theft Act, the statute, the language of the statute at that time said any vehicle that... any self-propelled vehicle that wasn't on rails, if it were transported would be a violation of the Motor Vehicle Theft Act.

And the Government's position was well, you now have airplanes, and if you steal one of those it should be included in that because the meaning was arcane and antiquated.

This Court rejected that argument.

We think similar reason should apply to this case.

There is no indication that Congress ever considered this type, this specific type of fraud.

That is... and I will admit that it's a fraud.

But the specific conduct of sending facially valid titles from one State to another as within the gambit of 2314.

And this Court has... has long concluded that when Congress has the will it makes thing clear.

When this Court has to make decisions for what Congress didn't talk about, because it's a criminal statute, the less broad meaning has preference, that the Government position in this case to broaden the statute is given a very careful and scrutinous eye by this Court.

But our position is that this Court does not have to reach that... that interpretation of what Congress meant, because the plain meaning of the words falsely made, even if this Court must assign an independent meaning to those words, can be defined as conduct which does not cover Mr. Moskal's conduct.

And of course then we reach the problem of... of notice.

Because if the Government has their way, they have a problem with the notice requirements of criminal statutes, and exactly what Mr. Moskal did was that effective notice to all individuals.

We suggest that if the Government has its way in broadening the statute, they have that problem.

But we suggest that--

Unidentified Justice: It was on notice that if he shipped these Pennsylvania titles across the State line he was subject to prosecution.

Mr. Hart: --No question about it.

And I can tell the Court that in Pennsylvania for years dealers were given what amounted to a ticket for that activity.

In Pennsylvania it was against the law to tamper with the odometer and change the odometer documents, and I believe it was a $100 fine for each document.

So he knew that that was against the law.

The question is when he got the facially valid Virginia titles back, did he know that was against the Federal law 2314?

He did not.

We believe he was correct in that.

Thank you.

Unidentified Justice: Thank you, Mr. Hart.

Mr. Nightingale.

ORAL ARGUMENT OF STEPHEN L. NIGHTINGALE ON BEHALF OF THE RESPONDENT

Mr. Nightingale: Thank you, Mr. Chief Justice, and may it please the Court:

This case presents the question whether washed automobile titles constitute falsely made securities within the meaning of section 2314.

Our position is that they are, for essentially three reasons.

First, the ordinary meaning of the term falsely made securities fits those documents.

Second, that interpretation accords with the history and purpose of this statute.

And third, there are... is no canon of construction that would justify imputing an artificially narrow interpretation.

Unidentified Justice: Who made that... how were these Virginia certificates falsely made?

Mr. Nightingale: Your Honor, the making of a automobile title involves the incorporation of information from the prior title, plus some additional information supplied by the new purchaser to State authorities.

They then return a new title incorporating the information.

A washed automobile title is falsely made because that process is corrupted through the addition of false information, and the end product, the Virginia title bearing false odometer figure, is indistinguishable in substance from the classic forgery, a situation in which you get a purportedly valid document that is capable of being used to mislead used car purchasers.

Unidentified Justice: And so the same rationale would apply to the color of the car on the title?

Mr. Nightingale: There may be a limit on the statute for materiality.

I mean, if you made a mark on an automobile title that had no effect on it, whatever, that might not violate the statute.

But the color of the car I don't think would fall within the de minimis situation.

That would be a means by which, if for example it was a stolen car, someone could mislead the purchaser as to the true identity of the car.

But I believe that a false addition or an introduction of a falsity through this process--

Unidentified Justice: Would the name of the seller--

Mr. Nightingale: --The name of the seller would qualify, because it would prevent the purchaser from being in touch with him to find out the history of the car.

Unidentified Justice: --Would you read the same sort of materiality requirement into the terms forged, altered, or counterfeited?

Mr. Nightingale: Your Honor, I would in this sense, that if you had a valid title and the only alteration was the addition of a pencil mark on it, I guess it would be altered in some sense.

But it would be completely immaterial.

Unidentified Justice: Mr. Nightingale... I'm sorry.

Mr. Nightingale, do we normally look at the terms used in the statute in light of their common law meaning?

Mr. Nightingale: That is a general principle, yes, Your Honor, but it's... it's one that has some important limitations as well.

Unidentified Justice: Well, do you, before you get to the limitations, do you concede that at common law the terms falsely made would not include the Virginia title?

Mr. Nightingale: The term falsely made at common law drew a distinction between false in execution and false in content.

Unidentified Justice: Right.

Mr. Nightingale: Now, there were fictions developed because that line was not entirely satisfactory.

I agree that none of the fictions present in 1934 would have covered the Virginia title, but it's important to recognize that they existed.

Unidentified Justice: Your answer to the question is that these Virginia titles would not have been falsely made at common law?

Mr. Nightingale: At common... under the old common law term.

Unidentified Justice: And presumably the Government could have charged Mr. Moskal with transporting altered certificates, the Pennsylvania certificates?

Mr. Nightingale: Your Honor, in this case the option was available, because Mr. Moskal was both the sender and the receiver.

He was at both ends.

But I want to add, in light of the Court's questions about the significance of this case, that that is by no means a certainty in these cases.

There are many cases in which... potential cases one can visualize in which a different person sends the altered documents one way, then receives them on the return trip.

And there may also be problems--

Unidentified Justice: Are there other statutes, such as the mail fraud statute and some of these others that might be available?

Mr. Nightingale: --In some of them, right, but in this case the evidence demonstrated that the documents were sent by Federal Express, and in some cases hand carried.

And the prevailing rule in the courts of appeals right now is that Federal Express does not qualify as a use of the mails.

So that was not an available option in this case.

Unidentified Justice: Mr. Nightingale, don't you think it's at least a reasonable meaning of falsely made, when I say a document is falsely made, that I would... assuming it means something beyond the common law meaning, don't you think I would think that the person who made it must know that it's false, as opposed to just having been given incorrect information and then he writes it out, and you say it is falsely made because he has written down false information that somebody else has given him?

That's a very--

Mr. Nightingale: Your Honor, there were--

Unidentified Justice: --Isn't it at least reasonable to give it the other meaning?

And if it's reasonable, why doesn't the rule of lenity suggest that that is the meaning we ought to give it?

Mr. Nightingale: --In the context that this statute operates it is not a reasonable interpretation.

I would... I want to point out as well that--

Unidentified Justice: I don't know what you mean by that, in the context in which this statute operates.

You mean--

Mr. Nightingale: --Let me indicate... let me refer to a case decided 8 years ago by the Court, Bell v. United States, in which the question was whether a statute that prohibits people from taking and carrying away money from a bank was designed to extend beyond common law larceny.

Now, those words had a distinct common law ring to them, and the question was did... did Congress, when it enacted a statute prohibiting taking and carrying away money, mean to incorporate all of the common law limitations.

In general the common law required that the taking be from the possession of the owner rather than the acquisition of title.

And the Court found that in the context of a statute that was designed to protect banks from losing money, the distinction between title and possession made no sense whatever.

And essentially that is our position in this case.

In the context of securities there is no difference in substance between a document run off an illicit printing press with a false odometer reading and a document prepared by means of the scheme that Mr. Moskal and his confederates followed.

The question is in the context that Congress acted, did the statute... would the distinction drawn by the common law make sense.

Unidentified Justice: --Well, you could have said that about the common law, too.

The very first statute wouldn't make... I don't know why there is anything special about this statute.

Mr. Nightingale: Your Honor, in fact in the common law there was difficulty with your proposition.

There is a case cited in our brief, Count de Toulouse Lautrec, in footnote 10 of our brief on page 17.

The facts there were that a printing company printed securities for a corporation, printed a few extra copies for its own files by way of samples of its work.

The defendant obtained the samples and negotiated them as valid bonds.

And that defendant was convicted of forgery.

The Court found that where there was no authority to use the documents in that fashion there was a forgery.

There was another case, one not cited in our brief, Commonwealth v. Foster out of Massachusetts in around the 1870's.

In that case the defendant called in a gentleman who had the same name as a rather well known commercial firm, had him sign some notes in his Wilson & Co., by Mr. Wilson, and then that person took the... of course Mr. Wilson was not a party to the fraud.

The defendant took those notes out and represented them to be the notes of the large commercial outfit.

And again there the Court held that that qualified as forgery.

This is illustrative, Your Honor, of the sorts of distinctions and difficulties that were present in the common law at the time Congress was called upon to legislate in the area of falsely made production of securities.

Unidentified Justice: Well, if at the time the statute was passed the committee report had said

"and we expect these terms to be given their normal common law meaning."

would you still be making the same argument?

Same context.

Mr. Nightingale: If there were an indication that that meaning could be attributed to Congress as a whole, yes, Your Honor.

Those circumstances aren't present here.

Let me review, if I could, the history of the statute.

Unidentified Justice: Yes, you would... you say you would still be making the same argument?

Mr. Nightingale: Let me... I don't believe there is an ambiguity in this statute, in its context, for which legislative history would be helpful in clarifying, no.

Unidentified Justice: When was this passed?

Mr. Nightingale: It was passed in 1939, Your Honor.

Essentially the history was as follows.

In 1934 the Attorney General sent a series of bills--

Unidentified Justice: Has the department made any effort to clarify it in Congress?

Mr. Nightingale: --Not that I am aware of.

There is one--

Unidentified Justice: You want us to clarify it.

Mr. Nightingale: --The Justice Department has not made... the Justice Department has not made an effort to clarify it.

Maybe I should back up and review the history of this statute.

In 1934 Attorney General, the Attorney General sent a set of bills to the Hill, all of which had as their common purpose the creation of Federal criminal penalties for criminal activity that extended across State lines.

Congress enacted those bills, recognizing that interstate criminal activity is more difficult to detect, it is more difficult to prosecute, threatens, in a large number of cases, more serious harm to the individuals.

As originally enacted that bill, the National Stolen Property Act, prohibited the interstate transportation of stolen securities; 5 years later Congress extended the prohibition by adding a separate paragraph including falsely made securities.

And it is fair to assume that Congress' intention in enacting the extension was its recognition that... of the difficulty of detecting and apprehending offenders and prosecuting those sorts of offenses.

There is no distinction in terms of that context, and I recall Bell again, where the purpose was to protect the assets of banks.

Unidentified Justice: In your view were these certificates forged?

Mr. Nightingale: The jury was not instructed on a theory that would have--

Unidentified Justice: But we're talking about questions of law here, and so--

Mr. Nightingale: --Yes, it is our position that there could be jury instructions that would encompass the sort of activity I spoke of with Justice Scalia.

The last footnote in our brief indicates that we believe that were the Court to reverse the conviction, the proper disposition would be a remand for a new trial in which forgery would be defined.

Unidentified Justice: --So, in your view this was both forged and falsely made?

Mr. Nightingale: That's true, Your Honor.

Unidentified Justice: Can you give me an example of a case where a document is falsely made but not forged?

Because if you can't, then your argument that we have to give independent meaning to the two terms, it seems to me, fails.

Mr. Nightingale: Your Honor, the one that comes to mind is as follows.

A check signed by an agent, purportedly for a principal, in which the agent has no authority is at common law not a forgery.

The reasoning behind that is that that check is made by the person purporting... is endorsed by the person purporting to make it.

It contains, though, only a false representation, which is that the agent had authority to act for the principal.

In my judgment that would quality as a falsely made security within the meaning of the statute.

Unidentified Justice: But if you run that analysis there, I think your answer to whether... whether this document was forged would probably come out the other way.

But I had a similar question to Justice Kennedy's.

Can you tell me... give me an example of something that is forged but not counterfeited or counterfeited but not forged?

Mr. Nightingale: Your Honor, no.

Counterfeiting is a subset of forged.

Unidentified Justice: So... so isn't that whole thing just, you know, just a vera test?

You know, lawyers use the same words to mean the same things often, and you admit that two of those words mean exactly the same thing.

Falsely made, forged, altered, or counterfeited.

Altered perhaps is something different, although it's a sub... a subcategory in common law, a type of forgery, a type of counterfeiting.

You could either falsely make or alter.

But once you say that counterfeit and forge mean one and the same thing I think your argument that we have to depart from the common law meaning, because otherwise falsely made would also mean the same thing, doesn't have much force.

Mr. Nightingale: I don't believe that we need view this statute as a series of independent boxes for the Government to prevail.

I do believe that when you consider this statute in the context of its passing, you... you are justified in recognizing the fuzziness at the edges of the definition of forgery.

Unidentified Justice: I thought we'd give the fuzziness to the defendant.

That... that's what the rule of lenity means.

Mr. Nightingale: Your Honor, again harkening back to the Bell case, the words take and carry away have both an ordinary meaning and, as my colleague indicates, they have a term-of-art meaning.

The common ordinary meaning is when you go into a bank without money and you come out with money, that is taking it and carrying away.

The common law term-of-art meaning was that when you go into a bank without money you have to get it by means of a scheme that involves depriving the victim of possession.

And I think that the same can be said of this situation.

If we walked out through those doors and asked 100 people in the street whether there was a difference in substance between the documents that Mr. Moskal sent to Virginia and those that came back, 100 people would fail to perceive that.

They would all recognize that the corruption of the process of making, through the introduction of the falsity, made those documents falsely made.

Now it is true that at common law those words had a somewhat narrower meaning.

They entailed a basic distinction which, as I have indicated, was somewhat riddled with fiction, that there was a distinction between truth in the execution and truth in content.

But I believe that there's a situation there where we have a common ordinary meaning that can be given effect by the Court in the context of this statute.

Again, without harping on it, it's fair to point out that Mr. Moskal's confederates were paying the people in Virginia $100 to convert the altered documents into washed documents.

They recognized that not only were they equally deceptive, but they were significantly more deceptive enough to justify the $100 a shot.

And in that situation, and given the common ordinary understanding of falsely made, there is no justification for reverting back to what we submit are arcane, obsolete distinctions without meaning in this context.

I do want to call attention to one subsequent enactment that bears on the problem before the Court.

In 1984 Congress amended the definition of security to which this statute applies to include valid or blank automobile titles.

The legislative history is very sparse on this.

The one indicator of Congress' intention was a committee report directed to the same bill in a prior Congress, but the indication is that Congress believed that valid titles were already covered by the statute.

The amendment was needed to add blank titles to those sorts of securities that could be transported.

It is clear though that in 1984 Congress understood there to be such a thing as a falsely made, forged, counterfeited, or altered valid automobile title.

And it is our position that one cannot conceive of a forged, counterfeited, or altered valid automobile title.

There has to be something for the... that operates on the term valid, and we believe it is falsely made.

This Court has--

Unidentified Justice: Did this... assuming that the statute before 1984 had meant something else, that is assuming that falsely made meant what your opponent says, or meant what the common law says, this incident in the 1984 legislation, or rather the legislative history of legislation that preceded the 1984 legislation but didn't get passed, has the effect of altering the meaning that the statute originally had?

Mr. Nightingale: --Not at all, Your Honor.

This Court--

--Then what does it, then what is the purpose of that?

Just to show that Congress misunderstood it or understood it correctly, one or the other.

There was no alteration in 1984.

In 1984 Congress by action [inaudible] its position.

Unidentified Justice: Well, but the position of the 1984 Congress which did not enact this statute is totally irrelevant, isn't it?

Mr. Nightingale: Your Honor--

Unidentified Justice: This statute was enacted in 1937 you told us... '37?

Mr. Nightingale: --'39, Your Honor.

Unidentified Justice: '39.

Of what possible relevance could be the 1984's Congress' misunderstanding of the law, or correct understanding, whichever one it was?

Of what possible relevance is it, unless it is amending the law?

Mr. Nightingale: Your Honor, the Court has often indicated that subsequent interpretations of a statute by Congress, though not dispositive, are entitled to significant weight.

Unidentified Justice: And you think this is an interpretation of a statute by Congress, this snippet of legislative history in '83 pertaining to an '84 statute?

Mr. Nightingale: Your Honor, it's not just the legislative history.

It is the action.

This is not a situation where congressmen got up in committee hearings and said we believe that this statute we passed 3 years ago meant X.

In this case the Congress as a whole passed a statute that makes sense only if there is such a thing as a valid automobile title that can violate section 2314.

And I think the closest parallel that I was able to find is the Red Lion case.

That was a case in which the FCC had promulgated a rule adopting the Fairness Doctrine.

There was question about whether the Commission had authority to do that, and a subsequent piece of legislation, Congress amended the FCC act and noted... provided however that this amendment is not intended to alter the obligation that in effect broadcasters have under the fairness doctrine.

The Court relied very heavily on that as an indication that Congress believed the FCC had the authority before to issue the doctrine.

Unidentified Justice: Suppose... suppose you have an automobile title that is counterfeited only with the... the odometer, that that is the only thing altered.

Mr. Nightingale: Yes.

Unidentified Justice: It is issued correctly by the State, and somebody alters the odometer reading, or the color of the car.

Is that a valid automobile title?

Mr. Nightingale: Your Honor, I believe that the State that issued it would not believe it was a valid automobile title, but--

Unidentified Justice: Because the color of the car has been altered?

Mr. Nightingale: --It's not the same title that was issued by the State.

It doesn't validly--

Unidentified Justice: Would you acknowledge that as a highly debatable proposition at least?

Mr. Nightingale: --Your Honor, the reason it's a difficult question to answer, I don't believe that that is what... that the situation that you have in mind is what Congress had in mind.

The difficulty in answering--

Unidentified Justice: Well, I don't know, but if it is you could fully explain the language Congress enacted in the 1984 statute as covering a situation where you have a title in which something quite irrelevant has been... irrelevant to the title at least, has been altered.

Mr. Nightingale: --Your Honor, let's focus a little bit on what automobile titles do, and then I think it will become clear why I am having difficulty with the question.

States have attached different significance to automobile titles.

In some States a title is the exclusive means by which you can pass title to a car.

If you buy my car but I don't give you the title, I sell it to someone else, he gets it.

In other States titles are prima facie evidence of ownership, but the... the transaction involves the sale of the car, and the evidence is altered to reflect the real transaction.

In that context, Your Honor, I believe that we are cut loose in many States from the concept that the title is needed to pass title as such.

The validity of the title, it seems to me, refers to the title being in its, in the condition that it had when it is issued by State authorities.

Unidentified Justice: But you just said in many States.

Mr. Nightingale: Yes, Your Honor.

Unidentified Justice: But in order for you to run the argument you are with respect to the 1984 statute, you would have to be able to say in all States, and therefore the 1984 statute can have no meaning unless it refers to what you claim it refers to.

Mr. Nightingale: Your Honor, I think that the way that would be handled in the rules of evidence would be to say that it would go to the weight assigned to the argument, but not to the correctness of the argument.

I don't believe that it's necessary to exclude all possibilities.

Unidentified Justice: No, your argument is that this '84 statute is utterly meaningless.

And what I am suggesting is even if there are only a few States where the title would be valid even though there has been an alterization... alteration, the statute would not be utterly meaningless.

It doesn't go to weight.

It goes to whether your argument is valid or not.

Mr. Nightingale: Your Honor, I believe that the... again, looking at it in the context... let me say that the 1984 legislation that added this provision was designed to deal with the problem of washing and changing titles to deal with stolen cars primarily, although there was indication of odometer fraud as well.

The committees that were dealing with the problem were told that a good way to title a stolen car would be to get a hold of an automobile title, alter the identification number to match the one of the car that had been stolen, wash that title, and then end up with an apparently valid... validly titled document.

And I believe that when Congress enacted the legislation making it a... making a valid title one that could be the subject of 2314, it was intending to deal with the same aspects of that kind of fraud and scheme that we have before us today.

And that they had evidence before them of... Congress had evidence before it of this type of operation, altered only in the fact that the identification number was altered rather than the odometer reading.

So I believe it is a fair inference.

Unidentified Justice: Mr. Nightingale, at the beginning of your argument you said your third point was going to be that no canon of construction interferes with your position.

Would you want to discuss the rule of lenity at all?

Mr. Nightingale: Your Honor, I would like to do that.

I believe the classic statement of the rule of lenity is Justice Blackmun's in the Huddleston case in 415 U.S. There are two reasons for the rule of lenity in effect.

One reason is to give fair notice to individuals.

The second is to be sure that legislatures define crimes and not courts.

And the rule is subject to the important qualification that although penal laws are to be strictly construed, they ought not to be construed so strictly as to defeat the obvious intention of the legislature.

I submit that this is a case in which neither of the underpinnings of the rule of lenity are applicable.

Mr. Moskal was not endowed as to the illegality of his conduct, and if he had given any attention to section 2314, I submit that looking at the common ordinary meaning of falsely made, he would not have believed that he would have been free... not free to send the documents down, but free to receive them back.

In the context that this statute operates, I think that it's clear that Congress was acting against an evil, the interstate transportation of falsely made securities, which fully covers this situation.

It would be highly inconsistent with Congress' intention to exclude from this statute a scheme, the essence of which was the use of interstate transportation--

Unidentified Justice: Suppose the Virginia issuer knew that this odometer reading was false.

That would be... this document then would be within the common law definition, wouldn't it?

Mr. Nightingale: --I'm sorry, Your Honor, I didn't understand.

Unidentified Justice: Suppose the issuer, the Virginia issuer knew that there was a false... false information in that document that he was issuing.

Wouldn't that document then satisfy the common law meaning of falsely made?

Mr. Nightingale: There was dispute on that question, Your Honor.

The Goucher and Corfield cases in footnote 9 of our brief, even a corrupt official could not forge an official document.

Under the Hibbs and Wilson cases--

Unidentified Justice: Could he falsely make it?

Mr. Nightingale: --The... those cases did not distinguish between falsely made and forgery.

Under the Hibbs and Wilson cases though, that was a forgery.

It's... it's our belief that Congress meant not to, meant to go beyond that dispute.

Unidentified Justice: But assume it was a forgery and was falsely made because the fellow knew it.

Will the person who sent in the false information, who sent in the false titles, if he could be prosecuted it would only be because the Virginia fellow knew it.

So I don't see what difference it makes whether the Virginia fellow knew it or not as far as his liability under the statute's concerned.

Mr. Nightingale: That is our position, Your Honor.

The end product is a document which is falsely made because false information has been introduced into it in the process of its making.

Unidentified Justice: And this defendant was responsible for the false information.

Mr. Nightingale: Right.

The defendant in this case had intent to defraud, and made the interstate transportation knowing of the falsely made document.

Those are the two mental elements of this statute, and they are fully satisfied.

Unidentified Justice: Mr. Nightingale, in determining whether the rule of lenity should be applied, it doesn't seem to me it is fair to take this particular defendant as the sole example.

Suppose somebody who intends to get his car painted, but it isn't painted yet, and he tells the person when he is making over the title put down red.

It isn't red yet; it is actually green.

And then he transports it in... in interstate commerce.

He would be in violation of this law, although, you know, if I were he reading the law I certainly wouldn't think that it would cover anything like that.

Mr. Nightingale: Your Honor, I don't think a jury could find that that gentleman had the intent to defraud that is required for this statute.

The statute prohibits... covers whoever with unlawful or fraudulent intent transports in interstate commerce, and so on and so forth.

I see my time is up.

Thank you.

Unidentified Justice: Thank you, Mr. Nightingale.

Mr. Hart, do you have rebuttal?

REBUTTAL ARGUMENT OF DENNIS M. HART ON BEHALF OF THE PETITIONER

Mr. Hart: Yes, Your Honor.

If I may, I would like to make four observations.

The first is the Government places great reliance on congressional action and section 2311, the amendment that they spoke about, about the valid or blank titles.

I had to wade through all that congressional testimony, and I didn't see one mention of odometer fraud, of title washing for roll-backed odometers.

What Congress was concerned with in 1984 was interstate car thefts and what they called chop shops, the assembly of vehicles from odd parts.

They were concerned with vehicle identification numbers, and there was no concern at all for odometer roll backs of title washing.

The Government is in error if it tries to convince this Court that that was the purpose of the 1984 amendments.

It does not in any way affect section 2314.

The second observation I would like to make is the Court asked the United States--

Unidentified Justice: I don't understand that last point.

Why wouldn't it affect 2314 if it affected chop shops and all that that put together different pieces--

Mr. Hart: --I am sorry, the Court is correct.

It does affect it in that sense.

Unidentified Justice: --It just doesn't affect odometer roll backs.

Mr. Hart: Yes.

Unidentified Justice: And this is just another species of phony documents for getting to the same purpose, though, really.

Mr. Hart: No, it's not for the same purpose.

It is... if the general purpose is defraud, yes, it is the same purpose.

But--

Unidentified Justice: Well, fraud and selling automobiles that are represented as having a certain history when they have quite a different history.

Mr. Hart: --Yes, yes.

But we submit there is a significant difference between an old car sold as a new car, and a car sold that was assembled from 23 other different cars or was stolen across State lines--

Unidentified Justice: The latter one might be a better car.

[Laughter]

Mr. Hart: --The... secondarily we would like to make the observation that in 1979 a district court in Iowa decided the Rudge case, which decided that what Mr. Moskal did in this case wasn't a violation of 2314.

In 1980 I believe it was the Tenth Circuit in Sparrow made basically the same decision, that if it was a valid automobile title that passed title, even though it had alterations, it was not subject to 2314 prosecution.

Now subsequent to that other courts have disagreed.

But since 1980 Congress has had the opportunity to clear that up, and has not.

And the reason I mention that is because in examining the history of 2314 circuit courts have concluded that 2314 did not cover certain things.

And what comes to mind specifically is travelers' checks.

There was a circuit court decision in the 1960's, I believe, that said this statute doesn't cover interstate transportation of travelers' checks.

When that opinion was issued Congress came back and changed the law and said put travelers' checks into the section.

They realized they could change it, they realized it wasn't there, and they made the effort to change it.

And they have never done anything since Sparrow and Rudge in 1980.

Unidentified Justice: But we have a different history here.

Most of the lower courts have agreed with the Government, haven't they?

Mr. Hart: I disagree with that entirely, Your Honor.

I believe two of the circuit courts have agreed with the Government, the Tenth Circuit has agreed with the petitioner, and what we consider a similar case, the district court in Rudge have agreed with the petitioner.

And so I would call it at best an even split, and at worst, for the Government, it's consideration of different factors, because no one has ever considered exactly what the petitioner did in this case.

And finally we'd observe that the Government is going to get into problems if it talks about materiality, because what the Government didn't mention is that one of the titles in this case was altered by a pencil mark, just a small pencil mark in the number.

And that's all that was done in Pennsylvania.

Now, if the Government is going to draw a bright line between vehicle model and vehicle make, and odometer, and put on the other side of the line a pencil mark, they are going to run into problems with this case.

We suggest no such bright line can exist.

Thank you.

Chief Justice Rehnquist: Thank you, Mr. Hart.

The case is submitted.

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Schmuck v. United States - Oral Argument

Sun, 06 Feb 2011 03:46:21 +0000

Case:

Schmuck v. United States

Media File:

87-6431_19881130-argument.mp3

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87-6431_19881130-argument.xml

Transcript:

ORAL ARGUMENT OF PETER L. STEINBERG ON BEHALF OF THE PETITIONER

Chief Justice William H. Rehnquist: We'll hear argument now in No. 87-6431, Wayne T. Schmuck v. United States.

Mr.... It's Steinberg?

Mr. Steinberg: Steinberg.

Unidentified Justice: Steinberg.

Mr. Steinberg, you may proceed whenever you're ready.

Mr. Steinberg: Thank you, Mr. Chief Justice, and may it please the Court:

I have about a dozen points to make here.

The first is that title registration is required by law just as in the case of Parr, payment of taxes was required by law.

And in each case, the use of the mails was convenient but not compulsory.

I think that's a significant parallel to the Parr case.

Second, even in the decision of Galloway, the Seventh Circuit case initially establishing that odometer tampering could become mail fraud under these circumstances, the court recognized that it was stretching the limits of the mail fraud statute.

Judge Crabb, the trial court in this case as in Galloway, didn't in Galloway accept the proposition.

She granted a directed verdict, and the Seventh Circuit reversed.

Judge Swygert dissented from that in the Galloway case and Judge Cudahy, who concurred in the judgments, said that it was taking the mail fraud statute to its outer limits, but he accepted the extension because of the judicially hypertrophied reach of the statute.

Unidentified Justice: Judge Crabb let the case go to the jury and then granted judgment of acquittal after they returned their verdict.

Mr. Steinberg: Yes, in the Galloway case.

And then in the present case, in the panel decision in which Judge Swygert participated, although he rejected our argument that this wasn't a proper mail I fraud case, he did indicate that it was the history of judicial expansion of the statute which he felt controlled the case.

Now, I think in the McNally case, this Court established, according to the general principles of interpretation of criminal statutes, that where you're faced with two possible interpretations, you should choose the less harsh one and also that you shouldn't create constructive crimes... constructive offenses.

And in McNally itself, the trial court had dismissed mail fraud charges based on the mailing of tax returns which were, once again, compulsory although... and the ruling in Parr was applied by the trial court in McNally.

The odometer tampering statute, which is on the books, covers my client's conduct precisely.

And in the case of Maze where after the offense in maze, which was credit card fraud, had occurred, Congress subsequently passed a law establishing credit card fraud as a separate offense.

In footnote 9, the Court in Maze noted that there may or may not have been some significance in that and didn't actually decide whether the existence of a specific federal statute covering the specific conduct meant that the mail fraud statute should or shouldn't also apply.

Unidentified Justice: How long a period of time did this odometer scheme go on as established in the indictment and as established at trial?

Mr. Steinberg: About two years, Your Honor.

My client had been--

Unidentified Justice: We'll, isn't the government going to tell us in its part of the argument that the mails were really necessary for the scheme to continue this long?

Mr. Steinberg: --Well, it seems to me that if in a single instance the mailing of the title documents doesn't suffice to make it mail fraud, the multiplication of the instances doesn't change anything.

I simply feel that the repetition of odometer tampering doesn't create a mail fraud.

Unidentified Justice: Well, a mail fraud can be a long-term scheme involving multiple acts, can it not?

Mr. Steinberg: Well, Justice Kennedy, the core prohibition of the mail fraud statute, as I think was well-analyzed in McNally, is to prohibit mailings which somehow alter the situation to the benefit of the person committing the fraud.

And these odometer... these title registrations didn't in any way induce reliance or forbearance.

They didn't lull anybody.

As... as I indicated in my reply brief--

Unidentified Justice: Why didn't they lull anybody?

They... they lulled the... the... the car dealer into... into believing that the titles your client had provided him were good in the past instances, and therefore he could rely on good title in future instances.

Wasn't that a lull?

Mr. Steinberg: --Justice Scalia, my client gave good title to those cars.

That's correct.

It... the... the success of the title registration indicated that my client had passed good title.

It said nothing at all one way or the other about whether he had rolled back the odometers.

And that's been the point I think at which the government's case breaks down.

There's nothing about title registration which reassures you the odometer hasn't been tampered with.

It's simply title registration is a method of preserving a record of who owned the car so that in the event there is an investigation, you can track down what happened.

Now, It's true--

Unidentified Justice: Wasn't passing good title to the car an essential part of his scheme?

Didn't he have to... he had to sell a car, and in order to sell the later cars, he had to persuade the car dealer that he had passed good title to the earlier ones.

And the mailing was essential to that.

Mr. Steinberg: --Well, the reason that there had to be a title registration mailed was because the state has set up a scheme for title registration in order to preserve a record.

My client had to pass good title to the cars, but the only reason the title had to be registered was because of a state requirement which was clearly related to assist in the investigation of this kind of conduct when an investigation is appropriate.

And I think it's significant--

Unidentified Justice: But... but if there had been no mailing in any given case in which your client participated, he would have had problems in the future, wouldn't he?

Mr. Steinberg: --But how could the fact that he had tampered with the odometers possibly affect whether the title registered or not.

That's the point I'm making.

The title was going to be registered.

He was giving good title whether or not he rolled back the odometers.

There's no way that his rolling back the odometers would have hurt the title registration process.

And as I indicated--

Unidentified Justice: Was there any evidence that the sale of the cars was facilitated by the lower mileage?

Mr. Steinberg: --The cars were sold for a higher price because of the lower mileage.

There was no evidence that the cars would not otherwise have been sold for a lower price.

Unidentified Justice: Well, then isn't that part of the scheme?

Mr. Steinberg: It's part of the scheme to sell the cars for more money, yes.

But as I seem to be repeating, there's simply no connection between registering the change in ownership and detecting this odometer tampering.

Unidentified Justice: If... if your point is that the... that the fraud, the misstatement of fact, has to be contained in the document that's mailed... is that the point because that can't be right?

Mr. Steinberg: No.

We really don't take the position that the inclusion or the exclusion of the odometer mileage statements makes any difference.

Our position is that you have to analyze the core prohibition of the statute and the facts of the case to see how the mailing contributed to lulling somebody, to obtaining something that otherwise would not have been obtained if the fraud had not taken place.

Unidentified Justice: Suppose your client had mailed the automobile title to the used car dealer instead of handing it to him.

He had given him... instead of giving him the title documents, he had mailed the title documents.

Would that have been enough to... to bring this scheme within the mail fraud statute?

Mr. Steinberg: I don't think so, Justice Scalia, because I don't think that the provision of good title was at all affected by the fraudulent odometer.

The... the title was good.

The odometer tampering scheme depended upon the false odometer slips which my client hand-delivered.

If he had mailed those false odometer slips, then I would agree there was a mail fraud case involved.

In fact, he used the telephone a couple of times--

Unidentified Justice: But... but you're now confirming what you before denied.

You said it isn't essential that the actual fraud... fraudulent element be put in the mail.

Mr. Steinberg: --No.

Unidentified Justice: Because I read the statute that way.

It's just the mail has to be part... the use of the mail has to be part of the whole scheme.

Now you're telling me that the use of the mail has to contain the... the essential element of the fraud.

Mr. Steinberg: No, Justice Scalia.

The point i'm making, which I think is made in Parr and in Maze and, for that matter, in Sampson, is you have to be able to point out how the mailing contributed to the success of the scheme, how it lulled somebody, how it permitted somebody to make a promise or as in the Carpenter case, how unless... in the Carpenter case, unless that newspaper column was distributed, there would be no benefit from trading on the inside information.

You have to be able to look at the mailing and see that because of that mailing something of assistance to the fraud.

And the point is the--

Unidentified Justice: Well, I... I... I take it that if the dealer had mailed your client the money in the mail for each car, there would have been a fraud?

Mr. Steinberg: --Well--

Unidentified Justice: I mean, we can't get any more--

Mr. Steinberg: --I think that case--

Unidentified Justice: --raw than that.

Mr. Steinberg: --I think that case--

Unidentified Justice: And if you say that doesn't have anything to do with turning the odometer back, we get back to the same question.

Well, of course, the odometer turn-back facilitated the sales.

Mr. Steinberg: --Justice Kennedy, I think the example you cite is more akin to Pereira where the $35,000 bank check was mailed from one bank to another for collection before it was paid.

I myself feel that the Pereira case is not reconcilable with Kann and Parr and Maze.

It has been distinguished in those cases, but I feel that it simply didn't apply the analysis of what the core prohibition of the statute reached.

Unidentified Justice: May I ask you a question, Mr. Steinberg?

Supposing that the automobile dealers, instead of mailing the documents to the Secretary of state, had thrown them in the waste basket and no mailings had occurred, would your scheme have been successful?

Mr. Steinberg: My client's would have been successful.

It wasn't my scheme.

Unidentified Justice: For how long?

For how long?

Mr. Steinberg: Because he got his money before the dealers resold the car.

Unidentified Justice: Once it would have, but for two years could he have kept going if they kept every time--

Mr. Steinberg: If the dealers had been willing to accept the loss of throwing the title outs, yes.

It could have continued as long as the dealers were that dumb.

But the fact is that, as we know--

Unidentified Justice: --You don't really think there are any dealers who are that dumb, do you?

[Laughter]

Mr. Steinberg: --No.

I... I think it's obvious that these mailings occurred, and anyone could have seen they would have occurred.

What I see a lack of is a lack of connection.

Unidentified Justice: And isn't it equally obvious that the scheme could not have persisted for two years had there been no mailings?

Mr. Steinberg: The sale of cars in general can't persist without mailings of title registrations.

The scheme didn't depend upon the registration of title as in any way--

Unidentified Justice: It depended on repeated sales of automobiles.

Mr. Steinberg: --It depended upon repeated tamperings with odometers.

If he had... if he had been selling the cars without tampering with odometers, it wouldn't have been mail fraud even under the government's construction.

Unidentified Justice: Well, because there's no fraud.

Mr. Steinberg: Exactly.

And in this case, the only fraud was odometer tampering fraud.

And the mailings were pursuant to a state regulation whose whole purpose it is--

Unidentified Justice: But odometer fraud wasn't an end in itself.

The odometer fraud was an end... was a... was a design by which cars would be sold for a higher price.

Mr. Steinberg: --If you--

Unidentified Justice: Certainly transfer of title is incident to the sale of cars.

Mr. Steinberg: --Mr. Chief Justice, if you accept that line of analysis, then any person who tampers with an odometer had better be prepared to face mail fraud charges because somebody sooner or later is going to register that car.

When you tamper with an odometer--

Unidentified Justice: Only if he sells the car.

I mean, I don't think it's a criminal violation to tamper with an odometer if it's in your own car and you never try to sell the car.

Right?

The offense is selling a car with... with an altered odometer.

Isn't that... or am I liable if I just... you know, I like to play with odometers.

[Laughter]

Is that a federal offense?

Mr. Steinberg: --Well, it says no person shall disconnect, reset or alter the odometer with intent to change the number of miles indicated thereon.

But as a practical matter, you don't do it if you're not expecting to sell the car.

That's true.

Unidentified Justice: So, you think it would be an offense even if I didn't sell the car.

Mr. Steinberg: I can't conceive of how the case would come to the attention of the U.S. Attorney.

So, although it might technically be an offense, I don't think you'd be prosecuted for it.

If you disclosed when you're selling the car that you did change the odometer, I don't think that it's an offense.

But the offense that we're talking about is odometer tampering, and the question is is every person who tampers with an odometer going to be guilty of mail fraud when somebody down the line mails in that title.

And under this theory--

Unidentified Justice: Well, that really isn't quite the same... that is not what is alleged in the indictment.

It's not a single odometer tampering followed by a sale.

It's a scheme that persisted for several purchases, several resales and so forth.

And so, every person who does one doesn't at least fit within this indictment.

Mr. Steinberg: --Well, Mr. Maze ran up a bill on several different credit card charges.

The defendants in Kann made repeated mailings.

If it... if a single instance isn't within the core prohibition of the statute, the repetition still doesn't bring it within the core prohibition of the statute.

Unidentified Justice: But Maze really just took a winter vacation.

I mean, he... he was gone and defrauded several motel owners.

Then he came back home, and that was the end of it.

Mr. Steinberg: I believe, Mr. Chief Justice, it was a summer vacation--

Unidentified Justice: Was it?

[Laughter]

Mr. Steinberg: --as you indicated in the opinion that you wrote for the Court.

Unidentified Justice: I don't know why he went south then.

[Laughter]

Mr. Steinberg: Well, in Maze in the dissent it was described as a $2,000 spree.

I don't know how much profit my client derived from his conduct, but in Kann it was an ongoing scheme.

In Parr it was an ongoing scheme.

In each case the mailings helped in a practical way because they got the money to the individuals in those cases.

But in each case there wasn't anything about the mailings that practically advanced the scheme.

And if you don't look at whether there's a practical assistance to the scheme in terms of helping the fraud, not simply completing the sale or collecting the taxes, you... you open up a floodgate of prosecution.

Unidentified Justice: I... I think you're right that... that the offense here is... is not odometer tampering.

I think if you tamper with an odometer, that's an offense.

The indictment here was for mail fraud.

Fraud doesn't have anything to do with odometer tampering.

It has to do with selling a car that purports to be one thing and is in fact something else.

But an essential part of the fraud is getting money by false pretenses.

Here the false pretense was purporting to transfer title of something that was different from what you were actually conveying.

Right?

And... and the transfer is part... is an essential part of that scheme, isn't it?

Mr. Steinberg: Scalia, I disagree.

The fraud here was odometer tampering.

We don't usually consider a person who tampers with odometers as not committing some kind of a fraud.

As a practical matter, that's the business they're in.

Unidentified Justice: If I never sell the car, that's a fraud?

It's odometer tampering.

It's certainly not fraud.

Mr. Steinberg: The reason it's prohibited is because that kind of conduct is typically associated with fraud.

And in this particular case, the indictment... there has been some discussion back and forth in the briefs about whether the indictment did or did not charge odometer tampering.

I think paragraph 4 makes it clear that my client was charged with having caused to be altered the odometers so that they reflected inaccurate mileage.

And I think it's quite clear that the indictment did, in fact, list the elements of odometer tampering.

I'd like to move on to the issue of the lesser included offense instruction.

In the cases of Keeble and Beck, the analysis that this Court used focused on the prejudicial effect of the evidence which was received upon the fairness of the jury's verdict.

And in the Geiger case, the California case that I cite in my briefs, the ALR note to that case lists a number of states which use a rule more liberal than the strict elements rule.

It seems to be a perfectly good rule.

In the Keeble case itself, the Court noted in footnote 19 the existence of the Whitaker case, the seconal case on the inherent relationship standard.

And It noted the abandonment of mutuality and specifically reserved ruling on the propriety of that.

So, I don't think that the Keeble case is authority for saying that Whitaker and the abandonment of mutuality are disapproved by this Court.

Now, in this case the jury was out for almost three hours.

This is a simple case, and the only thing the jury could have been out considering was is this really mail fraud.

Are these mailings really sufficiently closely related to what my client was trying to do to be mail fraud?

I think it's clear from that record that a lesser instruction on odometer tampering had at least an arguable chance of success.

I think it arguably would have changed the outcome of the case.

And the double jeopardy issue raised by the government I think is a red herring.

The Blockburger test for a lesser offense using the elements has been noted by this Court as simply a shorthand method of determining legislative intent.

And even if the Blockburger test says that one offense is an included offense of another, if the legislative intent is to impose double punishment, it's proper.

As in the Garrett case, as in a case cited in the supplementary brief in... before the court of appeals, Missouri versus Hunter, the armed robbery and armed criminal action can be punished as separate offenses.

Both our side and the government's side agreed in the supplemental briefs filed with the court of appeals that the double jeopardy analysis shouldn't be used to determine this issue.

In the government's supplemental brief at page 10, you'll find that concession.

So, I would submit that in fact the only way to preserve fairness in a situation where there is a potential for juries being influenced by proof of one crime is by looking, in fact, at the evidence in order to determine what instruction is appropriate.

I would like to reserve the balance of my time for rebuttal.

Unidentified Justice: Thank you, Mr. Steinberg.

Mr. Martin, we'll hear now from you.

ORAL ARGUMENT OF BRIAN J. MARTIN ON BEHALF OF THE RESPONDENT

Mr. Martin: Thank you, Mr. Chief Justice, and may it please the Court:

The first issue in this case is whether there was enough evidence for the jury to find that Petitioner Schmuck used the mails to further his scheme to defraud.

The indictment alleges and defines that scheme.

It states that from on or about July 1, 1979 until on or about July 30, 1980, defendant Wayne T. Schmuck did devise and intend to devise a scheme to defraud persons in the State of Wisconsin who would be and were induced to purchase automobiles from Wisconsin dealers on which Schmuck had caused the odometer mileage to be altered.

The government alleged and proved an ongoing scheme.

The victims of that scheme were the retail purchasers.

They testified at trial that they relied on the false odometer readings when they made their purchase decisions.

And, indeed, Petitioner's counsel at trial conceded to the jury that their testimony showed that his client had devised a scheme to defraud within the meaning of the mail fraud statute.

Unidentified Justice: Mr. Martin, why wasn't it complete when the cars were sold to the dealers?

Mr. Martin: Because Mr. Schmuck was in... in the business of... a continuing business of selling cars to the public through dealers.

The evidence shows that he sold some--

Unidentified Justice: Well, I thought he wanted his money.

And why isn't it complete when the dealers bought the car?

He wasn't getting the money from the ultimate consumer.

Mr. Martin: --He sold to dealers with the understanding that they would resell.

He sold continuously.

Unidentified Justice: Well, all dealers are going to resell.

Mr. Martin: Absolutely, absolutely.

Unidentified Justice: But I'm not sure that that means that the offense isn't complete when the dealers bought it.

What if the cars had been destroyed by a fire or something while in the dealer?

Would the government take the position there had been no fraud?

Mr. Martin: Well, there would... if... if there was no resales--

Unidentified Justice: He had sold them to the dealers, gotten his money, and the car is destroyed.

No fraud?

Mr. Martin: --Certainly there would be no fraud at the retail level.

The dealers would have been defrauded.

I don't know if the mails would have been used in... in furtherance of that fraud.

The evidence showed that he sold some 300 cars in... in the two years in question here.

He was in... had a continuing relationship with the dealers.

The demand for his cars was created at the retail level.

The more the retail level persons would buy from the dealers, the more the dealers would buy from Petitioner.

Unidentified Justice: Did the evidence show that they relied... that they purchased for him because they'd purchased from him on past occasions?

Mr. Martin: Yes.

Two of the dealers who testified at trial purchased on many occasions, five times for one dealer, five times for another dealer, and that's just of the 12... or 12 counts of this case.

We don't know how many times in all that they purchased from Mr. Schmuck, but two of the dealers had a relationship of many, many years.

And of the four dealers in this case, two of them had five mailings, two other had five mailings, and there was one apiece--

Unidentified Justice: Did they say specifically that they relied upon him because of past transactions, or do we just infer that?

Mr. Martin: --They developed a business relationship with him.

It was a good business relationship.

It was profitable to them.

He would call them up and say I have these cars.

They've been reliable in the past.

So, the dealers would rely on Mr. Schmuck in that way.

We have not understood Petitioner's claim to be a challenge to the scope of the indictment or the alleged fraud.

Rather he claims that the mails... mailing of title papers cannot, as a matter of law, be in furtherance of such a fraud.

Unidentified Justice: When you say the scope, he's not challenging the scope, you mean he's not raising the point that Justice O'Connor was raising?

Mr. Martin: That has not been--

Unidentified Justice: Because I have trouble with that point too.

I think it's very difficult--

Mr. Martin: --That has not been our understanding.

At trial he... he did not challenge the factual point that the government was making that it was a continuing business, that it mattered to him that these cars were resold in the way that would matter to General Motors that its dealers sell cars to the public.

That's where the demand for his cars was created.

That was not challenged by Petitioner at trial, and we have not understood that to be the basis of their challenge in this Court.

Unidentified Justice: --Okay, but... but nonetheless, if... if that is your theory then, you have to show that the use of the mails was necessary to sell it to the customers, not to the dealer.

Mr. Martin: Exactly.

Unidentified Justice: Okay, which is probably easier I guess.

Mr. Martin: Yes.

The mailings in this case were all title applications for the retail purchasers.

Unidentified Justice: And mailed by him.

Mr. Martin: And mailed by the dealers.

Unidentified Justice: Mailed by the dealers, not Schmuck.

Mr. Martin: Not by Schmuck, although Schmuck... the evidence shows that Schmuck knew that the dealers customarily mailed applications.

Unidentified Justice: And do you know are the... is there a sample of the title application in the record?

Do you know?

Mr. Martin: It's... It's not in the appendix, but it is in the record.

Exhibits 1 through 12 are the title applications.

Unidentified Justice: Some applications, you know, require you to put the mileage down.

Mr. Martin: Yes.

The reason this scheme would work is that at the time Illinois titling laws did not require mileage.

Wisconsin did.

Unidentified Justice: Yes.

Mr. Martin: But the first mileage in Wisconsin titling records was the false odometer mileage that Mr. Schmuck recorded when he applied for Wisconsin titles or when the dealer did.

So, that's why this scheme worked.

If you look at the titling papers, there's no evidence of any fraud because the first odometer reading in the title papers is the false one.

Unidentified Justice: These were cars brought in from another state?

Mr. Martin: Yes.

These were cars that... Mr. Schmuck is a resident of Illinois.

This is where his business ran.

And these cars were... were sold at retail in Wisconsin.

Unidentified Justice: So, it was a... so, it was a... was it the accurate or the false odometer reading that was on the title application in Wisconsin?

Mr. Martin: It was the false... it was the false odometer reading.

But that's the first reading.

So, if you compare it to subsequent readings, when the car is resold, there's no evidence of any odometer tampering which is actually one of the benefits of the titling system is that if you look at the papers, you see no evidence of a fraud.

There's a certain lulling effect.

Mr. Schmuck has contended all along that it's a matter of law, titling papers are counterproductive, they cannot benefit a scheme to defraud.

Well, in fact, the evidence would support a finding here that the existence of title laws which he could circumvent, figure out a way to get around, actually had a lulling effect.

But the--

Unidentified Justice: Well, that would really broaden the mail fraud statute if every document mailed had a lulling effect because it didn't mention the fraud.

Mr. Martin: --Well, I... I think our point is that an average retail customer understands that titling laws are there for protection of customers, maybe to some extent to protection from odometer tampering.

And if the records do not indicate a fraud, there's an additional lulling effect over and above an average mailing.

But the primary benefit in this case was that... was that the mailings were necessary to effect the transaction.

And that's all that the mail fraud statute requires is that the mailing be incident to an essential part of the scheme or step in the plot of the scheme.

And the sale could not be made without the title papers being sent to the Department of Transportation.

That's clear.

You cannot get a license plate.

You cannot drive the car in the Wisconsin.

The dealers could not have sold the cars.

That's the primary benefit... primary benefit to Petitioner in this case.

In every case where this Court has found that a particular mailing was not in furtherance or in execution of a scheme, the Court has been unable to find any material benefit to the defendant.

And that has been true in Maze and in Parr and in Kann.

But here the benefits were the sale was completed.

The dealers would come back for more cars.

And there was the additional lulling effect of making the appearance appear perfectly traditional.

No one was the wiser.

We heard this morning that Mr. Schmuck clearly violated the odometer law and he should have been charged with that.

But this Court has held in Batchelder that the government may select between two fully applicable statutes.

So the question only is whether the evidence supported the verdict of mail fraud in this case.

Unidentified Justice: He was not charged with odometer tampering in the indictment.

Mr. Martin: He was not charged with odometer tampering in the indictment.

As part of the scheme to defraud in which he used the mails, one of the factual allegations in the indictment is that he caused odometers to be turned back.

But it does not even state all the elements of the odometer violation because there's a knowing and willful requirement which is not set forth in the indictment at... at that stage.

I'll turn now to the next issue which is whether Petitioner was entitled to a lesser included offense instruction on odometer tampering.

And this requires the Court to interpret Rule 31(c) of the criminal rules and the language that a jury may return a verdict on any offense necessarily included in the crime charged.

We believe that Rule 31(c) adopts the statutory elements test that a lesser included offense is defined by the elements of... of the statute.

Every violation of the greater offense necessarily includes a violation of the lesser offense.

We believe our interpretation is most consistent with the language of 31(c) and the phrase "necessarily included".

Unidentified Justice: Where... where in your brief is the language of 31(c)?

Mr. Martin: It's stated in full in Petitioner's brief.

In our brief--

Unidentified Justice: Where is it in the Petitioner's brief?

Mr. Martin: --Page 19 has the "necessarily included" language of our brief.

Unidentified Justice: Thank you.

Mr. Martin: We believe that points to an abstract examination of the statutory elements of two crimes and not to the facts of a particular case.

One offense is not necessarily included in another simply because in one case defendant happens to commit both.

Rather we think that offenses necessarily included in another--

Unidentified Justice: Which page 19 is... is the language?

Whose brief?

Mr. Martin: --We cite it on page 19 and quote a phrase.

Unidentified Justice: All you quote is the phrase "necessarily included".

Mr. Martin: The entire rule... the entire rule is in Petitioner's brief on page 2... or page 2.

Unidentified Justice: You didn't feel it necessary to set it forth in your brief.

Mr. Martin: We felt it was necessary to set forth the "necessarily included" language.

We left out the other six or seven... six or seven words in 31(c).

Our lead argument in our brief is based on the history of 31(c) and not the language because we... we think the language is open to dispute, but the history is not.

The advisory committee notes state 31(c) was intended to adopt and restate existing law.

And we explain in our brief what the existing law was and that was the statutory elements test.

This Court applied it in the 19th century under the then effective statute.

The Ninth Circuit applied it two months before 31(c) was adopted, and many state and lower federal courts had applied it in the interim.

And in Petitioner's reply brief, he has not questioned our history, but instead relies on the inherent relationship test which seems to find its origins in the 1971 opinion of the D.C. Circuit in whitaker.

We also think that the statutory elements test was the implicit understanding of this Court in the Berra decision and in the Sansone decision when it considered whether the failure to pay a tax is a lesser included offense of tax evasion.

The Court compared statutory elements and concluded that, yes, it is a lesser included offense.

But under the facts of that case, no instruction was required.

So, we basically think that 31(c) adopts the statutory elements test, and that's the end of the matter.

The language and the history support that.

Unidentified Justice: May I ask you a question there?

Mr. Martin: Sure.

Unidentified Justice: The only case I guess we have that deals with this is the Keeble case in which the lesser included offense was one which was not prohibited by federal law.

So, how could the statutory elements of the lesser included offense have been part of the greater included offense in that case?

You recall the case [inaudible].

There was no--

Mr. Martin: I do recall the case.

This Court held under the Major Crimes Act that lesser included offense... I... I believe that the Court applied an elements test.

And I think they looked to--

Unidentified Justice: --But there was no federal definition of the federal crime of simple assault which the lesser included offense, as I remember it.

Mr. Martin: --As I remember, this Court held that the lesser included offense was assimilated necessarily implied in the Major Crimes Act.

And that was... the whole point of the decision was the lesser included offense in... included implicitly in the Major Crimes Act.

And this Court said, yes.

Basically it was a matter of statutory construction as we understand the case.

Unidentified Justice: Thank you.

Mr. Martin: We also think that the elements test is the better rule although the Court need not address that aspect of it because we think it is a required rule.

But we think it's clear and certainly much simpler to apply.

Both sides know in advance the possible charges to the instruction, the possible convictions that the jury could return.

And--

Unidentified Justice: May I ask one other question?

Mr. Martin: --Certainly.

Unidentified Justice: Would it... is it any simpler to apply than the... than just looking at the indictment?

In this case I guess the indictment clearly alleged odometer tampering as well as mail fraud.

At least as I read it, it seems to allege all the elements of odometer tampering.

Mr. Martin: It doesn't say knowingly and willfully, but... so, there could be a challenge if... if--

Unidentified Justice: But it's certainly clear that it was done--

Mr. Martin: --It's close.

Unidentified Justice: --intentionally.

Mr. Martin: Uh-hum, uh-hum, uh-hum.

Unidentified Justice: I'm just wondering because your argument of... I mean easily applied certainly has some appeal to it.

But is it really any easier to apply than... it would be more difficult here to look at the evidence.

But when you have the indictment that at least arguably spells out all the elements of the lesser offense--

Mr. Martin: Well--

Unidentified Justice: --why is that any harder to apply?

Mr. Martin: --I think it's... the statutory elements test is still easier, and that's apparent from the panel opinion in this case because the alternative is the so-called inherent relationship test.

No circuit... no... Petitioner does not advocate a lesser included offense instruction whenever the evidence would support such an instruction or support a finding that the defendant committed that crime.

They tack on the inherent relationship test to avoid abuse by defendants.

Now, what does it mean to have an inherent relationship?

The panel and this Court disagree.

We're not sure.

And that's where we think that the difficulties in application counsel in favor of the elements test, which this Court applies in double jeopardy contexts [inaudible] and Woodward the Court applied it in determining whether Congress intended dual punishment under two separate statutes.

There can be difficulties in applying the elements test.

That's a matter of congressional intent and reading of statutes, and... but if you find one... one crime in Title 18, another in Title 27, it may be difficult to determine whether the elements test is satisfied.

But we--

Unidentified Justice: Mr.... Mr. Martin... your first name Brian.

Mr. Martin: --Right.

Unidentified Justice: If you... if you adopt a test based on... on an indictment, I take it you still wouldn't give an instruction unless there were evidence of the lesser included offense, enough evidence to support a verdict to that effect.

Mr. Martin: Absolutely.

There would have to be enough evidence to support a verdict to that effect and an acquittal on the greater offense.

If in a typical case the... the evidence would either support an outright acquittal or a conviction on the greater offense, then the lesser included offense should not be given.

There has to support a rational jury finding the defendant innocent on the greater offense.

One of the outside elements is hotly contested.

Perhaps it's intent perhaps it's willfulness, whatever it is.

In such a case, then a lesser included offense may be required.

The Court in Berra actually made that point.

And we think lastly that the elements test respects the role of the government and the grand jury as the charging instrument in criminal matters.

Unidentified Justice: Excuse me.

I just want to be clear on that.

Your position is... is that the defendant is entitled to the lesser included offense instruction if he asks for it in the Berra type of... in the case that Berra had in mind, that is to say where the lesser offense is necessarily included in the greater.

Mr. Martin: Where it's necessarily included, and the evidence is hotly contested on the element which makes the greater offense the greater offense so that a rational jury could find the government hasn't proved the greater offense, but has proved the lesser offense.

Then the instruction is appropriate--

Unidentified Justice: But if... if... if the... if... if the evidence is... is very strong on all of the elements of the greater offense?

Mr. Martin: --Then--

Unidentified Justice: I mean, I thought the evidence was always contested because the government has the burden of proof.

Mr. Martin: --Well, sometimes the contest will so equally to both the lesser and greater offense, however.

If the defense is I wasn't there, I wasn't... you've got the wrong person, well then a rational jury would not make a distinction between a lesser and greater offense.

Unidentified Justice: And you're not entitled to the instruction?

Mr. Martin: You're not entitled to the instruction.

Unidentified Justice: I'm not sure I understand the logic of that.

Mr. Martin: It's probably explained more from the history than... than logic, and I direct the Court to the Stevenson opinion, and Berra and the entire history of lesser included offense instructions.

Unidentified Justice: Mr. Martin, may I ask one other question.

If... if... what we're concerned with here is when the judge must give the instruction, as I understand it.

Mr. Martin: Yes.

Unidentified Justice: I take it that if a judge felt that in a case like this... say, Judge Crabb had thought that, well, maybe I only have to give it when it's with the same statutory elements.

It would not have been error for her to have gone ahead and given the instruction at the defendant's request, would it?

Mr. Martin: I don't know which... what legal rule would support that.

It seems to be at odds with the government and the grand jury's role as the charging party.

Unidentified Justice: So you think that the... that she may only give it where... where she must give it.

Mr. Martin: Yes, where... where... where 31(c) authorizes it and the evidence--

Unidentified Justice: Yes, of course, the evidence has to support it.

I agree to that no matter what test she used.

Mr. Martin: --Yes.

Unidentified Justice: Yes.

Mr. Martin: If there are no further questions, thank you.

Unidentified Justice: Thank you, Mr. Martin.

Mr. Steinberg, you have 10 minutes remaining.

REBUTTAL ARGUMENT OF PETER L. STEINBERG

Mr. Steinberg: Thank you, Mr. Chief Justice.

May it please the Court:

I don't think that my client's scheme was successful.

Unidentified Justice: You wouldn't be here if it was.

Mr. Steinberg: Right.

[Laughter]

In fact, I think that every time he repeated his offense, it raised the probability that he would ultimately be caught.

The large number of transfers of title, the large number of cars that he sold--

Unidentified Justice: Can't you say that to any criminal activity?

The more often you do it, the more chance there is you'll get caught.

Mr. Steinberg: --Yes, but he should have been caught, Justice Stevens, for odometer tampering.

And this reminds me... this case reminds me of a story Abraham Lincoln used to use to illustrate a point.

You'll find this in Carl Sandburg's biography.

By way of illustration, how many legs will a sheep have if you call his tail a leg?

Only four because calling a tail a leg doesn't make it one.

I don't think that calling odometer tampering mail fraud makes it mail fraud.

Now, what was in these title registration documents that we think was so bad for the scheme?

Well, among other things, the address of the person who had sold the car to my client was in those title documents.

So, how did they prove the case?

They wrote to those addresses.

They said can you give us the odometer statement you really gave Mr. Schmuck, and they got it.

Unidentified Justice: xxx to his scheme, why would he ever have them mailed?

Mr. Steinberg: Well, he had no control.

After he sold--

Unidentified Justice: Well, he had... they had to be called for the purpose of the scheme.

Mr. Steinberg: --The... this brings up my point about the relationship between the requirements that automobile titles be registered and the purpose of that registration.

The purpose is precisely to make it tough on people like my client.

And I don't think that you can bootstrap by a regulatory measure like this a fraud of odometer tampering into a mail fraud, just as you couldn't bootstrap in McNally mailing your tax returns in into mail fraud.

Knowingly and willfully does simply not distinguish the elements of odometer tampering from mail fraud.

In the Joint Appendix on page 72 in the panel decision, footnote 1, the court dealt quite peremptorily with that arguments.

Knowingly and willfully means exactly what it says rather than contains a hidden requirements.

In our reply brief on this point, we cited Justice Learned Pand in American Surety Company versus Sullivan saying the word "willful" means no more than that the person charged with the duty knows what he is doing.

So, knowingly and willfully is not an element that needs to be specifically stated in the indictment.

Debit and Blackmur's jury instructions recommend that no... no explanation of knowingly and willfully be made where it appears in the statute.

I don't think that's a valid grounds for saying that the indictment didn't charge odometer tampering.

But more importantly, I think you have to look at the evidence to see if the outcome was unfair.

In this particular case there was a cartload of evidence about odometer tampering.

We objected to much of it on the grounds that it was going to prejudice the jury.

The jury panel on voir dire... half of them knew all about odometer tampering.

Some of them were excused because of it.

Unidentified Justice: But in our system, that's up for... up to the prosecutor.

If... if he wants to go for a lesser offense, he goes... he... he could have charged for that, but he chose not to.

And that's the kind of system we have.

It's... it's not up to the... to the court to decide what... what the individual will be prosecuted for.

Mr. Steinberg: Well, Justice Scalia, when the court applies the elements test and gives a lesser instruction, they're doing the same thing.

They're overriding the prosecutor's prerogative.

It doesn't really matter what the test is.

Unidentified Justice: In a very limited area.

Your... your... your theory would... would extend that overruling much more broadly.

Mr. Steinberg: Well, I have more confidence in the federal judiciary.

I feel that they're not going to go around undermining strong cases with frivolous instructions.

But I think in this case we were the victim of the jury's hostility to odometer tampering.

I mention in my brief the comment that the government's attorney made in his rebuttal argument about how if you do any type of crime, you should pay for it.

It was clear invitation to say, well, he's certainly guilty of something, and we can't let him go.

And that's what the court didn't like in Keeble.

You're correct, Justice Stevens.

In Keeble, the lesser offense was not even in the federal statutes, but they, nevertheless, said to be fair, we have to let the defendant have the benefit of this rule.

We don't want to induce an unfair verdict.

Unidentified Justice: Let me ask about--

Mr. Steinberg: It may less--

Unidentified Justice: --Let me ask about the instruction you say you are entitled to here.

Should Judge Crabb have said you may convict him of 20 different counts of... I don't know how many times he did it, but it was a large number, as I understand it.

Mr. Steinberg: --They only proved 12, Your Honor.

Unidentified Justice: Would he have been subject to conviction for 12 counts of odometer tampering or just 1 under your view?

Mr. Steinberg: We would have been happy to take 12 counts of odometer tampering.

Unidentified Justice: But is that what she should have instructed?

Mr. Steinberg: Yes.

She should have instructed that you may find on each count.

If you can't find beyond a reasonable doubt that he's guilty of mail fraud, you may consider whether he's guilty of odometer tampering.

Now, we weren't even permitted... my erstwhile partner who argued the case to the jury wasn't even permitted to say to the jury, well, this is really not mail fraud.

This is really odometer tampering.

Don't let the government get away with overcharging.

Now, if we're not even allowed to suggest to the jury that it's overcharging and if the government is allowed to make the kind of argument that says he has done something, so convict him of what we've got him here for, I think we've been the victim of unfair use of the jury's hostility to odometer tampering.

Nobody likes odometer tampering.

It's not--

Unidentified Justice: Presumably nobody likes mail fraud either.

[Laughter]

I mean, odometer tampering is a... is a misdemeanor.

Mail fraud is a felony, isn't it?

Mr. Steinberg: --In fact, mail fraud is now a felony too although it's only a three-year felony.

So, Congress... excuse me--

Unidentified Justice: What is now a--

Mr. Steinberg: --Odometer tampering has been raised to the level of a felony by the Truth in Mileage Act of, I believe, 1986.

Unidentified Justice: --Truth in Mileage Act?

But it seems to me for your argument about unfairness to amount to much, you'd have to say that the jury wasn't justified in returning a verdict against your client for mail fraud.

Mr. Steinberg: Well, if as Judge Crabb indicated, the question of whether these mailings were or were not in furtherance of the scheme was a jury question, and she did let it go to the jury, then yes.

It may have been sufficient taking... assuming that it was sufficient for the jury to find mail fraud, it was also sufficient for the jury to not find mail fraud as the judge instructed it.

But by failing to give us the lesser included offense instruction, the jury was given an up or down choice.

And if they had been given the third option, I'm confident that that's what they would have done.

They were out for three hours in a very simple case.

As to what the... one other thing the title documents included, they did in 9 out of the 12 cases include an odometer mileage statement.

It's now compulsory for every state.

They... as I said, they included the addresses of the prior owners so that it was... they were a useful tool.

When Congress passed the Truth in Mileage Act, they talked about how useful these records were going to be to catch odometer tamperers.

And to me, as I've said before, it seems incongruous to say that a regulatory scheme set up to inhibit, deter and detect this fraud is nevertheless going to raise it to a higher level because it was complied with not by my client, but by the people he... the victims.

The victims of the scheme were both the dealers and the retail purchasers.

That's what the indictment said, and--

Unidentified Justice: xxx--

Mr. Steinberg: --Yes?

Unidentified Justice: --your... your mailing argument that... that... you think it's important that the mailing wouldn't have helped... wouldn't have helped your client's scheme, that if anything, it would have... it would have hurt it.

That depends on how you read the statute, doesn't it?

The statute says for the purpose of executing such scheme knowingly causes to be delivered to be delivered by mail.

It depends on what the phrase

"for the purpose of executing such scheme. "

goes to.

Does it mean for the purpose of executing such scheme causes or does it mean for the purpose of executing such scheme delivered?

Mr. Steinberg: Well, Justice Scalia--

Unidentified Justice: Is it delivered for the purpose of executing the scheme, or is it is causes for the purpose of executing the scheme?

He... he doubtless caused this to be delivered for the purpose of executing the... he didn't cause it to be delivered for the purpose of executing the scheme, but--

Mr. Steinberg: --Well--

Unidentified Justice: --for the purpose of executing the scheme, he caused it to be delivered.

Isn't that... isn't that--

Mr. Steinberg: --For the purposes of analyzing whether he knew it was going to happen or not under the rule of Pereira, he caused it because he could have foreseen that it happened.

But in order to determine what execution of the scheme means, you simply have to lock at the statutory history... the legislative history of the statute which indicated the main thrust of it was to keep people from sending out circulars advertising things that they then didn't deliver, and you have to lock at the relevant cases, Kann and Parr and Maze, which I feel state quite clearly it takes more than just a mailing.

It takes more than the proof of a fraudulent scheme plus some connected mailing to make a case mail fraud.

xxx time is up.

Chief Justice William H. Rehnquist: Thank you, Mr. Steinberg.

The case is submitted.

Attribution:

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Featured:

Carpenter v. United States - Oral Argument

Wed, 13 Apr 2011 20:10:55 +0000

Case:

Carpenter v. United States

Media File:

86-422_19871007-argument.mp3

Related Transcript:

86-422_19871007-argument.xml

Transcript:

ORAL ARGUMENT OF MR. DON D. BUCHWALD ON BEHALF OF PETITIONERS

Chief Justice William H. Rehnquist: Mr. Buchwald, you may proceed whenever you are ready.

Mr. Buchwald: Mr. Chief Justice, and may it please the Court.

The convictions of Wall Street Journal reporter Foster Winans and his two co-defendants, should be reversed because what these defendants did is not securities fraud and it is not mail or wire fraud.

By way of overview with respect to the securities laws first, there are two principal reasons that we have as to why the securities fraud conviction should be reversed.

First, that securities fraud can only be committed on investors or persons who participate in securities transactions.

It is not something that can be committed upon a newspaper or upon a private employer who has not participated in the securities transaction and who has no interest in the purchase, sale, or value of the securities involved.

And second, that a private company work rule, such as the Wall Street Journal's does not have the force of criminal law, particularly whereas here it is presented to employees as going beyond the requirements of the law.

This case involves a private wrong by Foster Wynans upon the Wall Street Journal which, if it became public, could adversely affect the newspaper's reputation.

This kind of wrong, we submit, however one may view it, is simply not what was intended to be covered by the securities laws, even if the wrong is cast in terms of the misappropriation of information.

The securities laws were designed to protect market participants from fraud, and not employers form potential damage to their reputations.

Just as the mail and wire fraud statutes protect persons from fraud in their capacities as property holders, the laws proscribing securities fraud protect persons from fraud in their capacity as investors or participants in market transactions.

Unidentified Justice: Mr. Buchwald, can I ask you a question right there?

Supposing... I know the theory of the case as... tried was a little different.

But supposing, on precisely the same facts, there had been an allegation in the indictment or the complaint, or whatever it was, that saidas, that said,

"as a by-product of this scheme, investors were injured, those who sold or purchased from, Winans? "

They just threw that in and then they proved it.

Would that amount to a... would there have been a violation then?

Mr. Buchwald: There would not, Your Honor.

Unidentified Justice: In that you could reasonably conclude that there was some injury to market participants as a result of this?

Mr. Buchwald: We would submit that that would not suffice, that there must be fraud upon the market participants.

Here, Justice Stevens, what we have as Foster Winans' trading on what he perceives will likely be the market impact of the accurate articles that he is writing and that, we submit, is no different than a situation where Salomon Bros. may trade knowing that their very well-known economist partner, Murray Kaufman is going to be making a speech in the afternoon, in which he gives his opinion that interest rates are going down, and Salomon Bros., in anticipation of the market impact of that speech, buys into sensitive stocks in the morning.

Unidentified Justice: But in the short answer, you are saying that, taking these facts, even if they had alleged and proved adverse market impact as a result of the fraud, that would still not be a violation because... because what?

Mr. Buchwald: Because a market participant must be defrauded in that capacity as a market participant, and that that is the reach of the securities laws.

It is not sufficient that there simply be a fraud, assuming that Winans' conduct here vis-a-vis the Wall Street Journal is a fraud, which is a premise we dispute.

It is not sufficient that there be a fraud upon a third party, which who himself, has no interest in the purchase, sale or value of securities and is not participating in a securities transaction; and then that fraud somehow relates or impacts upon--

Unidentified Justice: But why is this any less of a fraud on the market participants than if the information that gave him an advantage in trading was corporate information instead of information about the timing of his columns?

Mr. Buchwald: --It would still not be a fraud on the market participants unless there was a pre-existing relationship between Mr. Winans in this case and the people selling him the stock that he buys in advance of the column, which gave rise to a duty to disclose that information.

Unidentified Justice: But you never have that on a trade on the open market.

Mr. Buchwald: Well, in the cosmic sense, that I think that the securities laws presume in the discloser's staying... obligation exists even when you have open market transactions.

And the existence of that relationship occurs where you have a pre-existing relationship to the corporation whose securities are being traded; there, as in essence, say a fiduciary or trustee of the corporation's information, the securities laws presume that you are a trustee or fiduciary of the information of all of the shareholders.

Unidentified Justice: What if the insider uses inside information that pertains not to his own corporation but to another corporation that this corporation somehow, somehow happens to have acquired?

And he uses that to purchase shares of that other corporation... you would say that that would not be within the securities laws either?

Mr. Buchwald: That that would not be in the securities laws because there is no... that is really the situation of Tiorello, where you have information that emanates from the acquiring company side, and you then use that information in the... to buy stock of the company to be purchased... the target company.

And while that Tiorello kind of situation is now covered by Rule 14e-3, the 10b analysis, it would not apply because there is no pre-existing relationship that gives rise to the duty to disclose.

Unidentified Justice: Counsel, do you concede there was impropriety here, however?

Mr. Buchwald: I think that there clearly was an ethical breach by Mr. Winans--

Unidentified Justice: Is there any remedy for this kind of thing?

Mr. Buchwald: --Yes.

There is the remedy that the Wall Street Journal took.

They fired him.

They wrote about him on the front page of their newspaper; went into every aspect of his personal life, both that relevant to the ethical breach and that not relevant to it, and effectively have drummed him out of the profession.

Unidentified Justice: But there is no judicial remedy of any kind?

Mr. Buchwald: There is no judicial remedy, Your Honor because there is no fraud that he has committed within the meaning of any state law, or within the meaning of any federal securities law.

There are potential civil remedies, if the Wall Street Journal can establish some kind of--

Unidentified Justice: But why is there no fraud sufficient for a mail fraud or wire fraud, purposes?

Mr. Buchwald: --Justice O'Connor, there are I guess three main reasons that we have on the mail and wire fraud side.

Number one, that the simple... that the breach of a private policy: of the undisclosed breach, of a private policy, is not a criminal fraud.

Now number two, that here the only--

Unidentified Justice: But the cases have been pretty generous in looking at different schemes or artifices, as sufficing for purposes of a fraud.

Mr. Buchwald: --I think that they have... that there has been, certainly pre-McNally, Your Honor, a tendency to be very expansive in the view of what is fraud, and that many cases in the Circuits have suggested that whenever one violates a rule of one's employer, there is potential mail or wire fraud exposure.

Unidentified Justice: But you said there were three reasons.

You think there is no fraud?

We might disagree on that.

Now, what is the next reason?

Mr. Buchwald: Our position is that, the kind of injury which is asserted here, namely a putative reputational injury, is not the kind of injury that is cognizable under the mail or wire fraud statutes.

Unidentified Justice: Well, it is more than that.

It is "reputation" with an economic effect.

I do not think any of our cases have dealt with it in such a way such as to indicate that could not be enough.

Mr. Buchwald: But the suggestion, the process... the district court held not that there was, in fact, reputational harm here; not that Winans intended reputational harm, but that because he could contemplate that, if his unethical conduct was discovered and became public, though that was not his aim, obviously; that that could cause diminished reputation of the employer and that, in turn, could have economic impact on the Wall Street Journal.

Unidentified Justice: Do you not think that the employer, that the Wall Street Journal had maybe a property right in its publication schedule?

Is that not a sort of a business secret?

Mr. Buchwald: Well, the short answer, Justice White, is I think that there can be a property interest in the publication schedule, but the question is, in what way are they deprived of that property interest by Foster Winans' conduct?

They... when I use--

Unidentified Justice: Well, it was certainly no longer a secret that they, if they--

Mr. Buchwald: --But, if Foster Winans, for example--

Unidentified Justice: --have not been deprived, if they were trying to keep that secret and it is suddenly given out to a limited number of people, it is no longer a secret.

Mr. Buchwald: --But the fact of secrecy has no independent value, we submit, except vis-a-vis, competitors.

If Foster Winans were to have told his mother about the interesting article that he had written that was going to appear on Monday's newspaper, thought that would be a violation of the Wall Street Journal policy, it does not hurt.

There is no economic impact.

Unidentified Justice: Whatever property interest the paper has is suddenly gone.

So you are really saying there are really no property interest that needs to be considered?

Mr. Buchwald: What we are saying is, the only way that a property interest can be said to exist is in the exclusive use of the knowledge, and that that is a meaningful interest only vis-a-vis competitors.

Unidentified Justice: Mr. Buchwald, why is that so?

I assume that, I assume that one reason the Wall Street Journal is purchased by a lot of people is that they read articles such as this one about a company that may contain public information, but it brings it all together and I say,

"gee, if I read that article and purchase that stock right away, I will get a rise of 30 points. "

let us say.

0 [Mirth.]

To the extent that Mr. Winans, or anybody else, leaks in advance the fact that this article is coming out, or using his, the knowledge that the article is coming out, to make a profit, the rise will not be 30 points; it will be 29 1/2 points.

I mean, he milked some of that rise.

Now, why is that not something of value to the Wall Street Journal?

Indeed, why would not the Wall Street Journal itself trade on the knowledge that it is coming out with an article?

The only explanation I have is that it knows that, if it traded on that, the jump would not be as much and its articles would not be as... have as much of an impression.

And therefore they would not sell as many newspapers.

Now why is that not something of value that he has taken away?

The half-point spread?

Mr. Buchwald: The Journal itself, and very specifically, and at trial, through its testimony, disclaimed any intention of giving market advice to its readers, or to recommending or suggesting they buy or sell stocks.

Unidentified Justice: People just read it from general interest?

0 [Mirth.]

Mr. Buchwald: It does not seem to me that the Journal could claim to be defrauded with respect to a function which it specifically denies that it has.

And a purpose that it specifically disclaims with respect to the column.

Unidentified Justice: Estoppel?

Is it estoppel you are arguing here?

Estoppel?

Is that why this theory cannot be used?

Mr. Buchwald: This theory could not be used because it is not charged at all.

They were... the first time there is even mention of a potential value of the column as an investment advice vehicle to investors, which the Journal itself, therefore, has a property interest in, is in the supplemental post-McNally brief.

That argument was never made below.

Your Honors, if I might return to the... well, let me follow up the argument about reputation while we are here.

It seems to me, if you can follow a process of

"my ethical breach, which is not itself illegal conduct, but my ethical breach, if it is discovered, can cause reputational damage to my employer... that might have economic fallout; therefore I am guilty of a federal mail and wire fraud, assuming the requisite mailings and wires. "

What you have done, essentially, is elevated every employee ethical breach into a federal crime.

You have given federal prosecutors a vehicle, even though you start with conduct that is not illegal, for establishing a process, if it is discovered... though that is not intended, if the public therefore thinks less of your employer, though there is no finding that that occurred here, and indeed, every indication is that it did not occur here... and if that reputational damage can translate somehow into economic harm.

So all ethical breaches by employees are elevated to the status of federal crimes, and we submit that quite aside from trivializing the criminal law as that would do, and quite aside from federalizing the rules pertaining to employee ethical breaches, and quite aside from the enormous discretion that this places in the hands of prosecutors, that there are three additional reasons on the facts of this case why that putative reputational damage cannot translate into the kind of economic injury which McNally requires the schemers aim for.

Number one is, that on the facts of this case, and the testimony is undisputed, the Wall Street Journal had never made known its policy to the readers or to the public prior to the events of this case.

That it never appeared in the newspaper, and never appeared in any public filing of the Wall Street Journal's... and therefore reliance by members of the public on the existence of the policy or on adherence to the policy, had never been invited.

The second reason is that the Court... this Court has held in construing the term, v. Davis, in the context of state deprivation of property without due process of law, that property does not include reputation.

And with respect to interpreting the 1868 civil rights amendment, the 14th Amendment, it seems to me that the relatively contemporaneous mail and wire fraud statute, we should not assume that Congress--

Unidentified Justice: Well, I think that in Paul v. Davis, the Court really just said that reputation alone, apart from some more tangible interest, such as employment, or so forth, would not.

So I think you are reading a lot more into that case than is warranted.

Mr. Buchwald: --Justice O'Connor, the think about reputation, and the facts there, it were the case that, because the plaintiff there had been defamed and called a "pickpocket", and therefore it was less likely that he would be employed by the bank as a teller, or less likely that he would get any one of a number of employment opportunities, the damage to reputation could only, as a theoretical level, as a putative injury concept, be stretched out to mean "potential economic harm".

So it seems to us that, while I think Your Honor is quite correct, that Paul v. Davis simply went off on a "reputation" concept, reputation, the value of my name, the value of reputation, is the way it translates economically.

Unidentified Justice: Congress could, in the mail fraud statute, define v. Davis, could it not?

Mr. Buchwald: I think that is clearly the case.

We do not mean to suggest that, because of the interpretation in one, but the relatively contemporaneous nature of the statute--

Unidentified Justice: But you say it has not done so yet?

Mr. Buchwald: --That is correct, Your Honor.

And we believe that it would be unwise to do so for the very reason that we have here, that you elevate an ethical breach into a federal crime if the ethical breach, if discovered, could cause reputational injury.

Unidentified Justice: But your argument is only partly that it would be "unwise", I take it.

Your argument is basically against constructive crimes.

Mr. Buchwald: That is correct, Your Honor.

That is correct, Your Honor.

At... here, as I go through the litany of things that we believe are wrong with using reputational damage as the fulcrum for mail and wire fraud injury, the third reason that we would give here, is that there is simply no intent by these Petitioners to deprive the Wall Street Journal of its reputation.

And we think that McNally has set forth a requirement in defining what is the "scheme" that there be an intent to deprive the victim of money or property.

Here the pre-McNally concurrent findings of fact below, were that, was that there was no intent and that, indeed, it was the aim of the... of Mr. Winans' and the co-Petitioners, to maintain the reputation and the journalistic integrity of the articles, because, in the words of the courts below,

"only if that reputation were maintained. "

could their hopes, or their perception that the articles would have impact, and therefore that their trades would be profitable, only if it were maintained, could that arrangement succeed.

Turning, if I might, back to the mail and wire fraud... well, let me just address one other point with respect to the mail and wire fraud statute, and then turn to the securities law: we have also argued as a third grounds for reversal of the mail and wire fraud convictions, that the mailings and wirings here, what is alleged is that the printing of the Wall Street Journal articles, and that the mailings of the Wall Street Journal to subscribers the following day were "wires and mails" caused for the purpose for this scheme to deprive the Wall Street Journal of property.

And if one focuses on the publication schedule, or the exclusive use of the publication schedule is that which is deprived, even in this context of it not going to a competitor, of it not going to the New York Times, as the property that is deprived, on the facts here, that all occurs on the day preceding publication of the article, when there is a leak in the information, when the initial purchase of stock in anticipation of the article, occurs.

So if that is a cognizable property deprivation, it is something which has fully occurred before the wires, before the mailings, of the Wall Street Journal, and in no sense can those wires or mailings be said to be caused for the purpose of executing the scheme to defraud.

There is no fraud alleged here nor, in fact, was there a fraud upon the readers of the Journal or on the investors.

And so even though that subsequent publication may enable, may cause to exist, that process by which Winans believes he is going to be successful in the stock market, that is not the cognizable fraud that is alleged on the Wall Street Journal in the mail and wire fraud counts.

And therefore, these mailings and wires, if that language,

"cause for the purpose of executing. "

has any meaning, are not sufficient here.

With respect, if I might return to the securities law point: we believe that the requirement of fraud that the participants in market transactions, how investors be defrauded, follows from the language of the statute, for which the misappropriation theory is not a substitute.

One must, in each case where the government alleges that misappropriation has occurred, look to the particular conduct which the government asserts constitutes that misappropriation, and then determine if that conduct constitutes

"a manipulative or deceptive device or contrivance employed in connection with the purchase or sale of securities. "

as Section 10b requires, and is it a fraud, as Rule 10b-5 requires?

And those terms in turn, have come to have recognized meaning.

"manipulative or deceptive device or contrivance. "

prescribes conduct directed at investors.

The hoodwinking of investors, either indirectly through manipulations, watched sales, matched orders, things aimed at the market as a whole, but designed to affect individual investor conduct, or the

"hoodwinking of investors directly through deceptions, falsehoods, half-truths, or silence, where there is a duty to speak. "

And that fraud under Rule 10b-5 encompasses

"deceptions or manipulations designed to affect an investment decision to the economic detriment of a market participant, or to deprive a person of investment value. "

Virtually by definition, a private wrong endangering an employer's reputation is not what the securities laws are about.

There are, when you have an alleged misappropriation, there are two directions that you look instead of the traditional one direction.

You look to see if the conduct defrauds the seller of the stock that you are buying, and you can look to see if the conduct defrauds the person or entity from whom this information is allegedly misappropriated.

And you ask yourself in each instance, "is that a securities fraud"?

With respect to that first view, is the seller defrauded?

That is not something that is alleged here because it could not be alleged under the Court's holding in Chiarella that there is a

"requirement of disclosure with respect to informational advantages only where there is a pre-existing relationship which gives rise to the duty to disclose. "

And with respect to the second view here, is there a securities fraud upon the entity from whom the information has been misappropriated... has the printer, Chiarella, defrauded the acquiring company in that case by virtue of the misappropriation, has Winans here committed a securities fraud upon the Wall Street Journal by virtue of misappropriation?

If the answer to that question is "yes", in Chiarella, it is because the acquiring companies are defrauded in their capacity as investors and in their capacity as market participants.

And we submit that certainly is not the case with respect to the Wall Street Journal.

Your Honors, the whole notion that a private employer can make a special securities law for his employees simply does not make sense.

Here we had a Wall Street Journal rule presented to its employees as intended to go beyond the requirements of the law, and suddenly it has the force of the law.

Let us suppose that that rule said explicitly what we believe it means implicitly, namely that, here at the Wall Street Journal, we want to follow the highest ethical requirements, while we recognize that the equal access to information rule was not accepted by the Supreme Court majority in the Chiarella decision, we nonetheless believe that it represents a higher standard of ethics, which we want Wall Street Journal employees to follow, so that we may have the highest reputation.

"If you do not follow the equal access to information rule, your employment here will be terminated. "

That, in essence, is what happened here.

That, as a matter of internal policy, policy which the Wall Street Journal made up on pain of firing those who do not follow the policy, that by adopting that rule, the government claims that therefore the securities laws are changed with respect to the employees of the Wall Street Journal.

Your Honors, we submit that, if Congress wants to pass a statute which says that,

"utilization in the stock market of an informational advantage in violation of a private contract with anyone is a new species of crime. "

that is fine.

Because then we will all know what the rules are.

But to try to stuff that result, in effect, into existing securities fraud legislation, is simply to rewrite the law to give it a new ex post facto interpretation, and we submit, is contrary to the very integrity of the law.

Mr. Chief Justice, if I might reserve the balance of my time?

Chief Justice William H. Rehnquist: Thank you, Mr. Buchwald.

We will hear now from General Fried.

ORAL ARGUMENT BY CHARLES FRIED ON BEHALF OF THE RESPONDENT

Mr. Fried: Thank you, Mr. Chief Justice, and may it please the Court.

Just a few preliminary things to clear up.

It should be quite clear that, in our view, the property which was misappropriated here was not reputation.

It was confidential information.

That was the property.

And as to that, there was, of course, a very clear intent to deprive.

A very clear intent to misappropriate the confidential information.

Unidentified Justice: You are speaking now to the mail fraud count or to the securities count?

Mr. Fried: In fact, in that respect, I speak to both counts, but certainly to the mail fraud count.

The harm comes about via the reputation which was put at-risk.

The fact that they did not intend to get caught, I think, is not a particularly compelling... answer to that point.

Now, there is another issue that has been raised which, I feel, must be answered at the outset.

Unidentified Justice: Excuse me, this would have been an offense even if there had never been any publication of the fact that this is what Winans did, putting the reputation at-risk constitutes damage?

Mr. Fried: Oh, it certainly does.

I think Judge Stewart, in his findings, and we set out this point in our, in a footnote in our Supplemental Brief, made the point very well.

The information was the property of the Wall Street Journal.

If somebody takes my car, Justice Scalia, and returns it with a full tank of gas and no dents, it is not okay for them to say, "oh, nothing happened".

They have deprived me of my car.

True, they did not intend to get caught, and they did not get caught until they brought the car back.

But nevertheless they deprived me of my property and they put it at-risk in ways which I am entitled to prevent being put at-risk.

I am lucky there were no dents, but there might have been.

And I am entitled to control that property to prevent that happening.

That, I think is just what Judge Stewart meant in his findings.

Unidentified Justice: Does not fraud ordinarily require that the same respect in which you are damaged I am benefitted?

For example, if someone pays me money to trick you into burning your house down, it does not seem to me I could be prosecuted for defrauding you of your house?

It would be a very strange use of the word, "defraud".

I somehow have to get the benefit from what you are deprived of, and that is what I do not see here.

There may have been either an actual harm to the reputation, or a threat to the reputation, but it is not that same harm to the Wall Street Journal which constitutes the benefit to the person who allegedly did the defrauding.

Mr. Fried: In fact, I would differ there.

I think there is considerable symmetry between the mechanism of benefit, I would say, Justice Scalia, on one hand, and the mechanism of the potential harm on the other: the mechanism of benefit to Winans and his confederates is that people believe in this column and do not imagine that, in fact, all this stuff has been traded upon and it is just to be discounted.

If it were not for that conviction... your questions to Mr. Buchwald earlier pointed that out... if it were not for that conviction on the part of the readers, the fraud would not have its effect.

So the reputation is there on both sides.

It is the very thing that the Wall Street Journal is selling its newspapers on, on one hand.

Now, that is not very much money on any particular day, but over the years it mounts up.

That is the very thing the Journal is selling its newspapers on on the one hand, and it is the very thing which Winans and his confederates are profiting from on the other.

So I think that there is quite considerable--

Unidentified Justice: But not what they sought to deprive the Journal of, as was pointed out by your opponent.

To the contrary, they did absolutely not want to deprive the Wall Street Journal of its reputation.

The continuation of its reputation was essential to their scheme.

They were not depriving it of its reputation.

Mr. Fried: --No, they were depriving it of the information.

The information was valuable to the Wall Street Journal and its confidentiality was valuable to the Wall Street Journal.

The fact that nobody outside knew what the column would be and what day it would run was valuable to the Journal and it was very valuable to Winans and his confederates.

And that is what they took.

Now, the point has been urged by Petitioners--

Unidentified Justice: "That" is what they took?

What precisely is "that"?

Mr. Fried: --The confidential information regarding the timing and the contents of the column.

That a column about... that a column saying that

"Digital Switch is going to have some good luck, we think. "

and the fact that that column was going to appear on Wednesday, "that fact" is what they misappropriated.

That fact was entrusted to them.

Unidentified Justice: So now you can misappropriate a fact?

Mr. Fried: The information.

What is being misappropriated is the information as to the timing and content of the column.

And you certainly can--

Unidentified Justice: And it was a confidential information which was then used by them in their scheme?

Mr. Fried: --Precisely.

This Court, every Member of this Court recognized the nature of confidential information in an employment relation in the Snep case, where the Court said that,

"even in the absence of a written contract, an employee has the fiduciary obligation to protect confidential information obtained during the course of his employment. "

That is the duty which he breached.

That precisely is the--

Unidentified Justice: Now, does McNally bear on this problem?

Mr. Fried: --I think McNally is wholly irrelevant to this case.

Because McNally addressed a concern that the government was federalizing breaches which deprived... employers of the faithful service of their employees, and even more troublesome, breaches which somehow deprived state and local governments of good government and the faithful service of public service.

That is not the issue in this case.

In this case, the breach of loyalty, the same breach that the Court noticed in the Snep case, is the instrument, not the end, of the crime.

And the breach of loyalty is a constant feature of many garden variety frauds practiced upon employers--

Unidentified Justice: Snep was not a criminal case.

Mr. Fried: --Snep was not a criminal case, but Snep recognized that there is this duty of confidentiality.

And that duty of confidentiality is the very duty which Winans breached in this case.

Unidentified Justice: Yes, but if Congress wanted to say in so many words,

"no person shall breach a duty of confidentiality to their employer. "

in these circumstances, the case would give one little trouble.

But Congress has spoken in very general terms and it seems to me you are kind of putting layers on the thing.

Mr. Fried: I hope not, because in speaking of fraud, Congress necessarily assumed the ordinary common law meaning of fraud.

Fraud can only take place, as is true of many property crimes, on the shoulders, as it were, of pre-existing relations within the civil law.

And the criminal cannot reach down and define all of those pre-existing relations before the crime can be said to have been "properly defined".

So in the usual case, where there is a fraud, what you have?

A fraud through nondisclosure, what you have is a relationship of trust.

That relationship is not itself defined anywhere in the criminal--

Unidentified Justice: Well, more than that, you have property, and that is what is hard to take here.

You are... I think what you have said is true; it builds on existing common law concepts, but one of those concepts is property.

And the property you are asserting that has been taken here is--

Mr. Fried: --Confidential information.

Unidentified Justice: --is the fact of later publication and the date of the publication.

Mr. Fried: The confid... the property clearly is confidential information.

And we have to stand on that; we are quite comfortable standing on that.

It is quite a traditional, though intangible, form of property right.

This Court in Ruckleshouse v. Monsanto recognized trade secrets as property which would raise 5th Amendment concerns, so I see no difficulty in treating confidential information as a species of property.

Under the securities law, of course, one need not even find property with that degree of focus and specificity.

That is a requirement only under the mail fraud.

So in either event, I think we are not doing anything so far-out as petitioners suggest.

Unidentified Justice: What is the closest criminal fraud case that you would have to this species of property?

What case of ours comes the closest?

A trade secret case, where a trade secret was purloined?

Mr. Fried: Well, there are McNally cases where trade secrets... where I believe confidential information, and Indeed, privacy rights were obtained, where somebody obtained access.

I am thinking of the Louderman case where there was access to private information, and that access was thought to be a kind-of interest that was protected by the mail and wire fraud statutes.

But here, in speaking of confidential information as property, I think we really are not even as far afield as that particular case would have got.

It is not--

Unidentified Justice: Is that a decision of this Court?

Mr. Fried: --It is not in this Court.

It is a Court of Appeals case.

Unidentified Justice: General Fried, I am a little troubled because, are you claiming that the obtaining of this property, namely the information, was done by fraud?

Mr. Fried: The fraud, the information was misappropriated at the time either that Winans himself traded on it, as he did I think on at least one occasion, or when he communicated it to his confederates for the purpose of trading on it.

Unidentified Justice: No, it was misused, as you say, but the acquisition of the information was not obtained by fraud?

Mr. Fried: No.

If you want a common law equivalent, we would say,

"this property indeed was stolen, but the form of theft was embezzlement rather than larceny by trick or false pretenses. "

Unidentified Justice: I am not contending the information was, there was nothing dishonest about his finding out when the column was going to be published, was there?

Mr. Fried: No.

The initial acquisition of the information, at least at the outset or the scheme, he may have been entirely honest; it is the subsequent use of the information which had been entrusted to him, just like any other servant who is entrusted with property and who, perhaps, receives that property in quite good faith, but subsequently misappropriates it, is guilty of embezzlement.

Unidentified Justice: I do not know how he is guilty of mail fraud?

Mr. Fried: Well, as this Court said in Grin v. Shine, "embezzlement is fraud".

Unidentified Justice: Yes, but you are saying that, to complete your elements of the crime, you have got to have the harm, and you say the harm is the injury to the reputation?

Mr. Fried: That is correct.

Unidentified Justice: But yet you are saying it is different from the intangible right to honest and good government somehow, the intangible right to honest and good reporting, is different in intent.

I am worried about the McNally implications when you focus on this intangible interest in good reputation.

Mr. Fried: Well, I see this as very different from those concerns in McNally because what was the object of the fraud here was the confidential information, which does seem to be a familiar, though intangible, form of property.

Unidentified Justice: But it is also an element to deprive the Wall Street Journal of its good reputation and so-forth.

Mr. Fried: The harm of its... the reputation is the harm.

It is not the property.

The reputation is the harm which the Wall Street Journal suffers, or which is at least put at-risk.

There is no need to show that it suffered harm.

Unidentified Justice: But you do agree that some kind of harm of that nature beyond the acquisition of the property is an essential ingredient of the offense?

Mr. Fried: Well, I think of Mr. Buchwald's example of Foster Winans telling his mother about this information just because he is a gossip.

I think that is quite different.

Unidentified Justice: Yes, it is an essential element of the defense.

Mr. Fried: There has to be some kind of harm which is contemplated or risked.

I do not think that it has to actually eventuate.

Unidentified Justice: If that is true, why is this "harm", which I would call some sort of an intangible harm, why is that different than the "harm" in McNally?

Mr. Fried: Because in McNally, what was lacking, what was utterly lacking, was the depriving of anything like the property which in this case we have I would say we have in sufficient degree.

So we have the taking of the property and the only question is,

"how does depriving the Wall Street journal of this property harm it? "

If somebody takes your car, Justice Stevens, and it is up in the country, and you do not know about it, they have taken your property and then there is a further question,

"what harm has it done you? "

Those are two separate questions.

Unidentified Justice: I understand that, but I suppose in a sense, one could say in McNally there was a property interest in controlling the placement of insurance and they acquired that without violating any laws by exercising their authority.

Mr. Fried: One might have said that, indeed.

I think we urged that on the Court... unsuccessfully.

0 [Mirth.]

But I think that we had, and we did not prevail, in part because the interest in being able to direct where insurance commissions will go is a rather unfamiliar species of property, while confidential information is an entirely familiar species of information.

Unidentified Justice: I must say that the concept of putting something at-risk as harm sufficient to support a criminal charge is, it seems to me, rather strange.

It is not even harm sufficient to support a tort action, or we would have a lot of tort suits for near misses in traffic accidents--

0 [Mirth.]

--instead of even fender-benders.

Mr. Fried: With respect, Justice Scalia, in every trespass action, the harm is presumed in just the way it is presumed here.

Even though the person who trespasses upon your land and walks across to the other side without bending a twig, has done you no monetary harm.

So I think that there is nothing--

Unidentified Justice: Is that the theory of it?

That he could have done you harm?

I never heard that theory espoused.

I thought that the theory is, he should not be on your land?

The harm is, he is on your land.

You have a right to have him off your land.

Mr. Fried: --And the harm here is he should not be trafficking in your confidential information even though as things may turn out through your own diligence, you can put a stop to the reputational loss which might otherwise come about.

Unidentified Justice: Well, you just said that, but I do not know why that is self-evident, and I never heard it before?

I do not know why you think you even have to get to reputational harm.

They have appropriated the property and you say you presume that there is harm: your property is appropriated.

Mr. Fried: Well, Judge Stuart in the district court so-said--

Unidentified Justice: I know that.

Mr. Fried: --and I think it is a very strong argument.

I am making a further argument if that should not be satisfactory to some members of the Court.

Unidentified Justice: Now, a while ago you though there had to be something beyond the appropriation of the property?

Mr. Fried: Oh, I think the harm is presumed, Justice White.

If I thought there had to be something other than--

Unidentified Justice: Well, it is like your car example, you... he took my car.

Mr. Fried: --He took my car, returned it, full tank of gas and no dents.

Exactly.

That is quite sufficient.

Unidentified Justice: Turn back the odometer.

Mr. Fried: Turn back the odometer?

0 [Mirth.]

Unidentified Justice: Yes, but I thought really, and there is a misunderstanding on my... I thought you were saying, as a matter of law, even though there is no physical or pecuniary injury, there is a legal harm by his having taken something he was not entitled to?

Mr. Fried: Yes, oh, yes.

We certainly hold that, but we say there is the further harm which is the reputational harm.

And both harms were found by the district court, so we stand on both of them.

Now, a great deal has been made of the point that we are seeking here to criminalize work rules of an employer.

And with respect, I think that is a "red herring".

The work rule is neither a necessary nor a sufficient condition of the kind of fraud which we say took place here.

The heart of the fraud here is that there is a relationship of trust and that somebody who is in that relationship of trust misappropriates what has been entrusted to him to the detriment of the one who trusts him.

Now, the work rule may simply set the context.

The contours, if you like, of what relationship of trust is.

So, for instance, if I may use a humble example, but one which I suppose happens every day: one employer may say to his employees,

"When you are travelling, we consider it a proper travel expense for reimbursement to charge laundry, telephone calls home, pay-television in your hotel room. "

and another employer might say,

"We have a work rule that no only-business expenses and all of those are private expenses. "

I take it that the employee who submits a hotel bill, including those items, to the second employer, and does it by mail and receives a check back by mail, has defrauded his employer because he is in a relationship of trust to him; the employer trusts him and the statement there is an implicit statement that he is playing by those rules, and he has broken the trust.

So the work rule is really just a part of the context of trust.

Unidentified Justice: Well, General, do you think that this argument carries the day in the securities side of this case?

Mr. Fried: Oh, I think so.

I think very much so.

I think as to the securities--

Unidentified Justice: You mean just the fact that he has defrauded his employer sustains the securities?

Mr. Fried: --I am glad you brought me back to the securities fraud issue, because the concern which Petitioners raise is that we are criminalizing ordinary frauds, and I think there was a fraud here; there was a breach of trust here via the securities law in an open-ended way.

I do not think that is so because the way in which the securities law makes sure that the fraud is securities-related, securities-focused, if you wish, is by the provision that the fraud which the rule says can be committed on any person... not a market participant... by any person, must be in connection with the purchase and sale of securities.

Now, we maintain that, obviously, this fraud, and a palpable fraud it was, was a fraud that was committed in connection with the purchase and sale of securities.

How could it have been more closely connected?

Were it not for the purchase and sale of securities, there would have been no point.

The whole point and purpose was that: were it not for the purchase and sale of securities, the rule which he broke would have no point.

Were it not for the purchase and sale and securities, the reputational harm which was suffered would not be present.

So the connection was intimate.

Unidentified Justice: General Fried, can I... will you tell me why this hypothetical is not covered by the mail fraud statute, or perhaps it is?

I am employer of the Fred M. Smith Company, and Mr. Smith tells... one of his employees asks him, you know,

"What does "M" stand for? "

And Smith says,

"Well, I will tell you this just in confidence. "

He is a trusted employee;

"It is Marmaduke. "

"I am really very ashamed of it. "

The employee writes to a newspaper and says,

"You know, Fred M. Smith's middle name is "Marmaduke". "

And he gets some... he gets five bucks from the newspaper for that.

Is that mail fraud?

Mr. Fried: No, it is not.

Unidentified Justice: Why not?

Mr. Fried: Well, I am confident in saying it is not.

And now let us try and figure out why not?

Unidentified Justice: Right.

0 [Mirth.]

I believe you so far.

Mr. Fried: I would say that it is not because there is no harm.

There is no breach of trust, and I say that--

Unidentified Justice: The mere taking of the confidential information is the harm is what you said before.

And the mere using of it for your own advantage... it does not matter if the car is harmed or not.

The mere taking of it was enough.

Mr. Fried: --Because, because... the notion of "confidential information", the notion of "confidential information" and of "trust"--

Unidentified Justice: Doesn't involve "Marmaduke"?

Right?

Mr. Fried: --are both concepts which are intended to have enough weight and seriousness not to cover every trivial peccadillo.

This was not a trivial peccadillo.

It netted the defendants almost $700,000.

Unidentified Justice: Well, you might draw the line there; others might draw the line between a genuine trade secret of the sort that is used in manufacturing processes or something like that, and the mere fact that an article is going to appear in the Wall Street Journal several months from now You have to draw the line somewhere, right?

Mr. Fried: In that respect, I would draw it where the Court drew it in the Snep case.

It seems to me that is quite sufficient.

Now--

Unidentified Justice: General.

Fried, what if there had been no Wall Street Journal work rule?

Would either the mail fraud count or the securities count be good?

Could it be good without that rule?

Mr. Fried: --In the absence of such a work rule, for instance, if Winans had worked for the Daily Scalper instead of the Wall Street Journal, I would suppose that they would not have been given the context of the relationship that there existed, there would have been no understanding, no mutual understanding, that this kind of action is a breach of trust.

The work rule does not have to be spelled out in order to make it plain that a particular course of conduct is an act of disloyalty or is not an act of disloyalty.

But the work rule here made it clear beyond peradventure that there was disloyalty.

I do not know if the financial writers for the New York Times have been made aware of a similar work rule, but if there is an understanding that that is the nature of the relation, that is quite sufficient.

Now, I would like to address briefly the question about what the securities laws are directed against, because Petitioners say they are

"directed against protection from fraud of those persons who are trading in this particular case. "

What the statute says is that,

"in general, the securities laws are directed at procuring or assuring honest securities markets. "

And in specific, they say via 10b-5,

"fraud against any person in connection. "

Now, in this case, it seems to me that what has been done is not at all a parody of information theory, not at all.

Because, what we are saying is that,

"when you trade you should be on the lookout for trading against people who are smarter than you are, luckier than you are: better informed than you are... but not against people who have stolen the information which they are trading on. "

Because that kind of vigilance encourages what I would call a "cascading deterioration" of the honesty of the securities markets of the sort which the charge, at least in Chiarella, did not.

Where you think that somebody may have learned something, perhaps as an eavesdropper... well, perhaps by accident, through greatest diligence... well that is just the kind of incentive you want to put out.

But I do not think you want to put out an incentive to go out and steal information yourself, so that you can make good on the stock market.

Unidentified Justice: So it is a federal securities crime for any embezzler of money to buy securities?

Mr. Fried: Decidedly not.

Because the embezzler does not commit his fraud in connection with--

Unidentified Justice: The only reason he embezzled was to buy.

Just like this fellow.

The only reason he stole this information was to buy stock.

Mr. Fried: --He... Justice White--

Unidentified Justice: You said the connection was "palpable".

Mr. Fried: --He had the money, the embezzler did, and he could have committed it to the parimutuel, or to the numbers racket, or to a poker game; he chose to commit it to the stock market.

Unidentified Justice: Yes, but on the facts of the case, the reason he embezzled it was to buy securities.

Mr. Fried: Yes, but he might have changed--

Unidentified Justice: Well, but he did not.

Mr. Fried: --his mind and the harm would have been there--

Unidentified Justice: But he did not.

Mr. Fried: --and the money in his pocket.

Unidentified Justice: But he did not.

He just went to buy securities.

He got the money and went right across the street.

Mr. Fried: The crime is completed and fully identified at the moment he has the money in his pocket.

What he does with it next--

Unidentified Justice: Why can you not say that in this case?

Mr. Fried: --No, because the crime is not completed in this case until Winans either trades on the information himself--

Unidentified Justice: Oh, I do not know.

He gave it to his co-conspirators.

Mr. Fried: --for the purpose of trading.

Unidentified Justice: Well--

Mr. Fried: If he just told it to his mother to satisfy gossip interests, there would have been no effects.

But he communicated for the purpose of trading.

If there are no further question, I thank the Court.

Chief Justice William H. Rehnquist: Thank you General Fried.

Mr. Buchwald, you have two minutes remaining.

Mr. Buchwald: Thank you, Your Honor.

Very briefly, on the mail and wire fraud analysis in the deprivation of information point: We believe that all roads lead to a putative reputational damage, is what the government is talking about.

Here you have lawfully acquired information.

When you use information, unlike a car, you are not depriving the other person of that information either permanently, temporarily, or partially.

And the cutoff point, it seems to us, as to where information takes on some kind of property value in anything even remotely resembling a McNally sense, is either when you use the information in competition with your employer, or where you are giving the information to a competitor to use in competition; in essence in a trade secret sense.

With respect to General Fried's suggestion that, the in connection with requirement is satisfied if the scheme is for the purpose of buying or selling stocks, in addition to the example which Justice White gave, the example of obtaining information from a prominent investment advisor, if I join the Joe Granville hotline with a bounced check and no intention actually of paying Mister Granville for his advice and I then get a telegram in return for my one thousand dollar bounced check, saying that he recommends XYZ company and then I now go out and buy the stock in XYZ, under the government's theory, that would be a securities fraud, because it is for the purpose of trading in securities.

And essentially, because the government wishes to move away from these examples of the embezzlement, and the use of information fraudulently obtained from an investment advisor, they place a limiting principle of fairness on the market, which we believe cannot be found on the market, which we believe is not and cannot be found, in the language of xx.

ORAL ARGUMENT OF DON B. BUCHWALD ON BEHALF OF THE PETITIONER -- REBUTTAL

Chief Justice William H. Rehnquist: Your time has expired, Mr. Buchwald.

The case is submitted.

Attribution:

The OYEZ Project

Featured:

McNally v. United States - Oral Argument

Fri, 09 Jan 2009 14:48:26 +0000

Case:

McNally v. United States

Media File:

86-234_19870422-argument.mp3

Related Transcript:

1986_86_234_argument.xml

Transcript:

Argument of Carter G. Phillips

Chief Justice Rehnquist: Mr. Phillips, you may proceed whenever you're ready.

Mr. Phillips: Mr. Chief Justice, and may it please the Court:

--This case involves the proper interpretation of 18 U.S.C. Section 1341, the Federal Mail Fraud Statute.

The primary issue presented is whether it is fraud within the meaning of that statute for a political party leader to fail to disclose to state officials a potential conflict of interest in his handling of the state's patronage system.

The Court of Appeals held that a conviction under this so-called intangible rights theory is proper and we urge this court to reverse.

The basic facts were as follows: The petitioners and the third individual, Howard Hunt, were politically active in the Democratic Party, in the state of Kentucky, during the 1970s.

In part because of their hard work on behalf of Governor Carroll, who was elected in 1974, petitioner Gray was appointed to a cabinet position in 1976 and Mr. Hunt was named head of the Democratic Party.

Hunt as the head of the Democratic Party was invested with substantial patronage powers by the governor, which is not an uncommon practice, I think, in any state.

What may be somewhat less common is the decades long tradition in Kentucky that certain state insurance commissions are treated as part of the patronage system.

Thus, the agent for the state in procuring insurance was asked to share commissions with other individuals holding insurance licenses.

Unknown Speaker: Why is that worse than ordinary party patronage?

I don't understand.

Mr. Phillips: I don't know that it is worse than ordinary party patronage.

I think it's just somewhat less common than any other party patronage.

Unknown Speaker: All of it is fraud as far as you're concerned?

Mr. Phillips: As far as the government's concerned.

Unknown Speaker: Right.

Mr. Phillips: Yes, I think that's correct.

Unknown Speaker: Does it include box seats to the Derby?

[Laughter]

Mr. Phillips: I suspect the government would say so.

Yes, Your Honor.

Those receiving shared commissions were not required to perform any services or to be engaged in the insurance business at the time that they received those commissions.

All that was required was that a licensed agent be available.

And it was not uncommon frankly for relatives of public officials to receive some of those commissions.

For instance, the State Insurance Commission--

Unknown Speaker: Was there no violation of state law for these people to get commissions for having done no work?

Mr. Phillips: --No, absolutely not a violation of state law to receive commissions for doing no work.

There is no obligation that you do any work.

Unknown Speaker: How about if you're not a licensed agent?

Mr. Phillips: That would be a violation of the state law.

Unknown Speaker: And that was involved here as well, wasn't it?

Mr. Phillips: No, at the time that all the commissions were received, the individuals receiving them were licensed agents, or had a licensed agent affiliated with the company involved, or the recipient of the commission.

Unknown Speaker: So, it's your position that at no time was any Kentucky state law violated here by either of your clients?

Mr. Phillips: I would say two things about that, Justice O'Connor.

First, that's correct.

No state law was violated.

Two, even if state law had been violated there was no instruction to the jury asking the jury to find that state law had been violated.

So that it's not, you know, whether there was a violation of state law in this case is simply not relevant to what the jury decided.

As I was suggesting.

It was not uncommon for public officials, or the relatives of public officials themselves to receive shared commissions under the patronage scheme.

The Insurance Commissioner himself testified that his son was receiving insurance commissions as a part of this practice.

He knew about it and never doubted that it was a lawful practice.

In this case the government has however, challenged Mr. Hunt's recommendation to the Insurance Commissioner to appoint the Wombwell Insurance Agency as the agent of the state for Worker's Compensation and his directions as to how to share those commissions.

Because the government in its brief, in this Court on the merits, has for the first time suggested that this case is not really an intangible rights case, I think that it is terribly important that the court understand clearly, precisely how the case was submitted to the jury.

The government has reproduced the relevant instructions in its brief at pages nine to ten and footnote eight.

In reading them as a whole, I submit, reveals quite clearly that the District Court told the jury, at the government's request that it could conclude that petitioners "devised such a scheme", describing the scheme in the indictment as read in relevant portion to the jury, if the jury found five facts basically.

One, that there was control over the naming of an insurance agency by Mr. Hunt.

Two, that Mr. Hunt had something to do with the selection of Wombwell.

Three, that he directed Wombwell to share those commissions in a particular way, four, that he held an ownership interest in Seton Investments.

And five, that he failed to disclose debt interest to the state government.

With respect to the petitioners then, they are charged solely with aiding and abetting that basic claim.

Our position is that however you analyze those facts as required to be found by the jury, there is no fraud in this case.

And that the jury was clearly instructed that it could find on that theory as an alternative basis for holding that the Mail Fraud Statute has been violated and that the jury, and therefore the government must justify its extension of the Mail Fraud Statute to the situation involving Hunt.

Unknown Speaker: Well, Mr. Phillips, I thought the government is now telling us that the jury was instructed that for mail fraud, the government had to prove a scheme to defraud the citizens of their right to honest performance of public business and to obtain money or property by false pretenses.

And that the jury clearly had to find both present.

Mr. Phillips: Well, the first part, the government is clearly, I mean, the government is clearly making that argument and there is a statement in re-reading--

Unknown Speaker: And there is such an instruction?

Mr. Phillips: --Well, the indictment was read to the jury and that is in the indictment.

But if you read the paragraphs before the indictment and the paragraphs after the indictment, the reliance on obtaining money or property by false pretenses is irrelevant.

It is a scheme to defraud as described at the beginning.

Unknown Speaker: So you think, the position you take is that the instructions as a whole do not bear out that argument.

Mr. Phillips: Absolutely.

Absolutely.

Couldn't say it better myself.

Because the government in it's brief on the merits in this Court has taken, excuse me, to the place the government's theory then into perspective, the Court must realize, one, the jury was not asked to find that the state of Kentucky or any of its citizens lost any money as a consequence of this scheme.

And two, the jury was not asked to find that Hunt, Gray, or McNally frankly received one cent from the patronage arrangement.

The theory is merely one of non-disclosure.

Unknown Speaker: The theory being these commissions would have been paid to somebody anyway.

Mr. Phillips: That's absolutely correct.

Unknown Speaker: So--

Mr. Phillips: The commissions, the size of the commissions were outside of the state's control.

That money went to Wombwell.

So that the government's repeated reference to this as a matter of public funds, simply inaccurate.

They were not public funds.

They were Wombwell's funds and Wombwell willingly parted with them.

Unknown Speaker: --The theory is that so much commission was going to be paid to Wombwell, what by the company or by the Kentucky government?

Mr. Phillips: It is paid by the underwriter.

Unknown Speaker: By the under--

Mr. Phillips: It's a commission paid back by the underwriter.

But the amount of money that Kentucky had to pay to--

Unknown Speaker: --When you say xxx.

Mr. Phillips: --have insurance was set.

It couldn't be modified in any way.

Unknown Speaker: When you say it's a commission paid back by the underwriter, who is the underwriter in this case?

Mr. Phillips: Well, there were two underwriters and they're just large insurance companies.

Unknown Speaker: And they're--

Mr. Phillips: xxx.

Unknown Speaker: --It's basically a discount?

Mr. Phillips: No, it's just the method of recompense for the activities of the agent and so--

Unknown Speaker: So they're paying the agent for having gotten the business?

Mr. Phillips: --Right.

Unknown Speaker: The way other insurance commissioners would.

Mr. Phillips: Absolutely.

Unknown Speaker: And they were going to pay a specified amount to Wombwell and these people's theory is if Wombwell wanted to split it up with other people that was a private arrangement.

Mr. Phillips: That is precisely our position, Mr. Chief Justice.

As far as we're concerned the term--

Unknown Speaker: Although I suppose you can say if Wombwell's willing to split it with other people, Wombwell would also be willing to charge less.

Mr. Phillips: --Might of been willing to charge less.

Unknown Speaker: Which would mean that the state would probably be able to buy its insurance for less.

Mr. Phillips: Well, except that there's--

Unknown Speaker: xxx.

Mr. Phillips: --no evidence to that effect in the record in this case.

And no effort by the government to try to prove that--

Unknown Speaker: Well, but that's common sense isn't it?

I mean, what does Wombwell care.

Wombwell's not getting the money.

They would as soon give it back to the state as give it to some third party.

Mr. Phillips: --Well, I mean, my guess is that Wombwell would prefer to share it with other insurance agents if for no other reason than to develop good will.

Unknown Speaker: That the whole reason for the scheme?

It was a patronage device wasn't it?

Mr. Phillips: Yes, it was a patronage device.

It was to generate good will both with the state of Kentucky and with other insurance agencies.

Unknown Speaker: They weren't handing anything back to the state.

Mr. Phillips: No, no one ever suggested that anything could be granted back to the state.

Unknown Speaker: That wasn't patronage to hand it back to the state.

Mr. Phillips: No, that would be sort of anti-patronage, I suppose.

Unknown Speaker: Yeah.

[Laughter]

Mr. Phillips: In light of the jury instructions in this case, it seems to us quite remarkable that the government has all, I think, but conceded that the Mail Fraud Statute as applied to a political party leader is wholly inapplicable.

It's sole defense on this issue in the brief appears in a single paragraph on page 32.

And the government tells the court, quote, it is at least clear that those individuals, referring to party leaders given the power to carry on the state's business, have a duty not to use that governmental party to criminally profit themselves or their friends.

The problem with that statement and it's the sole defense of the government's case here, is that it again ignores the jury instructions.

There was no criminal profit.

There was no profit at all, in terms of what the jury was asked to find.

The sole theory in this case involves a matter of non-disclosure.

That's what the jury was instructed on and that's what the jury found.

The fact the jury found that however is unfortunate for the government because this is not mail fraud.

It's not fraud of any sort.

Because as this Court said in Schiarella, in order for there to be fraud, there must be a duty to disclose and what is utterly missing in anything, in either the government's brief or anything at the trial in this case is any indication of where a duty to disclose exists and extends to a political party leader.

And because of that, the government's case necessarily fails as a matter of law.

Mr. Gray was a political official, but as the jury--

Unknown Speaker: You mean a state official, you mean?

Mr. Phillips: --Yes, he was a state official.

But as the jury instruction quite clearly specifies--

Unknown Speaker: He was part of the scheme?

Mr. Phillips: --He was found guilty under the government's theory of aiding and abetting Hunt.

But, not as a government official.

There's nothing in the instruction with respect to aiding and abetting that required Mr. Gray to be a government official.

And in the closing arguments--

Unknown Speaker: Did he have any duty to disclose?

Mr. Phillips: --I don't believe he would of had a duty to disclose, although the jury wasn't required to find that he would.

Unknown Speaker: But, he was a state official.

Mr. Phillips: He was a state official.

Unknown Speaker: He certainly is in a different position than Hunt.

Mr. Phillips: He would be in a different position and this case would be somewhat different if the jury had been instructed only that it had to find the Mr. Gray had violated his duties.

But that was not the way the jury was instructed.

The jury was instructed--

Unknown Speaker: Did Mr. Gray get any money?

Mr. Phillips: --I'm sorry?

Unknown Speaker: Did Mr. Gray get any money?

Mr. Phillips: No, Mr. Gray did not receive any money.

Unknown Speaker: He didn't get any benefit?

Mr. Phillips: The government attempted to prove that he may of gained some benefit, but the jury was not asked to make any findings as to whether he had gained any benefit.

And there is clearly no evidence as to receipt of any money.

Whether he gained a benefit is unclear but--

Unknown Speaker: You answered while ago that this scheme didn't involve any violation of state law.

I take it means that Mr. Gray didn't violate state law either?

Mr. Phillips: --I don't believe that Mr. Gray violated any state law as a consequence of his conduct.

Unknown Speaker: Even if he did in fact receive benefits in the form of condominium usage and vehicle usage and so forth and so on in Florida and elsewhere?

Mr. Phillips: Well, I'm not frankly completely familiar with bribery laws in the state of Kentucky, but my sense is that those benefits are so far removed from any public actions that Mr. Gray would have undertaken that I doubt seriously there would have been a violation of state law.

Unknown Speaker: Well, he was the insurance commissioner, wasn't he?

Mr. Phillips: No, no.

He wasn't the insurance commissioner.

Unknown Speaker: xxx.

Mr. Phillips: He was the Secretary of the Cabinet.

Unknown Speaker: Yeah, that's right.

And why did Mr. Hunt want him in the scheme?

Mr. Phillips: Well, I hesitate to speak on it, for Mr. Hunt, but I think the answer is they were friends and I don't think it is a scheme, frankly.

They were friends and they happened to have an inter-relationship.

But I don't know that from our perspective and given that the jury wasn't required to make any findings, I hesitate to say that he was involved in that particular scheme.

But I think the important point to remember, Justice White, is that the jury was instructed on that point in the alternative and therefore, whether or not, and I don't think the Gray theory would hold water either, but whether or not it would is irrelevant to this case.

The government still has to demonstrate that Mr. Hunt violated the law in the ways that he did and that the petitioners aided and abetted that violation.

Unknown Speaker: Who again was Mr. Hunt?

Mr. Phillips: Mr. Hunt was the head of the Democratic Party.

He was the Executive Chairman of the Democratic Party of the state of Kentucky.

Never held public office within the state of Kentucky.

Unknown Speaker: But, he was empowered by the governor to direct the receipt of these insurance commissions?

Mr. Phillips: He was placed in charge of basic patronage recommendations.

Unknown Speaker: He was given some kind of defacto duty to perform on behalf of the state.

Mr. Phillips: Well, the jury instruction didn't ask for that.

All the jury was asked to find was that he had control over those decisions and so, and the evidence was that he made recommendations and those recommendations were followed.

To say that he had defacto control in that sense strikes me as not any different than any other party leader making recommendations to his own party leaders who happened to hold public offices.

So, in a sense sure, he had defacto control, but our position is that jury instruction is so far removed from anything that would make him a public official, that there is simply no basis for creating a duty, certainly if the government has cited nothing--

Unknown Speaker: Mr.--

Mr. Phillips: --on the basis for creating that duty.

And that is a federally created duty.

It does not exist in state law.

And,--

Unknown Speaker: --Mr. Phillips, may I just be sure I understand something?

Is it your position on this the fact there are no pecuniary benefit and nothing but a violation of an alleged duty to disclose, which you deny existed?

Would you say the case would be different if he were a state official?

If Mr. Hunt were a state official?

Mr. Phillips: --Well, on that issue, just on that one issue as to whether they're might be a state law duty to disclose the issue would be different.

On the issue of whether or not there's any pecuniary gain, and whether pecuniary gain is a necessary requirement of the Mail Fraud Statute, I'd say that's a separate and open issue.

I think we would also have made some additional arguments if this case turned on Mr. Gray's status in terms of when does a duty trigger.

It is one thing to say that public officials have some duties to disclose, but it doesn't seem to me that every, that you know, in this case the government says, Mr. Gray had a duty to disclose basically because he saw some wrong doing going on.

Not that he necessarily benefitted from it.

So, it's not at all clear to me that he would of had a duty to disclose in this case.

But again, we run far afield from anything the jury was asked to decide in this particular case.

Unknown Speaker: Mr. Phillips, I don't think our cases are at common law that it was ever an element of fraud that you had to prove pecuniary gain to the defendant.

Mr. Phillips: This Court's decisions in both Fasulo and Hammerschmidt state that what is involved with respect to fraud is injury and injury defined in terms of property.

Unknown Speaker: Maybe economic injury to the victim, but never a requirement of gain to the perpetrator.

Mr. Phillips: Okay.

Oh no, that's correct.

That's correct.

Unknown Speaker: And that's what you keep arguing--

Mr. Phillips: Well,--

Unknown Speaker: --is missing.

And I just don't see that as an element at all.

Mr. Phillips: --No, Justice O'Connor, I don't mean to imply that.

Throughout our brief we argue that what's missing here is any injury, any economic injury to the victim of a fraud, which is the state of Kentucky, and what is also missing is any pecuniary gain to the defendants.

But that was only in response to Justice Stevens' question.

Unknown Speaker: That just isn't an element.

Yeah.

Mr. Phillips: You know, our position remains that injury to money or property is a condition required for mail fraud.

Unknown Speaker: Well, there's been a lot of cases haven't there in which that has not been required under this Mail Fraud Statute.

You're looking at a number of public officials in other states who have been convicted by the use of this statute.

Mr. Phillips: Well, no decisions--

Unknown Speaker: Without proof of some kind of, much more than an intangible right kind of an argument.

Mr. Phillips: --Well, none of those decisions were by this Court and the government freely concedes that this Court has never decided the validity of the intangible rights theory.

And as we indicate--

Unknown Speaker: But your position is squarely inconsistent with the Kerner case, or Isaacs case rather, isn't it?

Mr. Phillips: --I'm sorry?

Justice Stevens, I'm--

Unknown Speaker: I know it's not been decided by this Court, but the decision Governor Kerner's case, you would require that one, your position is inconsistent with the holding in that case.

Mr. Phillips: --Well, I think the evidence is slightly different in that case because there really was bribery and--

Unknown Speaker: But no injury to the--

Mr. Phillips: --and closeness, the nexus in terms of the duty and the creation of duty--

Unknown Speaker: --I don't think there was any injury, any pecuniary injury to the state of Illinois.

Mr. Phillips: --No, on that issue it's the same.

Unknown Speaker: It's the same.

Mr. Phillips: But,--

Unknown Speaker: But, then where did the duty to disclose come from there?

Cause the status of a public official, wasn't it?

Mr. Phillips: --Well, there was more to Kerner actually than simply a duty to disclose.

There were intangible rights underlying it and that's certainly a part of that case.

There was also, you know, a certain amount of--

Unknown Speaker: In other accounts, but just on the mail fraud is all I'm talking--

Mr. Phillips: --Just on the mail fraud.

But, you know, as we suggested in our reply brief, that wasn't all he was convicted of.

So that even if the Court had taken up the mail fraud issue, would not have required reversal of all the convictions against him.

Unknown Speaker: --I understand.

Mr. Phillips: Which I think--

Unknown Speaker: Well, you say that case is the same as this only insofar as your broader argument is concerned.

That is your attack on the intangible rights theory.

Mr. Phillips: --Right.

Yes, I understood that to be Justice Stevens point.

Unknown Speaker: But, even we reject that argument, you would still say that Kerner was a public official--

Mr. Phillips: Sure, he was clearly a public official.

Nobody disputes that.

And, none of the petitioners are, I mean, Hunt does not.

In sum, the government today asks this Court to sign what is basically a prosecutorial blank check to rid the mails of any political act that a United States attorney finds unacceptable.

What makes this request most dangerous we think, is the fact that even an indictment in the context of political officials or public, or it's going to be party leaders, can be devastating to their public careers.

And thus, the government is asking this Court not only to sign a blank check, but a check that is of enormous consequence.

This Court cannot sign that check.

Only Congress can because only Congress can declare conduct to be illegal.

And Congress has not declared anything that the petitioners have done in this case, as presented to the jury, to be against the law.

Now, what the government--

Unknown Speaker: --xxx the two parties here are McNally and Gray?

Mr. Phillips: --The petitioners are McNally and Gray, yes, Justice White.

Unknown Speaker: And what was Gray's offense?

Mr. Phillips: Gray's offense, under the instructions to the jury was aiding and abetting Hunt.

Unknown Speaker: And he wasn't charged as a principal?

Mr. Phillips: He was charged in the alternative as a principal.

The instruction is quite clear at footnote A, the District Court's instruction to the jury says, in order to find this scheme, you must find one of the following: Either that Hunt engaged in certain activities and was aided and abetted by the two petitioners, or that Mr. Gray engaged in certain activities and was aided and abetted by petitioner McNally.

It is clearly in the alternative and therefore, the government is obliged to justify both of those theories.

With respect, unless there are further questions on the mail fraud count, with respect to the conspiracy issue and the failure of the Court of Appeals to consider petitioner's contention that the government failed to prove the tax object of the conspiracy, we explained in both our opening brief and our reply brief, why the government's request for a rule of per se harmless error seems to us unwarranted.

In light of the government's concession; however, that if it loses on the mail fraud issue that the conspiracy count must necessarily be reversed.

I would rest on the briefs unless the Court has questions and reserve the balance of my time.

Unknown Speaker: Thank you, Mr. Phillips.

We'll hear now from you Mr. Ayer.

Argument of Donald B. Ayer

Mr. Ayer: Mr. Chief Justice, and may it please the Court:

The government agrees, I think, with one general proposition that is made by the petitioners in this case.

And that's the point that there is a substantial amount of confusion concerning this intangible rights mail fraud theory.

And we would further agree that there is in some opinions of various courts of appeals, what I would describe as extravagant language, talking in terms of standards of moral uprightness, fundamental honesty, fair play and right dealing.

But that's, I think, where our agreement ends because first of all, in terms of this case, which is before this Court, that language I think is completely irrelevant.

Also, as to the very cases in which that language appears, I think one is hard-pressed to find even one where the language itself is necessary to the holding of the case and indeed where the outcome, the decision and indeed the reasoning, if you read the opinion further, isn't well supported on a much sounder and narrower theory of the Mail Fraud Statute.

But before we get to that question of intangible rights, I want to address the first proposition made in our brief, which is the point that this intangible rights theory need not and indeed I think, should not be addressed in order to resolve this case.

Unknown Speaker: Why didn't you tell us that when we were entertaining petition for cert?

Yeah.

Mr. Ayer: If we had known it, we would have told you.

Unknown Speaker: [Laughter]

You mean if you would have thought of it.

Mr. Ayer: Well, yes.

[Laughter]

If we had focused on the jury instructions, at the time that we filed our opposition, which we file I think 700 or so a year, indeed it would have been much better had we done that for all of us, I guess, but we didn't and thus we didn't make the point.

But having discovered it when we discovered it we felt like it was only right to bring it up as soon as we figured it out.

Unknown Speaker: Surely would have been better for us and maybe better for you.

Mr. Ayer: Well, we'll find out I guess.

[Laughter]

The reason why I think that the issue is not presented comes from a simple reading of the instructions, I wouldn't represent that the instructions themselves are simple--

Unknown Speaker: What page and what document?

Mr. Ayer: The government's brief at page 11 indicates in footnote eight.

What must be proved beyond a reasonable doubt is that the defendant's knowingly and willfully devised, or intended to devise a scheme to defraud as described in instruction 11.

I don't know why the reference to instruction 11 because the precise language of instruction 11 appears in this instruction 15.

But, in any event, repeated twice is the description of the scheme.

Repeated in instruction 11 and in instruction 15.

If you look at page nine at the beginning of footnote eight back where it first indents, is the reference to the scheme to defraud the citizens of their right to have the business and it's affairs conducted honestly, etcetera.

And then immediately following, the same scheme to obtain directly and indirectly money and other things of value by means of false and fraudulent pretenses, representations and promises and the concealment of facts.

There is no instruction as is typical in situations where you have multiple ways of violating a particular statute.

There is no instruction that says the jury must agree unanimously.

I have at least one of these ways of violating the statute.

Unknown Speaker: But, Mr. Ayer, that instruction does charge that, devised a scheme or artifice to and then it's a conjunctive not a disjunctive that links one or two which suggests that the scheme or artifice embodied both (a)(1) and (2).

Mr. Ayer: That's exactly right, Your Honor.

That's exactly our point is that the jury was told that they had to find a scheme to do both, or they couldn't convict and indeed they did find a scheme to do both.

They found a scheme to obtain property by false pretenses and having done that, and we knowing that they have done that there is no occasion to go further and ask whether the theory and the evidence would support the other theory as well.

Unknown Speaker: xxx.

Mr. Ayer: I think, if both--

Unknown Speaker: I mean, the Court shouldn't have said you had to find both.

Under your theory it would be a scheme to defraud if they just found number two.

Mr. Ayer: --That's correct.

And I must say when I first--

Unknown Speaker: So, the and is really not right.

Take advantage of it, so it's exactly right.

Mr. Ayer: --Exactly right.

Yeah.

We will take advantage of it and I think it is in fact, clearly what the jury was told to do and it's got to be what the jury xxx.

Unknown Speaker: It certainly isn't clearly because the court then goes on to say to find that the defendants, or either of them, devise such a scheme, referring back to the beginning of the preceding paragraph.

A scheme or artifice too.

One and two, which you just quoted.

To find that either of them devise such a scheme you must find beyond a reasonable doubt one of the following, and then it has one or two.

Mr. Ayer: Right.

And the one or two, those are references to the roles played by Hunt and Gray.

In each of those paragraphs, you find discussion of the channeling of commissions.

That is the appropriation, the obtaining of property.

Unknown Speaker: xxx one of those, you proved the scheme described above.

Mr. Ayer: That's correct and that language plus the additional language that says you must find beyond a reasonable doubt that they knowingly devised the scheme above.

xxx.

Unknown Speaker: Well, now, wait a minute.

How do you find any obtaining of property in Number two?

Where is the, or, you know--

Mr. Ayer: Yeah, I do.

It was a matter under the supervisory authority of the Defendant Gray, a secretary of public protection of regulation or secretary of the governor's cabinet at the time that Seton Investment Inc. received commissions from that insurance policy.

And then they talk about the ownership interest that Gray had.

So, there must have been a receiving of commissions by Seton.

Unknown Speaker: --Yes, but you're still left with whatever defect in hears in that number two.

And that,--

Mr. Ayer: Well, I will address that now, Your Honor, as you brought it up.

That the first, that is paragraph one requires in order to convict Mr. Gray that he had aided and abetted Mr. Hunt.

Mr. Gray was at all times relevant either or both the Secretary to the Cabinet, or the Secretary of Public Protection in Regulation.

And in both of those positions, in the second position of protection and regulation, he directly oversaw the entire state insurance program.

And as Secretary to the Cabinet, he was one step and oversaw among others the Secretary of Regulation.

Our theory is that in order to have found one, In order to have convicted under one, and who to have convicted Gray as the jury did, they must have found that Gray aided and abetted Hunt.

And for Gray in his public position to have been essentially turn, at least turning his head to the diversion of this money in ways which in a minute I will show to have been quite improper.

That in itself constitutes the breach of a public duty.

That is his duty as a public official.

Unknown Speaker: --Oh yes, but not under one.

Because under one he's charged as an aider and abetter and for that to be wrong, the principal, namely Hunt, has to be doing something wrong.

I don't think you can rely on Gray's capacity as a public official to satisfy the paragraph one.

Mr. Ayer: Well, we think we can, Your Honor.

And the reason we do is that there is no dispute as to his occupying a public position at all times relevant.

And the public position--

Unknown Speaker: But that's not because an aider/abetter is it?

I man, as an aider and abetter, he has to be aiding Hunt to do what is charged in that paragraph.

Mr. Ayer: --Well, the fact that most have been found is that Gray aided and abetted the scheme that Hunt was carrying out.

Unknown Speaker: Right.

If it said aided or abetted, in his official capacity, yes.

But it doesn't, it just says aided or abetted.

He could have aided and abetted him as a private citizen.

Mr. Ayer: I think what might be helpful in answering this question in a slightly, maybe circuitous way, but nonetheless it may be useful to refer to the facts in the case and in order to that in a brief way, I have submitted through the clerk, copies of exhibits that were used at trial.

And what they do, I'm not going to go through them line by line, but they were indeed used in trial to demonstrate the evidence in the case in a fairly brief and concise way.

Exhibits one and two are essentially flow charts of the way the money flowed from the Commonwealth of Kentucky to, in premium payments, to two different insurance companies and then the Commission's coming back from the carriers to the Wombwell Agency.

The Wombwell agency being the broker who got the business and agreed to handle this Workman's Compensation business for $50,000 a year and then at Hunt's request agreed, take that $50,000 and I, Hunt, as head of the Democratic Party will tell you where to send the rest of the commissions that you get back.

The key part of these diagrams.

Number one covers the period of 1976, I guess '76 through the middle of '77 and then other one covers the period '77 through '79.

Is what happens with the money, the premium, I'm sorry the commission payments once hey come back to the Wombwell Agency and what these, the little boxes over on the right hand side show, are the channeling of the checks to two different places.

One is to Seton Investments.

Now Seton Investments as we've indicated in our brief is an entity which was created by Hunt and Gray.

It was set up as a real estate investment company, but in fact, transacted no real estate business except the purchase of two condominiums, which the evidence showed was for the personal use of Gray and Hunt.

It purported to be for purposes of this scheme because it had to be under state law an insurance brokerage entity.

In fact, it transacted and the evidence showed it transacted no insurance business whatsoever.

It did not have an insurance license.

It put on forms which were submitted to the Wombwell agency as proof.

Unknown Speaker: xxx receiving commissions.

Mr. Ayer: That was the business it was in, Justice White.

And that is illegal under state law.

It is illegal under the provision of state law, under Kentucky revised statute 34.9-100, which we've cited in our brief, says that it is not a proper purpose of an insurance license to have it for the purpose and solely for the purpose of enabling the licensee to receive rebates or premiums.

Unknown Speaker: Do you think they foresaw this situation?

[Laughter]

Mr. Ayer: Well, they probably foresaw situations like it, given the existence of this kind of a patronage system in Kentucky, and given the acceptability under another provision, of splitting of commissions.

They wanted to make clear that this kind of situation is not acceptable.

Unknown Speaker: Still waiting to see who's been done out of money, you know?

Mr. Ayer: Well, who has been done out of money, number one, we would dispute and there is evidence I think in the record that supports the dispute that there was simply no way for Kentucky to do anything other than pay the money that it paid and to have the premiums that were paid, I'm sorry, the commissions that were paid back to Wombwell paid in a certain amount.

It is true that there's a regional commission that is set up.

I think it's basically part of the insurance industry that studies and decides what a reasonable commission is on a certain kind of policy.

It is always possible to renegotiate something like that and indeed there is testimony in the record that there, that that is a possibility.

It was never done here--

Unknown Speaker: That certainly isn't a crime to fail to get the lowest possible price you can for the state in dealing with insurance people, or auto people, or anything else.

Mr. Ayer: --That's absolutely correct, Your Honor.

Unknown Speaker: xxx making this argument to show that the state of Kentucky lost some money?

Mr. Ayer: No, I am not.

I'm trying to answer Justice Scalia's question as to who was done out of money.

It is indeed the case that had people been public watchdogs, looking for where the money's going, it would have come out differently.

That's not the point.

That's not the reason why this is illegal.

This is illegal, what I'd like to do is--

Unknown Speaker: Here is the analogy that I'm, patronage systems were never considered illegal.

I mean, that's why we had to have a law to have the civil service.

And the theory was, somebody has to have the job, you're going to give the job to somebody, why not give it to our guys?

That was never thought unlawful, or it certainly wasn't considered fraud.

Now it seems to me, you would have to persuade me that this is something any different from that to convince me that it's fraud.

And so far, you haven't.

I don't see how anybody has been done out of any money.

Just, the money has to go to somebody.

It might as well go to our guys.

Mr. Ayer: --Okay.

Unknown Speaker: Is that fraud?

You aren't arguing the state was done out of anything?

Mr. Ayer: No.

We are not and we did not at trial.

Unknown Speaker: But I take it you are arguing that simply receiving premium payments in the mail is different from getting paid for a job that you perform.

Mr. Ayer: Well, It's different.

I am not sure how much we can make of that given the premise that we all start from that this patronage scheme is legal and therefore, it's perfectly legal for someone out dole out money to his friends.

Unknown Speaker: I thought you were arguing that it wasn't necessary at all for Kentucky to be cheated out of any money.

Mr. Ayer: That's correct.

Unknown Speaker: It's just that somebody was receiving money under false pretenses and--

Mr. Ayer: That's correct.

Unknown Speaker: --by concealment and things like that, which is mail fraud.

Mr. Ayer: That's correct.

What has been done here, what I'd like to do is start with the proposition that, hypothetically speaking, let's forget that these people are in fact, public officials.

Let's leave that out of it.

As I think we have demonstrated in our brief, what was done was a, what was shown was a complete scheme for obtaining property by false pretenses.

The false pretenses are the setting up a phony insurance brokerage outfit for the purpose of making it appear acceptable to channel this commission money to them.

Under state law it is illegal to split commissions with anyone other than an insurance broker or agency.

And so what they did was to create this entity as an independent company, disassociate themselves, that is Gray and Hunt, from it by bringing in at least at a late date, McNally, to serve as its president and act like this is an independent entity that McNally is in charge of.

And indeed at trial the argument was that McNally owns this.

This is all his, we don't own it, that is Gray and Hunt don't own it, McNally owns it.

That scheme, just leaving out the element of public official and public obligation is in and of itself, that deception to allow the channeling of money to Seton, which indeed then goes essentially to the use, as is indicated on our exhibit three, to the use of these individuals in the form of condominiums.

That is itself a complete mail fraud scheme.

A scheme for obtaining property by false pretenses and we believe that that is the first and easiest way to resolve the case.

Unknown Speaker: Doesn't the false pretense have to be a pretense to get the property?

That but for that pretense, the property would not have been given?

Mr. Ayer: Well--

Unknown Speaker: You don't say I defraud somebody if I go up and say, I'll buy your car for $500 and I give him my wrong name.

You wouldn't say that I defrauded him of the car so long as I give him the $500.

Mr. Ayer: --It wouldn't have been possible for, even if they weren't public officials, it wouldn't have been possible for either Gray or Hunt to walk up and say give me commissions.

Even if they were politically influential because they are not insurance brokers.

And they do not have the requisite license to make it legal under state law to participate in this particular form of patronage.

Unknown Speaker: So whoever would have gotten the insurance commissions were done out of them?

I mean, because these two people got them and they weren't entitled to them, whoever was paying it to them would have kept them.

Mr. Ayer: I think, well the whole idea was to take this pot full of money which amounted $850,000 over four years and spread it around.

Unknown Speaker: Someone else would have kept the money.

Someone else would have got the money xxx.

Mr. Ayer: Someone else would have gotten it, but I don't think it would have been somebody who could of claimed he had a right to it.

Unknown Speaker: Who would the somebody else be?

Mr. Ayer: Someone else would in all likelihood of been, some other insurance brokerage, I should say some insurance brokerage outfit in the state of Kentucky who had been supportive of the governor and the administration.

Unknown Speaker: And so that's the person who is economically injured?

Someone else who is waiting in line and didn't get there in time.

[Laughter]

Mr. Ayer: Well, our theory is that, well, I don't think it's just our theory.

It's very clear as to this first cut, leaving out the public official and the public intangible right element.

It's very clear that what was proven on this first level was a scheme to obtain property by false pretenses.

The false pretenses being the creation of this Seton outfit which is phony.

Never does any business and just is there to receive money and channel it to Gray and Hunt.

That, in and of itself, the obtaining of that property, forgetting about who is hurt, there is no requirement in the law that someone be harmed as a result--

Unknown Speaker: Well, you said, Justice O'Connor made the point a while ago that fraud doesn't ordinarily require that the defendant may have gained, but I had thought at least fraud required that there had been some economic injury to someone.

Mr. Ayer: --Well, the--

Unknown Speaker: You say, not only need their be no gain, but there not need be any harm.

Mr. Ayer: --I think that's correct, Your Honor.

And I think that is emphatically clear--

Unknown Speaker: Why is it prohibited?

[Laughter]

Mr. Ayer: --Well, I think it's emphatically clear on the face of the statute that that is true.

Because the statute has three different clauses.

The first one is for creating, or putting into effect a scheme to defraud, or for obtaining money or property by false pretenses.

That is exactly what was done here, was the obtaining of money or--

Unknown Speaker: xxx right it.

It really does you're telling, cover the case where I go up and buy a car for $500, give my wrong name.

Mr. Ayer: --No, I don't think so, because I think you're giving your wrong name is no part of inducing the obtaining of money or property.

He wasn't relying on the fact that you gave a wrong name.

Whereas here, they very much are relying on the fact that Seton is supposed to be, and indeed to illustrate that, the Wombwell Agency, Mr. Tabeling specifically asked more than once for assurance that Seton was in fact, a legitimate insurance agency.

And so what he was given--

Unknown Speaker: Right.

Mr. Ayer: --was the insurance license number of--

Unknown Speaker: I have to add a fact then.

Mr. Ayer: --Okay.

Unknown Speaker: This automobile dealer does not sell cars to government employees.

And I walk up and I say, you know, my name Jones and I am not a government employee.

He sells me a car for $500.

I have defrauded him.

Mr. Ayer: Well, I think that as a technical matter you may well have.

If it is material and if you have a duty not to lie to him, which I think is fair to say you do.

Unknown Speaker: If that were the only permissible interpretation of a federal criminal statute, I would think a court would be fairly loathe to reach that.

Mr. Ayer: Well, what we would suggest as a description of what must be shown, as a set of requirements under this intangible, first of all, let me say, I think it makes very little sense to conclude that somehow the mail fraud statute doesn't cover schemes to defraud of intangible rights.

If you define an intangible right as any right other than the physical possession of something.

You talk about a right to a stream of income under a contract.

Or, you talk about a right to purchase a piece of property.

You talk about almost any right in our society.

Very few people walk around with gold bars in their pocket.

Most people rely on intangible rights.

And so, as an opening proposition, we've got to be all assuming that the Mail Fraud Statute can reach some--

Unknown Speaker: xxx intangible property.

Mr. Ayer: --Intangible property.

Unknown Speaker: That's a good old concept, intangible property.

It's a little different from intangible rights in that it doesn't include the right to good government, for example.

Mr. Ayer: Well, I'm not sure I know where it begins and ends.

If I have expectations that have value, is that intangible property?

Unknown Speaker: xxx same category.

As traditional a category as rights in stock and so forth which are intangibles.

Mr. Ayer: Do I think what is?

Unknown Speaker: The right to good government is--

Mr. Ayer: Well, I think--

Unknown Speaker: --an intangible right of which one can be defrauded.

Mr. Ayer: --I think in the following, when you meet the following set of requirements the answer would be yes.

And this is what we would be suggesting as a substitute for what I referred to earlier as the extravagant language of some opinions.

Number one, that there must be the duty that you're talking about has got to be an enforceable duty of some kind.

The thing you're being defrauded out of is not just a moral aspiration.

It's got to be a real duty.

It can arise from the criminal law.

It can arise from the civil law.

It can rise from a statute, or the common law.

And we would suggest it can arise from contract.

Unknown Speaker: You don't even need standing to be able to enforce that, do you.

Mr. Ayer: No, xxx.

Unknown Speaker: I assume I have no right to sue for good government, right?

It's a right I have, but it's not a right I'm able to sue for.

Mr. Ayer: Well, I think that's correct.

I think the state in dealing with--

Unknown Speaker: But I can sue somebody for defrauding me of it?

Mr. Ayer: --Well, I think the state can sue, or can bring a criminal action for defrauding it of the right to honest services of its employees.

Or the honest services of people who have been given trusted, trusted with responsibilities.

But, that's only the first part.

That's the first step.

The second step is that there must be a causal relationship between the breach of that duty and either the appropriation or the deprivation of a thing of value.

We are not suggesting that simply the abstract non-performance of a duty is a sufficient basis to bring a criminal action.

We think that it is quite appropriate to require that the breach of the duty have some kind of a consequence and in this case the consequence, well let me skip over this case for a minute.

The third element would be an element of deception.

Which is a traditional element of the Mail Fraud Statute.

That there must be some effort to cover up the scheme to deceive, to essentially hide what's going on.

And when you put those three things together, I would submit what you have is really only another way of saying what is going on in a more traditional property oriented male fraud case.

Unknown Speaker: Do you think these instructions covered those elements insofar as this theory of deprivation is concerned.

I don't see anything in the instructions that suggest that these people had any duty to, unless you say that the Court must of thought there was a duty or they wouldn't have given this kind of an instruction about disclosure.

Mr. Ayer: We, just to repeat briefly, we think first that the case should be resolved as one for obtaining property xxx pretenses.

Unknown Speaker: Yes, I understand that.

I understand.

Mr. Ayer: Leaving that aside I think the instructions in their references to the directing of commissions and to the--

Unknown Speaker: Without disclosing?

Mr. Ayer: --Right.

And to the positions, there's two different things we have to talk about.

One is the position of Gray and whether is position and the duties that he owed were sufficient.

And we think that that can be a basis for deciding the case under either xxx.

Unknown Speaker: Wouldn't that be a jury question, whether they had the duty, or not?

Or was that legal, some instruction the court ought to give?

Mr. Ayer: Well, I think that--

Unknown Speaker: Because I don't see anything about a duty to disclose.

As far as these instructions are concerned, it wouldn't make any difference whether there was a duty to disclose, or not.

Mr. Ayer: --What, the discussion--

Unknown Speaker: There was a failure to disclose.

Mr. Ayer: --The discussion that does exist is the discussion of Gray's position as Secretary and the positions that he held.

Unknown Speaker: Yes.

Yes, but it doesn't say that he had a duty, or it doesn't ask the jury to find it.

If he didn't disclose it that was all the jury was interested in.

Mr. Ayer: Well, I think there's two different things going on here.

One is the duty to disclose.

And we would not put primary emphasis on that.

What I would suggest is that starting with the premise that there was an obtaining of property by false pretenses, how was it done?

It was done by these two individuals setting up the scheme and it happens that Hunt was imbued with official power, that is, the governor told him that he had the power to pick the insurance companies and to direct the commissions.

And secondly, Gray was in a position overseeing all of this and a lot of other activity.

What had to happen was the, by Hunt, the misuse of his position and of his authority.

He had to misuse state governmental power to direct this money to himself.

That's the first thing that had to happen.

And, Gray had to, in his position, essentially at a minimum, look the other way and happily receive the money at the other end.

And we think the use of state governmental power essentially to commit a federal mail fraud and that's going back to the first step.

That is apart from their state governmental authority, they committed a mail fraud.

The use of power to do that is a separate abuse of authority, that is, an abuse of the governmental authority.

Unknown Speaker: xxx did say that the failure to disclose, if there was a failure to disclose it had to influence, if there had been a disclosure, the conduct of other government officials would have been different.

Mr. Ayer: I don't know if that's in here, Your Honor.

I--

Unknown Speaker: Well, if there had been a--

--xxx and if Gray had an ownership interest, that he failed to disclose that interest to persons in state government whose actions or deliberations could have been affected by such action.

Mr. Ayer: --Okay.

Unknown Speaker: A jury xxx find that.

And so non-disclosure with that kind of a consequence.

Mr. Ayer, before you get through, you've given us the three parts of your theory and the first of which is the duty that's enforceable.

What, at least with regard to Hunt, what is the duty you're talking about?

Mr. Ayer: With regard to Hunt?

Unknown Speaker: Yeah.

Mr. Ayer: I think with regard to Hunt, if you have to reach that, and we submit you don't,--

Unknown Speaker: That's mainly what the Court of Appeals relied on as I remember their opinion.

Mr. Ayer: --Well, that's right.

But, it's usual I think, not to decide cases where they are not going to affect the outcome.

But the duties--

Unknown Speaker: xxx you said there's sufficient evidence as to the Hunt charge, but they didn't really reach the other, so we'd have to send it back to find out.

Mr. Ayer: --Right.

The duty was a duty not to misuse the governmental authority which was given to him to commit what is apart from his duties as a governmental official, a criminal act.

That is the scheme for obtaining property by false pretenses.

Unknown Speaker: What is the criminal act, you mean as a matter of federal law?

Mr. Ayer: Yes.

He--

Unknown Speaker: Well, this kind of xxx.

Mr. Ayer: --That the whole, as I indicated before, the whole scheme--

Unknown Speaker: The duty is a duty not to violate the Mail Fraud Statute.

Mr. Ayer: --That's right.

That he as a--

Unknown Speaker: If you prove a violation of the Mail Fraud Statute by proving you violated the xxx.

Mr. Ayer: --Well--

Unknown Speaker: I have difficulty following that.

Mr. Ayer: --Okay.

Well, what we tried to show is that the initial, the scheme to obtain property by using Seton, a phony shell company as a recipient for money.

Unknown Speaker: Of course, the jury was not required to find they were phony companies, as I read the instructions.

They were required that they had a secret interest in it, but they could have had a secret interest in a legitimate brokerage firm.

Mr. Ayer: Well, they were required to find a scheme for obtaining property by false pretenses.

Unknown Speaker: All right.

Mr. Ayer: There's got to be some false pretenses.

If there's no false pretenses then xxx--

Unknown Speaker: The false pretenses are not disclosing the ownership interest.

That's what the instruction says.

Mr. Ayer: --Well they certainly could also be the, and the bulk of the evidence in the case certainly dealt with the channeling of money to Seton.

Unknown Speaker: Right.

Mr. Ayer: That's what the case was about.

That's what the time in court was spent on was showing this money, check after check after check going to Seton.

Unknown Speaker: I understand, but you argued at some length the fact that Seton was a sort of a shell.

Mr. Ayer: Right.

Unknown Speaker: But the jury wasn't instructed to find that.

Mr. Ayer: I don't believe that there's anything in the jury instructions that says the jury had to find specifically that Seton was a shell.

They had to find a scheme to defraud by obtaining property.

Unknown Speaker: So, then don't we have to assume the case would be the same for legal purposes even if Seton were not a shell?

Cause we don't know the jury thought it was.

But there still, you're not necessarily out of, totally lost because you still then would claim the failure to disclose the ownership interest, I guess, is enough.

Maybe you don't want to go that far.

But then we're back to my just giving the wrong name.

And not even saying that I'm not a government employee.

Mr. Ayer: Well, I think what is critical is that there be a linkage between the duty that's breached, which we are arguing is--

Unknown Speaker: But you're not saying that's the duty to disclose.

That's what I'm trying to find out for--

Mr. Ayer: --Well, I--

Unknown Speaker: --The duty to this breach is the duty not to violate the Mail Fraud Statute.

Mr. Ayer: --I think there is a duty to disclose.

The only reason I am hesitant to rely primarily on that is that I frankly think the basic scheme to defraud, that is to get the money, by using Seton is a more persuasive fraud.

There is indeed a duty, on the part of a public official to disclose and I think, I would argue if we had say it to get, you know, to resolve the case which I think we don't for at least two other reasons.

That there's a duty on the part of Hunt to disclose based on his use of governmental authority.

I see my time is expired.

Thank you.

Unknown Speaker: Thank you, Mr. Ayer.

Mr. Phillips, you have eight minutes remaining.

Rebuttal of Carter G. Phillips

Mr. Phillips: Thank you Mr. Chief Justice.

I would like to make simply three points.

I hate to drag you back into the jury instructions, but I think they're fairly important in this context.

The first statement that Mr. Ayer made with respect to the instruction, I think, requires some clarification was his suggestion that Mr. Gray and his aiding and abetting must have been a public official, that the jury must have found that.

Aside from the point that I believe Justice Stevens made, which is that there was no requirement in the jury instruction that that be found.

The truth is that at the closing argument, the United States attorneys, the Assistant U.S. Attorney told the jury that the aiding and abetting was in setting up Seton.

And it is undisputed that when Seton was set up by Mr. Gray he was not a public official.

So, it's both contrary to the instruction and contrary to the facts of the case.

Second, with the respect to the false pretenses, I guess I would just like to repeat what Justice Stevens said, this whole notion of a phony business and the various ways that that may have operated is an interesting theory.

It is not the theory that was presented to the jury in this case and I take that as the best evidence that the reference to false pretenses was not regarded as somehow a separate item in this case at all, either to the court, or to the jury.

And the court made it quite clear what it thought the appropriate theory for conviction was in this case.

And that set out in the portion that describes the scheme underwritten in the indictment.

And finally, with respect to the government's eleventh hour effort to find some limiting principles for its mail fraud, I took it as quite interesting that in describing that there must first be a duty, Mr. Ayer suggests that he wouldn't put primary emphasis on that point and it's quite clear to me why he wouldn't do that in this case because wherever you look there is simply no duty.

And I think ultimately what it came down to was that the duty that exists in this case is a federal duty.

But that's not what the Mail Fraud Statute requires.

This Court made quite clear in Parr that you look to other sources to determine what is fraud, and the fraud in this case is based on a duty.

You must look to those sources to find out where that duty exists.

There are none accordingly and the petitioner's conviction should be reversed.

Chief Justice Rehnquist: Thank you, Mr. Phillips.

The case is submitted.

Unknown Speaker: The Honorable Court is now adjourned until Monday next at 10:00.

Attribution:

The OYEZ Project

Featured:

Liparota v. United States - Oral Argument

Fri, 31 Aug 2012 18:30:19 +0000

Case:

Liparota v. United States

Media File:

84-5108_19850319-argument

Related Transcript:

84-5108_19850319-argument

Transcript:

ORAL ARGUMENT OF WILLIAM THOMAS HUYCK, ESQ., ON BEHALF OF THE PETITIONER

Chief Justice Warren E. Burger: We'll hear arguments this afternoon in Liparota against the United States.

Mr. Huyck, you may proceed whenever you're ready.

William Thomas Huyck: Mr. Chief Justice, and may it please the Court:

This case presents the Court with a question of interpretation of the language of a federal criminal statute.

The statute at issue, Section 2024(b) of Title VII is one of a common type of criminal statute appended to a statute of Congress establishing a program... in this case the food stamp program... and providing for criminal prosecution for fraud, and stating in relevant part that whoever knowingly acquires food stamps in any manner not authorized by this chapter is guilty of an offense.

And the issue that's presented as to the wording of this statute is, taking the phrase, again in relevant part, acquires coupons in any manner not authorized by the chapter, since Congress has chosen to use the word "knowingly", does the word "knowingly" apply to that entire phrase; or, as argued by the Government, does it apply to only a portion of the phrase, namely "acquires coupons"; that in other words, the offender knew he was acquiring coupons, but that he need not know it was in any manner in violation of the statute.

The facts of this case can be stated very briefly.

The petitioner and his brother ran a small sandwich shop in a poor neighborhood in Chicago which was not a member of the food stamp program.

There was quite a bit of evidence in the record about the enforcement of the food stamp regulations against food stores and other participants in the food stamp program which in essence establishes a tremendous amount of notice and warning prior to undercover criminal investigation.

None of this applied to the sandwich shop that petitioner and his brother ran.

An undercover agent with a secret tape recorder came into their sandwich shop, having gone to a food store that she was investigating, the food store having told them that they would not buy food stamps from her, and then she went to... but told her try the sandwich shop down the street, whereupon she sent into the sandwich shop, offered to sell food stamps at a discount to petitioner and his brother, and did so on three occasions, whereupon they were prosecuted.

The issue that is before this Court was raised in the jury instruction conference.

The trial counsel, myself, offered a specific intent jury instruction, the standard specific intent jury instruction, that he had to be purposefully intending to violate the law.

The Government objected, and the judge agreed, that this was a strict liability offense as to the element of knowledge of violating the law, and thereupon, the judge's instruction to the jury told the jury in essence there were three elements of the offense, and he divided the action element from the knowledge element.

He said that they had to find first that the defendant acquired and possessed food stamp coupons for cash in a manner not authorized by federal statute, the act; and then he said second, they have to find the defendant knowingly and willfully acquired the food stamps, but not that it was in a manner in violation of the regulations.

Unidentified Justice: In your view did that mean the jury need only find that the defendant knew that the food stamps were food stamps and not postcards, so to speak?

William Thomas Huyck: Yes, exactly.

And that... there was a colloquy with the court, and in fact the colloquy went so far as my asking the court can I argue to the jury... my client had testified in this case that he was not familiar with the food stamp regulations, and that he did not know that it violated any regulations for him to be buying these food stamps from this undercover agent.

And this was virtually the only defense that he had other than entrapment, which was also a defense.

So this took me by surprise that this was going to be interpreted not as a specific intent crime, and so there was a colloquy, and I asked the judge can I argue that to the jury, and the judge said no, you cannot argue ignorance of the law in this case to the jury.

Unidentified Justice: Do you think Congress was concerned about acts or attitudes?

William Thomas Huyck: I think that Congress in drafting the statute used the word "knowingly" for some purpose, and I think that they... this is a statute where the element of it being in violation of the statute is written right into the words of the statute.

And so I think that by using the phrase

"knowingly acquires food stamps in any manner not permitted by this chapter, that that is the plain meaning of Congress. "

Unidentified Justice: You don't think it means that Congress was concerned about whether he knew what he was doing?

William Thomas Huyck: No.

That's precisely my point.

They did not use the word "knowingly"--

Unidentified Justice: And don't you think this instruction that was given submitted that issue to the jury fairly?

William Thomas Huyck: --It submitted the issue as far as "knowingly" goes.

He carefully did this.

He submitted the issue whether defendant knowingly and willfully acquired the food stamps, period.

And in view of the colloquy that we had, he was clearly intending to leave out that he knew it was in a manner violated by the statute.

But I want to emphasize that this is not a case where I am arguing for any kind of an ignorance of the law defense to a crime of this kind, and I'm not even arguing for the specific intent instruction that I offered at trial.

That was done... this issue came up hastily at the end of the trial, and I think that fairly... it fairly raised the issue.

But the issue that I'm arguing here is exactly the one that was pointed out, if I can quote some language from Justice Brennan's opinion in United States v. Freed, a concurring opinion,

"The definition of the crime as written by Congress requires proof of circumstances that involve the legal element. "

In other words, this is not a general ignorance of the law defense.

This is a statute where there's a legal element that is an attendant circumstance, as you will, of the crime.

The definition of this offense has an element of an act, acquiring food stamps, and an element of an attendant circumstance, namely that that acquisition is not in any manner authorized by the statute.

And you have, I think, in the Model Penal Code a much more reasonable basis for interpreting criminal statutes of this kind than to quibble about the way that modifying language can be phrased in the English language.

And as I tried to make an example in my reply brief, the results should not just turn on the fortuitous way that a phrase is turned.

Judge Magruder in the St. Johnsbury Trucking case that I cited used the example of adulterated milk.

If you have a statute that says whoever knowingly sells adulterated milk, people would assume that that means that you have to know it was adulterated as well as knowing that it was milk.

But if you phrased it this way, "milk which had been adulterated", using a phrase instead of an adverb, an adjective, you should have the same result.

But the Government could make the same analysis of that language that it's making here.

It could say that you have "knowingly" modifying the verb "sell", and then "milk" is the object of "sell", and the phrase "which has been adulterated" is a separate phrase modifying the verb "sell" and that--

Unidentified Justice: Of course, there's some bit of difference, it seems to me, because if you're talking about a prohibition against the sale of milk, milk is ordinarily an article of commerce, and you simply wouldn't expect its ordinary milk sale to be prohibited.

But food stamps are not really an article of commerce.

It seems to me that perhaps a potential defendant may be on some notice when someone comes to him with food stamps whether or not they can be acquired.

This is not an ordinary commodity that someone comes into your store and offers to sell.

William Thomas Huyck: --Well, that's correct, Your Honor, and I certainly am not offering up milk.

I'm offering this an example of phraseology in the English language, and the bottom line being I think you ought to use, for instance, the Model Penal Code rule of construction that if a word such as "knowingly" appears in front of a statute, that you assume that it applies to every element of the offense stated in the statute, unless the contrary point intent plainly appears.

But other--

Unidentified Justice: Is there any way of purchasing food stamps?

William Thomas Huyck: --Is there any... no, there is no legal way of purchasing food stamps, that's correct.

Unidentified Justice: So he starts off... he knew he was doing something wrong when he purchased.

William Thomas Huyck: He told the jury that he didn't.

Unidentified Justice: Hmm?

William Thomas Huyck: But I admit he had a tough case.

But he told the jury that he didn't.

And, of course, we're talking about a statute here that applies to the entire chapter and all of the regulations issued there under.

We're not just talking about trafficking violations.

But I certainly agree with you, Your Honor, that this was a tough case for the defendant, because purchasing food stamps, there is no legal way of doing it, that's correct.

And--

Unidentified Justice: Like purchasing drugs, like purchasing opium, isn't it?

William Thomas Huyck: --Well, no, I don't think that it necessarily is the same as that.

I think that--

Unidentified Justice: You mean it isn't as clearly.

William Thomas Huyck: --I think that when you're trying to draw a line as to which limited... and in the U.S. Gypsum case the Court said there are very limited circumstances where in the absence of a term defining the mental state, you will imply that Congress meant strict liability as to that element, very limited circumstances.

And one of them is this line of dangerous instrumentality cases... firearms, drugs and so on... where the Court's analysis has been that Congress probably intended strict liability as that element because of the very nature of the items.

And I do not think that food stamps are such an item.

Unidentified Justice: Under your analysis, the Government would have to prove beyond a reasonable doubt not only that the defendant knowingly acquired food stamps, but that he knew that his acquisition was not authorized by law, is that correct?

William Thomas Huyck: That's correct.

Unidentified Justice: How would the Government prove that second element?

William Thomas Huyck: Well, it was argued to the jury very effectively by the prosecutor in this case incidentally, enough the judge told her that she didn't have to, they said... she said these transactions took place in the back room.

Whenever she came around to sell food stamps, he said come in the back room and do it.

On one occasion he said to her my brother doesn't want me dealing in these food stamps.

He's scared.

They were bought at a discount.

They had warnings printed on the books.

My contention here is that the proof of the so-called criminal intent of the defendant in this case is no more difficult for the Government than in any other criminal case.

You're always making arguments to the jury that the circumstances of the offense show a consciousness on the part of the defendant that he knew he was doing wrong.

And this case was no different than the other cases.

And--

Unidentified Justice: Well, do you think it's a fair argument to say that in most of the cases, the vast majority of the cases like this, the defendant would know, he'd actually know that he was doing something wrong?

William Thomas Huyck: --I think so.

I think so.

As long as--

Unidentified Justice: And the Government says well, so why should we put the prosecutor up to have him prove it in every single case.

And so you're saying you would concede that if it were clear that Congress intended this to be a nonspecific intent case that you wouldn't have any leg to stand on.

William Thomas Huyck: --Oh, certainly in interpreting a federal criminal statute if the meaning is plain, that ends it.

I don't think that this is a case where the meaning is plain, and I think that it's an ambiguous... at the very least it's an ambiguous statute to which you should apply the rule of lenity.

But I... but think of all the... I put one example in my brief.

This statute can be used not only to prosecute trafficking.

I agree that a trafficking prosecution is no difficulty for the Government.

The Government doesn't need strict liability because Congress intended that they use these undercover agents to go to grocery stores, and that's what they do for the most part, and the grocery stores are on notice.

There would be no difficulty at all proving actual knowledge on behalf of any grocery store because they have all of these warnings.

Unidentified Justice: Do you think it's accurate to call this a strict liability case?

William Thomas Huyck: Well, strict--

Unidentified Justice: That the Government... if the Government wins, do you think it's a strict liability case?

William Thomas Huyck: --No.

Strict liability as to this element of the offense.

I think that we have to be careful in--

Unidentified Justice: Yeah, I agree.

William Thomas Huyck: --using words like "strict liability"--

Unidentified Justice: I agree with you.

William Thomas Huyck: --to talk about that we're recognizing that there are different elements in an offense, and we're talking about this particular element.

But to go back to an earlier question, why... it seems to me clear that Congress did not use the word "knowingly" here just to say that you couldn't prosecute someone who did not actually know that what they had was a food stamp.

And that is not, I submit, a very common use of the word "knowingly" or "willfully" in criminal statutes.

And there's no reason to believe that that was the reason Congress put the word "knowingly" in here.

Now, the Government points to the following section, subsection (c), and also that this was almost the sole reliance of the Seventh Circuit in holding that they could divine Congress' intent, because subsection (c) was worded in a different way.

Subsection (c) is a two-actor offense.

The offense... the statute is directed against whoever presents coupons for redemption, namely a grocery stores who's redeeming coupons; and that that person who's knowing that he's presented coupons for redemption, knows that those coupons were received, transferred or used in a manner in violation of the chapter, which could be a different person.

So in other words, you're saying the person presenting the coupons knew that, if it was another person, that other person got the food stamps in an illegal manner.

That is, to me, the pure answer of why the word (b).

It's a--

Unidentified Justice: Is it agreed that (c) does require proof of specific intent?

William Thomas Huyck: --It requires the... yes.

It requires the knowledge that's specifically stated there; in other words, knowledge that these stamps were received in--

Unidentified Justice: Well, you read that as meaning specific intent.

William Thomas Huyck: --As to that only... no, no, no, no.

That... well, yes, right; that specific intent, that element has to be proved, namely that the person presenting the stamps for redemption has to know that those stamps were received by somebody in violation of the statute.

But in subsection (c) they don't say whoever knowingly presents food stamps for redemption.

Congress in that section did not feel that they had to use the word "knowingly" to prevent the prosecution of a grocer who's handing in something that he doesn't know are food stamps.

Unidentified Justice: Well, is it entirely accurate to equate the term "knowingly" and speak of that as a specific intent?

I mean an intent is something... is the intent with which you do an act, and knowingly has always struck me as something a little bit different, or either less or more inclusive than the intention.

William Thomas Huyck: Well, here again, I think that the Model Penal Code offers guidance, because the definition of "knowingly" there as to an act is different than "knowingly" as to a circumstance.

We're talking about a circumstance here, and I think the definition is very straightforward, that he knows that such facts exist.

And here the circumstance is that they were acquired in a manner in violation of the statute.

He knows that that fact exists, that that was the manner in which they were acquired.

So I think that "knowingly" is a very accurate term.

I think that this Court's Bailey decision, United States v. Bailey, I think has been... had a very salutory effect in eliminating in many criminal trials this same specific intent instruction that I submitted in this case.

And pointing out that it would be much more useful to a jury for a judge to specifically address the mental element that is required for each specific element in the offense.

And a federal judge is at a disadvantage over a state judge, and I have cited an Illinois case, the Valley Steel case, as an illustration of how much easier this job is for a judge in a state that's adopted the Model Penal Code where you can look at the rules of construction and find, if it's not expressly put in there by the legislature, find what the mental element is as to each element of the offense.

Unidentified Justice: Assume the law was as you suggest, that the Government must establish that proof.

If on the whole record it is perfectly clear that that knowledge was possessed by the defendant, then would not the absence of the instruction you request be a harmless error?

William Thomas Huyck: Well, I think that question is particularly raised in this case because of what I pointed out in my reply brief, that in fact, his knowledge was argued to the jury, even though the judge said that I couldn't argue it, the prosecutor argued it even though she didn't have to, and then I argued it responding to the prosecutor.

And so I think that--

Unidentified Justice: Then the jury--

William Thomas Huyck: --on that point, it clearly presents this question: is it sufficient to say that the jury must have decided that in the absence of an instruction, and I say no.

I think that it's a very important principle to uphold, that the jury listens particularly to the instruction of the judge, and may discard or not pay attention to the arguments of the lawyers, and look to the judge for the instruction on the law.

And I think that sometimes it seems that it's harsh to reverse a criminal conviction and have a new trial because of instructions, but I think that here you certainly don't have a harmless misinstruction, if it is a misinstruction.

It's very crucial.

Unidentified Justice: --Well, if on the whole record it's perfectly clear that he did have the knowledge that you say should be shown, isn't that enough?

William Thomas Huyck: No, because the jury when they got back to deliberate, they were looking at this instruction, they found that they did not have to find that he knew that it was in a manner in violation of the statute.

And the colloquy makes clear that the judge was clearly trying to make that distinction in these instructions.

I want to say something about the Yermian case.

The Government has pinned its argument very closely to this Court's decision last term in Yermian, trying to say that this statute is similar to Yermian, and the case should be decided in the same manner.

The text is different from the text, and the circumstances are different, and the case is not governed by the Yermian decision.

Yermian involved Section 1001, and you had the making of a false statement, and then the phrase

"in any matter in a jurisdiction of a federal agency. "

In that statute the phrase "in any matter" came at the beginning of the sentence before the word "knowingly".

That's a difference.

The previous statute, which the Court also said in a footnote also has a clear meaning that it doesn't apply to that phrase, the phrase did follow the word "knowingly", but they were separated by a comma.

I think that... and even the statute where it came at the beginning, four members of this Court felt that it wasn't clear it was Congress' meaning that the word "knowingly" did not apply to that phrase "in any matter".

But I think more importantly, the background of this case makes it crucially different.

There's two steps involved here to the Government's argument, and they don't really follow through on the second step.

It's one thing to say did Congress mean the word "knowingly" to apply to this phrase "in any manner", but if you agree with them that it doesn't, then you have the next question: what mental state should be applied to that element of this offense?

And this Court has clearly stated on several occasions... in the Bailey case, in the United States Gypsum case, and in the Morissette case... that the mere omission of a word defining the mental intent does not mean that it's strict liability.

It does not answer the question just to say there isn't any word there defining the mental element.

And I think that it's--

Well, so the Yermian court then went on and relied on a couple of elements that are not present in this case, the first being that it was a jurisdictional element.

And the Court clearly stated that jurisdictional language need not contain the same culpability requirement as other elements of the offense, quoting this Court's opinion in Feola.

And the fact that that was a jurisdictional element in Yermian clearly was a point of distinction for this Court in trying to discern the meaning of Congress in the statute.

Secondly, Yermian had a particular... the statute had a particular legislative history which was debated at length in both the majority and dissenting opinions, which we do not have here... a dissenting opinion where the statute originally made it clear that it was only a defendant that knew he was defrauding the United States could be convicted, and then during... because of the vicissitudes of that statute, that language had been taken out, the issue being how much of the language had been taken out.

So that the analysis... in other words, my central point is the analysis doesn't stop once you say that Congress didn't mean "knowingly" to apply to this phrase "in any manner".

The analysis does not stop there.

Then you have to look to other principles and... principles of construction, the background of the statute, and so forth.

Now--

Unidentified Justice: Again, Mr. Huyck, do you... does one who presents coupons, a violation of (c), is he somebody who has acquired or possessed coupons in violation also of (b)?

William Thomas Huyck: --It could be the same person, and it could be different persons.

Unidentified Justice: Well, and if (c) requires a specific intent and (b) does not, then why would the Government ever prosecute under (c)?

Why wouldn't it always prosecute under (b)?

William Thomas Huyck: Well, I think that that's true, that you could... if there were a grocer presenting coupons, he would be... he would by definition violate both sections certainly.

He's acquired them.

Unidentified Justice: Well, then the Government... if that's so, the Government could prosecute all these cases under (b) because it doesn't require proof of specific intent.

Then they'd never have to prove specific intent at all, would they?

They'd never prosecute under (c).

William Thomas Huyck: I think that would be a possibility.

I imagine that--

Unidentified Justice: Only a possibility?

William Thomas Huyck: --You might imagine some situations, but I certainly cannot offhand imagine a situation where a grocer presenting coupons under (c) who wouldn't be guilty of violating (b) because he acquired the coupons.

Unidentified Justice: Could your client have been prosecuted for... under the second provision?

William Thomas Huyck: The subsection (c)?

Unidentified Justice: Yes.

William Thomas Huyck: No.

There's... actually, there's nothing in the record about what my client did with these food stamps.

Unidentified Justice: There's no charge that he presented.

He was charged with acquiring.

William Thomas Huyck: Acquiring, that's it.

No, there's no--

Unidentified Justice: Your complaint is lack of your instruction?

Is that your only complaint?

William Thomas Huyck: --Yes, although I would... if it was sent back for a new trial, I would certainly be content for an instruction specifically addressed to this element; that the jury be instructed that the defendant had to know that it was--

Unidentified Justice: You didn't ask for that, did you?

William Thomas Huyck: --In other words, I don't think I would offer my specific intent instruction on a retrial.

On a retrial, having more time to consider it, I would have a more precise instruction.

Unidentified Justice: You'd want more.

William Thomas Huyck: Yes.

Unidentified Justice: I thought--

William Thomas Huyck: Thank you.

Chief Justice Warren E. Burger: Mr. Rothfeld.

ORAL ARGUMENT OF CHARLES A. ROTHFELD, ESQ., ON BEHALF OF THE RESPONDENT

Charles A. Rothfeld: Mr. Chief Justice, and may it please the Court:

As one of Justice White's questions suggested, the dispute in this case is not about whether Section 2024(b) contains a scienter element of some sort.

Neither of the proposed readings of the statute would impose strict or absolute liability.

Under either reading the prosecution will have to prove that the defendant knew that he was handling food stamps and was aware of the nature of his activities.

Neither reading of the statute would permit a defendant to be convicted for accidental or inadvertent conduct.

And this is a significant limitation on the reach of Section 2024(b), because it means that only defendants who were aware that they were engaging in certain types of foodstamp transactions, which is the type of activity that almost everyone realizes is subject to some sort of federal regulation, only a defendant of that sort would be subject to conviction.

So the dispute here is a narrower one: whether in addition to these other limitations in the statute, Congress wanted to take the further very unusual step of excusing a defendant whenever the Government is unable to establish its familiarity with the law.

Unidentified Justice: Mr. Rothfeld, in light of the comment you just made, under (b), someone who deals in food stamps knowing that they're food stamps, okay, can be convicted, can't he?

He doesn't really have to know much more about it.

Charles A. Rothfeld: That's correct, Your Honor.

He would have to be aware that he was aware of the nature of his action and what he was doing, that he was using or acquiring it, and that they were food stamps.

Unidentified Justice: Now, you say he would have to be aware of the nature of his action.

Really all he has to be aware of is that he was acquiring... the things he was acquiring were food stamps.

Charles A. Rothfeld: That's correct, Justice Rehnquist.

Unidentified Justice: Any more awareness required?

Charles A. Rothfeld: Simply that he was conscious of his activity with that, and so that any accidental conduct would not fall within the scope of the statute.

But basically I think what you've described is correct.

Unidentified Justice: Well, if someone sent it to him in the mail and he opened the mail and found the food stamp, he probably wouldn't be guilty of anything, would he?

Charles A. Rothfeld: I think in the situation that you describe the language of the verbs in the statute impose some type of limitation as well.

It's not clear that person would have acquired a stamp within the meaning of Section 2024(b).

Unidentified Justice: Why not?

I don't understand that.

If you get a letter, and you open it, and you take the contents out, you've acquired the contents, haven't you?

Why wouldn't that violate the statute?

Charles A. Rothfeld: Well, it's conceivable that it would, Your Honor.

Unidentified Justice: I mean you say that's not an acquisition?

Charles A. Rothfeld: Well, there is little interpretation of the verbs in the statute.

I think someone who obtains a stamp as you describe it and keeps it, has acquired the stamp.

It is in his possession, and he has acquired it.

I think someone who picks a stamp up on the street or finds it in his pocket and throws it away or gives it to the Department of Agriculture perhaps does not acquire the stamp.

Unidentified Justice: If he throws it away, he violates the regulation, doesn't he?

Charles A. Rothfeld: Excuse me, Your Honor.

Unidentified Justice: If he throws it away, doesn't that violate a regulation?

Charles A. Rothfeld: If he--

Unidentified Justice: Disposes of them in any way.

If he tears them up, it violates the regulation, doesn't it?

Alters them in any way?

Charles A. Rothfeld: --That would be true, Your Honor.

Unidentified Justice: If he got an envelope with stamps in them and tore them up and threw them in the wastebasket, under your view he'd commit the crime, I think.

Charles A. Rothfeld: That's true, Your Honor.

But I should add that that might also very well be true under the petitioner's proposed reading of the statute, so long as--

Unidentified Justice: Yes, but he wouldn't commit a crime if he didn't... the envelope comes in the mail; he doesn't open the envelope.

Charles A. Rothfeld: --Then he would not have committed a crime.

Unidentified Justice: He just tears it up.

Charles A. Rothfeld: That's right.

Unidentified Justice: He says this is junk mail; I'll tear it up.

He just happens to be tearing up food stamps.

Charles A. Rothfeld: That's correct.

But he would not know that he was doing it to food stamps, which is an element of the statute under either reading.

Unidentified Justice: But if he opened the envelope and tore them up, then he would be doing it.

Charles A. Rothfeld: If he... if he--

Unidentified Justice: If he knew they were food stamps.

Charles A. Rothfeld: --knew they were food stamps, Justice Rehnquist.

If he simply looked... if it didn't register on him that they were food stamps, or he hadn't seen food stamps and didn't know what they were, he would not be subject to conviction.

Unidentified Justice: Well, he could probably... and you might have a tough time proving that he intended or knowingly received food stamps, if all he did was get it in the mail and open the envelope.

Charles A. Rothfeld: I think that's correct, Justice White.

And again, to the extent that such a person could be prosecuted, it is likely that... well, there is some possibility that he would be subject to prosecution under either reading so long as he was aware... if he happened to be familiar with the food stamp regulations, but did not know that it was a crime to tear up an excess food stamp, he would nevertheless, under the petitioner's reading, be subject to prosecution, because the line that would be drawn under the petitioner's reading is not one between people who are in some sense morally culpable and people who are not.

It's simply a line between people who are familiar, happen to be familiar with the contents of food stamps.

Unidentified Justice: Well, in this case it'd be a line between somebody who doesn't know it's wrong to tear up the food stamps and somebody who does.

I bet there are a lot of people who don't know it's wrong to throw away food stamps, who haven't dealt with them regularly.

I'm not sure everyone knows that.

Charles A. Rothfeld: Well, I'm not sure that situation arises with any frequency, Justice Stevens.

Unidentified Justice: But that's the kind of thing you want to cover.

You want to cover the people who do not know that what they're doing is unlawful.

Charles A. Rothfeld: We want to cover, I think, the situation--

Unidentified Justice: Or people you can't prove that they knew it was unlawful.

Charles A. Rothfeld: --That's correct, Justice Stevens.

And I think the situation in this case is an example of the type of people who realistically would fall within the reach of our interpretation of the statute.

Unidentified Justice: May I ask you to comment?

I hadn't really thought much about it before Mr. Huyck's argument, but he cited the Gypsum case... you remember the antitrust case... with no word of knowing anything in it at all.

And the Court held that in the criminal context, the general rule is you have presumed some kind of mens rea requirement.

Why isn't that case dispositive?

Charles A. Rothfeld: Well, I think there are several responses to that, Justice Stevens.

First, the type of thing that the Court was doing in Gypsum was preventing the offense from really being almost a true strict liability offense.

The Court in Gypsum did not require that the defendants be aware that their activities were a violation of law.

It simply required that they be aware that their activities would have the prohibited effect of inhibiting competition, which is analogous to the type of requirement we are contending for, that the defendant be aware that he is engaging in transactions involving food stamps.

I think Gypsum did not and the court of appeals in this case did not take the further step of requiring proof of familiarity with the requirements of the statutory scheme, which would be a very unusual thing for the court to do.

As the Court put it in the International Minerals case, which is probably the case most similar to this involving interpretation of a similar statute, that the general principle to be applied, termed a rule in the International Minerals case, is ignorance of the law does not excuse misconduct.

And that is the type of requirement that the petitioner's contending for: knowledge of the existence of regulations and what those regulations provide.

Unidentified Justice: Well, you don't get into all of these isolated cases like the Sullivan law in New York, which is absolute liability for possessing a weapon, and they've lived with that for 30, 40, 50 years.

Charles A. Rothfeld: Absolutely.

Unidentified Justice: And nobody's had too much trouble with that.

Charles A. Rothfeld: I think the Court has repeatedly upheld the--

Unidentified Justice: It's been upheld, and I'm talking appreciably in New York nobody raises any question about it.

Charles A. Rothfeld: --I think--

Unidentified Justice: And some people are completely innocent.

In one case a woman picked up the gun on a subway, and she just put it in a paper bag and carried it to the precinct.

And the sergeant said wait a minute, locked up.

She got out.

Charles A. Rothfeld: --I think that the Court's cases have consistently upheld the validity of statutes such as the one you've described in which knowledge... certainly knowledge of wrongdoing and in some cases knowledge really of any sort is not required.

Unidentified Justice: Well, may I ask, if you prevailed today, I gather there'd be no reason for you to bring any more prosecutions under (c), will there?

Charles A. Rothfeld: No, that's not correct, Justice Brennan.

Subsection (c) is aimed at--

Unidentified Justice: I know what it's aimed at, but if one presents food stamps for redemption, hasn't one acquired or possessed them?

Charles A. Rothfeld: --Certainly they have acquired or possessed them, but it would not necessarily be in a manner not authorized by law.

And to give you an example, if a grocer operates a large grocery store with many clerks who are taking food stamps, the clerk takes the food stamp in exchange for an item that he knows is an improper one, so he has committed a violation.

But the proprietor of the store, the person who is actually going to present the stamp for redemption, would have no idea that the stamp had been accepted in improper manners.

So far as he knows, it's collected in the normal course of business.

Unidentified Justice: Well, that would be... that would give him a defense under (c).

Charles A. Rothfeld: Under (c), that's correct.

Unidentified Justice: But it would not give him a defense under (b), under your view--

Charles A. Rothfeld: Well, he was not--

Unidentified Justice: --would it?

Charles A. Rothfeld: --I think it would, Your Honor, because he would not be the individual... we don't contend that subsection (b) implies respondeat superior liability on the proprietor of the food store who does not himself accept the stamp.

It has to be someone who knowingly accepted the stamp, and I think that is the grocer who accepts it.

The proprietor who then finds the stamp in his possession--

Unidentified Justice: Let me back up.

Now, the proprietor... I know you're not talking about respondeat superior.

But I own a grocery store.

One of my clerks violates the law and gets the stamps.

He gives them to me, and I don't know he's done anything wrong, but I am not authorized to have them, and I now pass them on to the government for money.

I have not violated (c) because I didn't know they were acquired illegally, but I have violated the regulation under (b), have I not?

Charles A. Rothfeld: --I'm not... I don't think that's correct, Justice Stevens.

Unidentified Justice: I have knowingly transferred the coupon.

That's what... I didn't know it was not authorized by law.

But I knowingly... I knew it was a food stamp.

I came right within the square language as you read it.

Charles A. Rothfeld: Well, the transaction between you, you as the owner of the food store, and your clerk is one that is authorized by law.

I think it would be the same thing, a clerk who accepted a food stamp from someone who had stolen it, for example, and then went into a food store and engaged in a permissible transaction, that clerk would not be subject to liability because the manner of the transaction was an authorized one.

It would be the individual who acquired the food stamp in the improper way who would be subject to prosecution.

Unidentified Justice: Let me just ask you, supposing one of my clerks is in some kind of a counterfeit operation.

He gives me a whole bundle of legitimate food stamps, but they've either been stolen or acquired in an illegal way.

Do the regulations authorize me to turn those into money?

Would I violate a regulation if I turned them in, or could I just go ahead and sell them and keep the money?

Charles A. Rothfeld: Well, you certainly couldn't go ahead and sell them if you--

Unidentified Justice: Because the regulations prohibit me from selling them, isn't that right?

Otherwise, why can't I keep the money?

Charles A. Rothfeld: --Well, I... the manner in which the grocer is redeeming them... he has accepted them in the normal course of business and is presenting them to an institution which is authorized to redeem them for him, and this is all in a manner that is authorized by law.

Unidentified Justice: Then why can't he keep the money?

Charles A. Rothfeld: Well, I'm not sure actually in that case, Justice Stevens, what the remedy would be, whether the remedy would recognize the grocer--

Unidentified Justice: The remedy would be, under your interpretation of the statute, he'd go to jail.

That's as I read it.

Under your interpretation of (b).

Charles A. Rothfeld: --Well, no.

Under our interpretation, the grocer would not go to jail.

People who improperly acquired the food stamps in the first place would go to jail.

And I think that in fact that the structure of subsection (b) and (c) provides significant support to our interpretation of the statutes.

Congress obviously intended there to be some sort of distinction between the reach of the two statutes.

The two statutes are written at the same time, and both are obviously addressed to the misuse of food stamps.

Unidentified Justice: Let me change my question.

Supposing my grocer has this big bundle of illegally acquired food stamps.

He's got them in his desk drawer.

He thinks they're perfectly lawful.

Is he now violating the statute?

Somebody walks in on him.

They find the food stamps there, and they got to him through his subordinate who had gotten them illegally.

He gave them to the boss.

The boss has them in his desk.

He possesses them.

Is he in violation of (b) or not?

I ask you first before the man tells him, and then later on a man comes in and tells him by the way, they're all stolen.

Does that make any difference on his liability?

Charles A. Rothfeld: Well, I'm not sure that he would be liable under... certainly in your first instance our position is that you would not be liable under (b), because the manner in which he had acquired them was an acceptable transaction.

Unidentified Justice: He got them from a subordinate who'd stolen them and brought them into the boss and said here are a bunch of food stamps, and he possesses them.

That's the charge now.

He possesses.

Is he possessing them illegally?

Charles A. Rothfeld: Well, let--

Unidentified Justice: And if he's not, does he start to possess them illegally when somebody tells him they're all stolen, you know?

Charles A. Rothfeld: --If the... well, I think to answer your second question first, yes, I think he would be at that point, because he would know that he was possessing them.

Unidentified Justice: Illegally.

Now, before he was told, all he knew was that he possessed them, but that's not illegal, you say.

Charles A. Rothfeld: Well--

Unidentified Justice: It seems to me the critical difference in your view is his knowledge.

Charles A. Rothfeld: --No.

Well, I don't think that's so, Justice Stevens.

I think the critical phase from our perspective is acquisition in a manner not authorized by law.

And to the extent that the grocer accepted the food stamps--

Unidentified Justice: Not just acquisition.

It's possesses, possesses.

Charles A. Rothfeld: --I think that either of those--

Unidentified Justice: And I'm asking you: a) whether the possession is unlawful when there are a bunch of stolen food stamps in his desk that he doesn't know are stolen; and b) does it become unlawful when he's advised that they're stolen food stamps?

And I really don't know your position.

Charles A. Rothfeld: --Well, I think in the instance in which he has no knowledge of any sort except that he has food stamps--

Unidentified Justice: He knows they're food stamps, and he knows he possesses them.

Charles A. Rothfeld: --And he knows that he possesses them.

I think he would not be liable under subsection (b) under our analysis of the statute, because again I return to the phrase he has accepted them in a manner authorized by law, which is--

Unidentified Justice: How would it help you if you used stolen money orders in place of the food stamps in Justice Stevens' question?

Charles A. Rothfeld: --Well, I'm not sure there is a federal statute which would--

Unidentified Justice: A federal statute of having stolen money orders?

You know of no such statute?

Charles A. Rothfeld: --Certainly, Justice.

Unidentified Justice: You'd better hurry up and pass one.

Charles A. Rothfeld: I think actually your hypothetical demonstrates our point.

If he knew that they were stolen food stamps, there certainly is a statute which makes known possession of stolen property illegal; and if he knew that they had been stolen, then he would be guilty under the statute.

Unidentified Justice: Well, all they were were money orders.

Nobody told him they were stolen.

Charles A. Rothfeld: If he had no--

Unidentified Justice: Nobody told him they were stolen.

Charles A. Rothfeld: --In that case, Your Honor, he would not be, so far as I know, guilty under any federal statute if he had possession of a property having no knowledge that it was stolen.

And I think the difference in the language of that sort of statute and the language of subsection 2024(b) is the knowledge element in the statute Justice Marshall has used as an example and 2024(c), in each case explicitly makes knowledge of impropriety the key to conviction.

The knowledge element in section 2024(b) which precedes the prohibited conduct but does not precede the 2024(c), does not make that type of distinction.

And I think that when Congress wrote the two statutes... there's very little discussion in the legislative history, Justice Stevens, that addresses the problem we've been discussing, so it's not clear to me that Congress focused on--

Unidentified Justice: This brings us back to the colloquy earlier in the argument about the difference between drugs or guns or things.

I mean you can see that if you just possess drugs, that's a crime.

You don't have to know there's a law against possessing drugs, but from the nature of the item.

But people can possess food stamps and not have any idea that they're doing anything unlawful.

But under your reading of the statute, they'd go to jail.

Charles A. Rothfeld: --Well, it's... where we differ with you, Justice Stevens, is the suggestion that they would not have any idea that they were doing some unlawful.

Unidentified Justice: Our hypothetical was the clerk in the grocery store was the crook, and he delivered the stuff to the boss.

That's how you differentiated between (b) and (c).

Charles A. Rothfeld: But in that situation the boss--

Unidentified Justice: Knows he possesses food stamps, but he doesn't know it's in violation of any regulation.

And is not that the classic example of what you say the statute applies to?

Charles A. Rothfeld: --I think the classic example of what we say the statute applies to is a situation such as the one here where someone... and I think--

Unidentified Justice: Yes, if it modifies "acquisition", it also modifies "possesses" in the same way.

You can't--

Charles A. Rothfeld: --But I think the difference is a significant one, because your hypothetical is concentrated on a grocer who is a participant in the food stamp program who has authorized methods of acquiring food stamps and has acquired the stamps that you hypothesized have been stolen in the court--

Unidentified Justice: --That's exactly the person I'd be concerned with.

That's the reason for having a mens rea requirement in criminal law is to be sure you don't get innocent people sent to jail.

They should know they're doing something wrong before you send them to jail.

Charles A. Rothfeld: --And that is why, Justice Stevens, we think that Congress made the distinction between 2024(b) and 2024(c).

In the situation you hypothesize the grocer who has acquired the food stamps would be made liable really under respondeat superior theory.

It would be strict liability, because he would have acted in the normal course of events in an authorized manner, which is acquiring these foods stamps from a clerk who has presented them to the grocer.

That is authorized by the regulation, and he has done that.

He has acted in an authorized manner.

Unidentified Justice: Yes, but you keep avoiding the point, would you not agree that he would possess them in violation of a regulation under those facts?

Charles A. Rothfeld: Well, I'm not sure that he would, Your Honor, because possession is a strange word within the group of words in the statute.

There is no... really no authorized manner in the statute defining how to possess a food stamp.

There are descriptions of how to apply for food stamps, how to use food stamps.

But it's difficult to say that someone, once having acquired a food stamp, is possessing it in a manner that is or is not authorized by law.

And that, I think, is the problem is why your grocer hypothetical presents a difficulty.

I think that your suggestion that someone should not go to jail for something that they had no control over is taken care of in most examples under section 2024(b).

Someone who acquires a food stamp in whatever manner, say to use the facts of this case as an illustration, someone offers to sell a food stamp to a nonparticipant in the food stamp program or to a participant in the food stamp program.

That person, even if the nonparticipant has no detailed awareness of the requirements of the Food Stamp Act, nevertheless, I think it was the congressional view, and it certainly seems a reasonable view, that person would have some suspicion that food stamps are to be used by low income families and acquired by low income families for certain purposes.

Certainly any reasonable person would realize that there is some doubt about the propriety of acquisition of a food stamp in that manner, which is not true of the grocer you hypothesized, because he has accepted it in a manner which is authorized by law.

He has accepted it from his employee.

I keep returning to that--

Unidentified Justice: So all you're proving, all you're suggesting is that in the appropriate case it's easy to prove the requisite intent, and it's hard to prove it in a case such as the one I hypothesized.

That's exactly why Congress would probably impose an intent requirement.

I've taken too much of your time.

Charles A. Rothfeld: --Well, I think that your questions lead to an important point, which is the question of will people have any idea that what they're doing is wrong, what they're doing is potentially punishable or subject to federal regulation.

And I think that the vast majority of cases in which our interpretation of the statute will apply, I think in probably all cases that will be true, certainly for a huge portion of people who come in contact with food stamps, which are the participants in the food stamp program, people who accept food stamps.

They have been informed by the Department of Agriculture, by statute and regulation they must be informed of all the requirements of the food stamp program.

So all these people presumptively are aware of the proper means for acquiring food stamps and are aware if they acquire them in a manner that is not authorized by law.

And as for nonparticipants, it would be extremely surprising to find that anyone has any doubts, anyone walking along the street who's offered food stamps, any similar situation that that person has any doubts that the acquisition of food stamps may well be suspect and is certainly likely to be subject to some sort of federal regulation.

And to the extent that anyone has any doubts about that, the stamps themselves have enough tangible reminders to, I think, make anyone hesitate before engaging in a food stamp transaction.

They are marked nontransferable.

Food stamp booklets carry the warning that improper use is a felony.

Food stores by statute are required to post signs warning against food stamp abuse.

And I think given all of these circumstances, it is reasonable to treat a person who actually acquires a food stamp in some manner that's not authorized by law as being on notice that his activities might be regulated and might be suspect.

And I think I'd return to a point that was alluded to earlier, the question if misignorance of the law excusing this conduct.

And the Court has repeatedly suggested, as Justice Marshall's question indicated, that knowledge of the existence of a regulation, as in International Minerals--

Unidentified Justice: Isn't there something to the your opponent's contention at least that isn't completely disposed of by saying it's an ignorance of the law defense; that there the statute itself in one of its clauses speaks of awareness or what have you and the fact that it's not permitted?

Charles A. Rothfeld: --There's no doubt that Congress can and has made awareness either of the law or of some legal attendant circumstance an element of a defense, and I think Congress did that, for example, in 2024(c) where it made knowledge of some type of impropriety.

But generally when Congress does that it signals its intention explicitly.

We cite a number of examples in our brief at page 17 where Congress has either expressly made ignorance of the existence of some body of regulations a defense to a criminal charge, or other statutes when Congress has wanted to make possession or acquisition of a certain type of property turn on knowledge of the law or knowledge of the legal status of the property.

It has generally done so by using... either making intent to defraud an element of the crime or, as in 2024(c), by making explicit the requirement that the prosecution prove the defendant's knowledge of the type of property he was dealing with.

But section 2024(b) does none of those things.

It's simply a flat declaration that knowing conduct, if not authorized somewhere in the food stamp laws or in the implementing regulations, is a violation of law.

Unidentified Justice: Well, but don't you think that the language you're just talking about is... when you add to it the language

"in any manner not authorized by this chapter. "

is quite different than just a flat prohibition that

"whoever knowingly uses, transfers, acquires, alters or possesses coupons or authorization cards in any manner. "

period.

I mean there you do have strict liability regardless of any knowledge.

But when you add to it the language

"not authorized by this chapter of the regulations. "

you've certainly brought in some kind of additional element.

Charles A. Rothfeld: Well, there is no doubt that some type of knowledge has been made an element of the offense, but I think the language of 2024(b), if construed the way petitioner suggests, would lead to peculiar consequences, given its use of the

"any manner not authorized by law. "

phrase, which is sort of an open-ended phrase.

It would require the prosecution to prove, if the requirement is taken literally, that the defendant knew that his actions were not authorized by any existing provision of the Food Stamp Act or of the implementing regulations.

And has been suggested in some circumstances, some cases, the defendant will have acted in such a suspicious or furtive way that the jury will be able to infer circumstantially that what he must have known what he was doing was wrong.

But that will not always be the case, and the facts here where the defendant seriously contended that he was unaware of the requirements of the food stamp law illustrate what can happen if a knowing illegality element is read into the statute given this open-ended language.

And here the defendant was involved, concededly involved in purchases of large quantities of food stamps for a substantial discount.

That is undoubtedly the type of action that most people would suspect to be of questionable propriety, but it would not be enough for conviction if there is a knowing illegality element in the statute that a reasonable person would have doubted the... had doubts about the legality of the defendant's action or that the defendant himself had doubts.

The Government would still be required, so long as the defendant could credibly claim that he had never read the food stamp laws or been told of their contents, the Government might well not have met its burden of proving that the defendant knew that no provision of law or regulation authorized his activities.

That is a very peculiar burden to place on the Government, and the court of appeals decision by declining to read such a requirement into the statute essentially has simply made it impossible for individuals who engage in these questionable food stamp transactions to be able to immunize themselves from liability by remaining ignorant of the nature of the food stamp law in the implementing regulations.

And I should add one very brief point which I think strongly supports the court of appeals decision, and that is the nature of the Food Stamp Act as a whole, and the other provisions of the Food Stamp Act which impose an enormously strict series of requirements and potential penalties on everyone who can be expected to come in contact with stamps to prevent every conceivable misuse of food stamps.

We set out in our brief this very fantastically complex and burdensome series of requirements, and it's very difficult to believe that Congress would have imposed these burdens on everyone who might possibly have any legitimate reason to come into contact with a stamp, and then allowed someone to engage in what everyone would realize to be a doubtful transaction and be able to avoid liability because he never bothered to learn the elements of the food stamp laws or its implementing regulations.

The nature of the Food Stamp Act I think also gives 2024(b) the characteristics that the Court has said repeatedly are typical of statutes in which Congress has not included a knowing illegality element.

And I think this responds to your basic point, Justice Stevens, about the danger of putting someone in prison who doesn't know what he was doing was wrong.

I think the presumption the Court has applied in cases like Gypsum and Morissette, when Congress has legislated against the background of common law offense, it is understood, unless it signals its intentions to the contrary, that it did not mean to direct the statute at anyone other than blameworthy defendants.

But that is not necessarily the presumption of statutes that have no common law analog, that, as Justice Blackmun along the court of appeals termed are statutes of prohibition rather than statutes of punishment that are designed to prevent some significant regulatory injury, and of particular importance, that operate in an area such as the food stamp area where certainly anyone who comes into contact with a stamp has a good idea that there is regulation.

These are not, as Justice Rehnquist suggested, these are not normal articles of commerce that everyone comes across every day, and they should be on their guard.

Now, given the nature of the Food Stamp Act, which allocates with as much precision as possible the necessary number of coupons to individuals in need, any violation of the Act's requirements, whether intentional or whether or not the person knew he was violating the Act's requirements, will detract from the achievement of the congressional purpose by necessarily detracting from the assistance being provided to the recipient household.

Unidentified Justice: But you do agree that subsection (c) requires specific intent.

Charles A. Rothfeld: Well, specific intent I think is a confusing phrase.

Unidentified Justice: Or whatever... mens rea, at least knowledge of wrongdoing.

Charles A. Rothfeld: Knowledge that the stamps were acquired in the manner described.

He may not know that his redemption of the stamps acquired in that manner subjects him to criminal penalties.

But we certainly acknowledge that, because we think Congress was concerned with precisely the point that we discussed at length before.

It did not want someone who had no reason to be on notice that his actions were suspect to be able to be subjected to criminal liability.

I think it hardly seems unfair in the vast majority of imaginable cases that someone who is engaging in questionable food stamp transactions could be subjected to criminal penalties.

And given the enormous complexity of the Food Stamp Act and the congressional purposes, on the crucial question of the case, which is congressional intent, there is no reason to think that Congress would have wanted someone who engaged in a harmful food stamp transaction that he should have suspected to be of questionable validity to be able to escape punishment by remaining ignorant of the requirements of the law and the implementing regulations.

Thank you.

Chief Justice Warren E. Burger: You have four minutes, five minutes remaining, Mr. Huyck.

ORAL ARGUMENT OF WILLIAM THOMAS HUYUCK, ESQ., ON BEHALF OF THE PETITIONER -- REBUTTAL

William Thomas Huyck: Thank you, Your Honor.

I do not agree, of course, with the Government that Congress has put a tremendous burden on the Government in proving a case that they would have to prove knowledge of complex regulations.

What the Government has to prove is that the defendant knew that what he was doing was unauthorized, was in a manner nonauthorized.

That doesn't mean that he has to... it's no more difficult than proving criminal intent in any other case.

And the Government answers its own argument when it then, in response to the examples that were given about the possible reach of their interpretation, keeps coming back with the argument that reasonable people would have some suspicions in a case like this.

That precisely makes my point.

In any kind of case that the Government has any business bringing under this criminal provision, you have a situation... basic fairness dictates that you would have a situation where people would agree a reasonable person should have some suspicions, should have known that there was something wrong.

And in addition, you have the particular circumstance here of an enforcement program that gives extensive notice.

You have visits, warning letters, et cetera, et cetera.

So that it's particularly true in this case that wherever the Government is reasonably directing enforcement, this is not a tremendous burden to prove knowledge that they're violating the statute.

The questioning about the grocer just points out what the possible breadth of reach of the Government's interpretation is, and the regulations are very thick indeed, and the statute is very complex.

I, searching for an example, on page 25 of my brief I put in an example about a particularly complex regulation about an elderly person receiving an allotment because he was a separate household from people that he was living with.

And that's the same example.

If he didn't meet those criteria, he would be acquiring his food stamps in a manner not authorized by the statute.

The Government probably reasonably wouldn't prosecute such a person; but I think that we've got to give a reading to the statute that wouldn't allow such--

Unidentified Justice: How does that affect your client?

William Thomas Huyck: --Pardon me?

Unidentified Justice: Did your client get those regulations?

William Thomas Huyck: No.

That's--

Unidentified Justice: Of course not.

He wasn't interested in them, was he?

William Thomas Huyck: --That's an example of someone who could be prosecuted under the Government's example... reading of the statute; however, they probably never would.

But I think that the statute should be given the reading that Congress intended, reasonable requirement of proof by the Government that people--

Unidentified Justice: Mr. Huyck, in your view would an instruction by the court in this case telling the jury that if the defendant had reason to know the stamps were unlawfully acquired, would that have been sufficient in your view?

William Thomas Huyck: --Yes.

That would meet... I think here again is a place where the Model Penal Code is useful.

Unidentified Justice: So you don't think that it requires actual knowledge.

You think it should be read as though it said having reason to know is sufficient.

William Thomas Huyck: Yes.

I would commend to the trial judge the Model Penal Code's definitions here where they make allowance for that kind of knowledge.

Unidentified Justice: Of course, you're dealing with a statute where the adverb is "knowingly".

It seems to me you can very reasonably read the word "knowingly" into the second clause of the statute, or you can say there is no intent requirement, because "knowingly" isn't found in this.

But how you can say their having reason to know, which is nowhere found in the statute, I don't know.

William Thomas Huyck: Well, here again, if we're going to have an era where federal trial courts are going to more precisely instruct juries on mental intent than they have with this boilerplate instruction I used in this case, probably there's going to have to be some guidance.

And I think that in many states in this Union, I think 38 of them, they use the Model Penal Code.

We don't have a federal criminal code that does that.

But I think that this is a very good example of how using the considered opinion of the American Law Institute would bring about a good definition for a case of this type.

The question was asked whether United States Gypsum is dispositive here.

What I would like to point out about United States Gypsum is it's one of three cases... the Bailey case, the U.S. Gypsum case, and the Freed case... where this Court has addressed statutes where no intent term is set forth and has adopted the very reasonable positions of the Model Penal Code on what kind of mental elements should be reasonably found in a statute.

And I think that certainly the U.S. Gypsum case stands for the proposition that if it's a felony, and cites the Model Penal Code for this, you ought not to be sending unknowing persons to prison for a felony except in very limited circumstances.

And I think it's very clear that the only limited circumstances this Court has ever recognized are cases such as Yermian where you're talking about a jurisdiction, and the dangerous instrumentality cases.

Thank you.

Chief Justice Warren E. Burger: Thank you, gentlemen.

The case is submitted.

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United States v. Maze - Oral Argument, Part 2

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United States v. Maze - Oral Argument

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United States v. Maze

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72-1168_19731114-argument

Transcript:

Argument of Jewel S. Lafontant

Chief Justice Warren E. Burger: We will resume in United States against Maze.

Mrs. Lafontant.

Ms Jewel S. Lafontant: Mr. Chief Justice, may it please the Court.

First, I would like to develop a little more, the theory expressed yesterday afternoon that this case involves the substantial use of the mails or the use of the mails is as stated in Pereira incident to an essential part of the scheme.

It is significant to the respondent when on a cross country frolic representing himself as one Meredith to obtain goods and services, well knowing that the issuer of the card would not learn of the fraudulent scheme until the purchase invoices which within the use of business practices would be mailed from the merchant to the card issuer.

And according to the testimony, one hotel owner as a delay of two or three weeks and often longer before the merchants learned that the particular credit card is being used fraudulently.

There is no doubt from the record that this respondent used the mails in that fashion.

There’s no doubt that upon receipt of the invoices through the mails, discovery of respondent’s fraud would be uncovered.

However, if the card issuer was present with the merchant when the respondent presented the credit card, he would have been discovered immediately, and --

Chief Justice Warren E. Burger: On the other hand, if hypothetically, none of the motels or stores ever sent the vouchers in, the discovery would be indefinitely delayed would it not?

Ms Jewel S. Lafontant: That’s true.

Chief Justice Warren E. Burger: Is it your point that since this is an indispensable, that is the use of the mail, the routine process of bringing this to the notice of the credit company is an indispensable, integrated part of the whole thing and it’s --

Ms Jewel S. Lafontant: It’s inherent in the credit card system and without it he would not have been able to perpetrate this kind of fraud.

Chief Justice Warren E. Burger: Even though he didn’t -- even he though didn’t select the mail that is the right process?

Ms Jewel S. Lafontant: That’s right the fact that he selected it isn’t too important practice that has caused his activity created the cause of action which included the use of the mails which was a pertinent part, an essential part in and of credit card scheme.

And as you’ve indicated Mr. Chief Justice, the fact the mails were used delayed his detection.

Chief Justice Warren E. Burger: Did he justify in this case?

I don’t recall from the record.

Did he testify?

Ms Jewel S. Lafontant: Yes, he did testify Your Honor and he admitted the use of the credit card.

He admitted that BankAmericard belonged to Meredith and that he had taken it but he said that he had permission to use the credit card, as well as permission to use the automobile.

But with all the evidence that was adduced, the jury did not believe him and found otherwise.

In fact, Judge McCree of the Sixth Circuit said that the evidence was overwhelming.

The evidence that was submitted by the Government was overwhelming to show that this was a fraud and that he actually did not have permission to use the credit card.

Now, this case --

Justice Potter Stewart: Who ultimately was the victim of the fraud?

Who was defrauded?

I suppose these innkeepers and tradesmen were paid, weren’t they?

Ms Jewel S. Lafontant: I would assume that they were paid.

Justice Potter Stewart: Did they suffer an ultimate loss?

Ms Jewel S. Lafontant: No, I believe the ultimate loss would have been with the Citizens National Bank in Louisville, Kentucky who issued the card.

The merchants initially were out of their merchandise but the BankAmericard has to reimbursed them.

So, the ultimate true victim would have been the card issuer who does not get paid because even the cardholder is only obligated up to $50 and in some instances it’s not bad if he has dutifully notified the card issuer that his card has been stolen.

Justice Potter Stewart: So --

Ms Jewel S. Lafontant: In this case, he didn’t do that.

Justice Potter Stewart: So the loss was suffered by the Louisville Bank.

Ms Jewel S. Lafontant: Certainly.

Yes, Your Honor.

Justice Potter Stewart: Although the victim of the fraud -- victims of the fraud were the four people covered by these four counts innkeepers and others, who were through misrepresentation caused apart with their rooms or their services.

Ms Jewel S. Lafontant: That’s correct Mr. Justice --

Justice Potter Stewart: And that there was no -- the fraud was perpetrated therefore against the tradesman and innkeepers, wasn’t it?

Ms Jewel S. Lafontant: That’s true.

Justice Potter Stewart: And the loss of the Louisville Bank was hardly -- the Louisville Bank was not defrauded, was it because no misrepresentations were made to it?

Ms Jewel S. Lafontant: Well, I interpret this fraudulent scheme as beginning with the idea of perpetrating a fraudulent scheme and initially, the innkeepers were defrauded.

All the other things were steps in following that including a cardholder taking --

Justice Potter Stewart: Taking the card in the first place?

Ms Jewel S. Lafontant: Taking the cards from him and misrepresentation in the first place.

Justice Potter Stewart: In the first place but the --

Ms Jewel S. Lafontant: The cardholder himself was not actually defrauded but was all part of one fraudulent scheme.

Justice Potter Stewart: The fraud, the actual misrepresentation was made to the innkeepers.

Ms Jewel S. Lafontant: Certainly.

Justice Potter Stewart: And with respect to the first count at least, that fraud would have been wholly effective with or without any use of the mails, wouldn't it because as soon as the person walked --

Ms Jewel S. Lafontant: That’s true, Your Honor.

Justice Potter Stewart: -- as soon as this man walked out of the motel --

Ms Jewel S. Lafontant: He had defrauded --

Justice Potter Stewart: -- had he defrauded that innkeeper and therefore no use of the mails was involved or at all at that point, was it?

Ms Jewel S. Lafontant: Up to that point, that’s right.

Justice Potter Stewart: Now, your point is that he perhaps could not have continued to commit the other three offenses --

Ms Jewel S. Lafontant: Without having --

Justice Potter Stewart: With the exception of the delay occasion by the delay in the mails and incidentally your argument is not a very good advertisement for the Post Office Department.

Ms Jewel S. Lafontant: [Laughter Attempt] I think, Mr. Justice Rehnquist will agree with that.

Justice Potter Stewart: Since you emphasize the great delay.

But as to anyone of these counts, the fraud could have been complete without any use of the mail at all, is that right, certainly, as to the first count?

Ms Jewel S. Lafontant: Yes, especially as to the first count if he turned in the card and got the credit --

Justice Potter Stewart: Showed him the card and signed it whatever you do and so the bill was paid.

Ms Jewel S. Lafontant: And there was no use of the mails.

It would have ended right there.

Justice Potter Stewart: Ended right then and there without any use of the mail.

Ms Jewel S. Lafontant: Right.

But that is not our case in that --

Justice Potter Stewart: Well, your case -- but these are four separate counts.

If it had been one count and you could have said at one count or covering this long, this fairly extended frolic, as you call it, through interstate journey, and your argument were that he could not have continued his fraudulent, has continued his defrauding of these innkeepers except by the delay occasioned by the mails, that would be one thing but each one of these is a separate count.

Ms Jewel S. Lafontant: Well, I would be willing to even go further --

Justice Potter Stewart: And this was (Voice Overlap) to any one count the fraud was complete, was it not when the innkeeper extended the credit?

Ms Jewel S. Lafontant: If the use of the mails were not involved I would agree with that.

But if the use of the mails were involved even with the one transaction, I would go so far as to say that it would be violative of the mail fraud statute but that’s not our case.

Our argument here too is although there are four separate counts, we consider this as one unitary scheme developed from all of the evidence that was --

Justice Potter Stewart: But you indicted as well up to four separate defenses?

Ms Jewel S. Lafontant: Yes.

Justice Potter Stewart: But did he get one -- did he get apparent --

Ms Jewel S. Lafontant: Yes, five years each.

Chief Justice Warren E. Burger: Now going back to the hypothetical -- going back to the hypothetical I put to you, if for one reason or another the tradesman had not sent the vouchers into the bank, then the bank could never have been defrauded, could it, unless they made personal delivery by some other method than the mail?

Ms Jewel S. Lafontant: Hand-delivery.

I agree with you.

Right, that if the --

Chief Justice Warren E. Burger: So that the mail was an indispensable part of the fraud on the Louisville Bank, that is your point, is it?

Ms Jewel S. Lafontant: That’s correct.

Very definitely.

Justice Lewis F. Powell: Mrs. Lafontant --

Ms Jewel S. Lafontant: Yes, Mr. Justice Powell?

Justice Lewis F. Powell: Do you think the bank, as the ultimate loser here could have brought a civil action against the party who perpetrated the fraud?

The bank was the only body that did lose money in this transaction.

Ms Jewel S. Lafontant: Yes, I would say that he could have brought -- the bank could have brought a civil action against Maze, the respondent here.

Justice Lewis F. Powell: The bank that pays a forgery or the bank which is a victim of forgery may bring a civil action against the party who commits a forgery here.

Ms Jewel S. Lafontant: That’s right and I think that this is an analogous situation.

I believe that the bank could have brought a civil action against the respondent.

Justice Lewis F. Powell: It may have been a total effort --

Ms Jewel S. Lafontant: In fact, it may have been -- it would have been a few left for them, I’m afraid, because he -- one reason he was living with Meredith in the first instance was that he had no job and suppose he was looking for employment.

But the answer to your question is very definitely the bank could have brought a civil action against him.

This case --

Unknown Speaker: I gather, Mrs. Lafontant, that this new 70 legislation and the Truth in Lending Act --

Ms Jewel S. Lafontant: Yes.

Unknown Speaker: -- that makes crime of fraudulent use of credit cards but that applies only where the amount involved was over $5,000?

Ms Jewel S. Lafontant: That’s right.

In the 1970 Amendment, the law states that credit card, the misuse or unauthorized use of credit cards in excess of $5,000 is punishable.

Unknown Speaker: Well, I noticed in your footnote at page 37 of your brief, you suggest that as a matter of policy, just as it has been following something like this, that doesn’t include the $5,000.

Ms Jewel S. Lafontant: No, and -- no, it doesn’t.

It’s just that the Department of Justice in many of these cases has not prosecuted under the mail fraud statute as such but even where they do it has to be one of interstate commerce as this case.

Unknown Speaker: You say important credit frauds.

The policy prosecutes under the mail statute only important.

What’s important?

Ms Jewel S. Lafontant: Well, I don’t know the real interpretation of that but I would interpret important as an ongoing scheme more than one little act of a felon that might go and forge --

Unknown Speaker: But in any event, I gather that it’s not the policy, so will I only in the Truth in Lending Act of these cases?

Ms Jewel S. Lafontant: No, not at all and of course it’s been well-settled that one act can violate two statutes and these statutes are not conflicting in any way.

Justice Byron R. White: What was the necessity for the new statute?

If this statute governed, why did you need some more federal presence in that?

Ms Jewel S. Lafontant: From reading the congressional record, Mr. Justice White, I gather that because as credit card business had just mushroomed so quickly and banks were sending cards out all over the country even without people requesting them and that there was beginning to be such a problem.

The Congress addressed itself to the problem to make sure that anyone who misused a card would be punished.

They made it for $5,000.

I think Senator Proxmire had said that he talked with the Justice Department and they had suggested using the figure $5,000 because it would be very expensive to oversee all of the credit card cases under this section.

It doesn’t rule out the mail fraud section because you could be guilty of the 1970 Amendment Act and also mail fraud if it exceeded $5,000.

But the people under $5,000, we contend, are still covered by mail fraud because even though they passed this new law, there’s nothing in conflict.

There’s no talk of repealing the earlier law and I don’t’ think we can repeal the law by inference or implication or what we think went on in the minds of the lawmakers at that time.

Justice William H. Rehnquist: You could have some coverage under the Truth in Lending section where you didn’t have it under the mail fraud section too, couldn’t you be because all the Truth in Lending section requires is affecting interstate commerce?

Ms Jewel S. Lafontant: Yes, that’s true and then just the unauthorized use is efficient.

So it’s broader in the sense although it’s limited because of the $5,000 figure.

Unknown Speaker: Do you think the new Act was prompted at all by decisions such as the one in here in this case?

Ms Jewel S. Lafontant: No, I don’t.

All I can say is there’s nothing in the congressional record to indicate that they knew that there are any cases thought.

We’ve had at least 13 cases involving the mail fraud statute, most of them before 1970.

So that they should have been aware of it but there was no mention of it and the --

Unknown Speaker: And were those cases where the mail fraud statute was set to cover the transaction?

Ms Jewel S. Lafontant: Yes.

We have them in six of the jurisdictions, the second, third, fourth, fifth, seventh, and ninth.

All say that the mail fraud scheme embraces the credit card.

I mean the mail fraud statute embraces the credit card scheme.

The last case was -- it just came down October 17th of 73 in Osher in the Second Circuit which went along with the majority view.

I see that my time is up.

Thank you.

Chief Justice Warren E. Burger: Very well.

Mr. Warner.

Argument of William T. Warner

Mr. William T. Warner: Mr. Chief Justice, may it please the Court.

I want to respond directly to several points and contentions raised by Mrs. Lafontant, but with the Court’s indulgence I would like to do within the context of presenting two major considerations which I feel are important and are before the Court this morning in this case.

Now the first is the, what we consider to be other failure of the Government’s proof upon the issue of knowing use of the mails including the so called delay issue.

The second point is the reasonableness, propriety, and or the necessity of extending federal criminal jurisdiction to this case and other cases similar to it.

Now, I think it should be pointed out --

Chief Justice Warren E. Burger: Well, would it not be true, Mr. Warner, that if you left this local prosecution, there would be prosecutions in four states or three states, is it?

Mr. William T. Warner: It’s possible.

I think in this case --

Chief Justice Warren E. Burger: Well, there were, assuming that the fact proof is the same here, it would be potentially one suit with respect to each act of defrauding was it alleged in the indictment, am I correct?

Mr. William T. Warner: In this case, Mr. Chief Justice, I submit that it would to the extent that as Mrs. Lafontant pointed out the ultimate loser in terms of who ended up with the paying the bill in this case was the Citizens Fidelity Bank in Louisville, Kentucky.

They took the responsibility.

They had to pay these invoices.

Maze was caught in Kentucky.

He was caught 30 miles from Louisville and presumably as we cover in our brief and as a matter of record, the Kentucky statutes are more than adequate to cover every aspect of the so called scheme from the misappropriation or theft to the credit card right on through to the defrauding of the bank.

Now, the Sixth Circuit Court of Appeals opinion in this case, I think should be pointed out was not as broadly drawn as the Government contends.

It said that a very carefully drawn opinion and it said essentially that the Government did not prove in this case by the evidence of record that Maze could have foreseen or knew that mails would be used or that the mails were inescapably direct incident between the defrauding of the innkeepers and the defrauding of the bank.

Now, I think it’s significant to --

Chief Justice Warren E. Burger: How else, Mr. Warner, would the vouchers reach the bank in Louisville in the normal course of credit transaction?

Mr. William T. Warner: Well sir, in this case, there were four vendors who testified.

Two stated that they customarily used them in the mails.

They dropped them in the mails and they were sent in.

One said -- testified that they went through bank channels, that was the extent of this testimony and one vendor I believe was indefinite or stated he didn’t know.

So the proof was not --

Chief Justice Warren E. Burger: Would the banks not use the mail?

Mr. William T. Warner: Well, this is a question in this case that some of the Circuits have raised with respect to charging a defendant such as Maze with a detailed knowledge of the very complex and intricate commercial scheme.

I assume that the mails were used.

I would.

But there may be other ways.

I don’t know how the banks transmit matters of this type and maybe like they do checks through the mail.

Now, Mr. Chief Justice, in response on this proof issue, I think it’s significant in response partially to a question that you addressed to Mrs. Lafontant.

Maze did testify in this case.

In other way testified, in his own behalf, but he gave a statement to the Postal Inspector.

Now, neither the Postal Inspectors or the Assistant United States Attorney who tried the case addressed one single question to Maze on the knowing use of the mails or did he know or did he contemplate or could you know.

In order the Government introduced any other witness as on this issue as to how the mails are necessary incident of this type of fraud.

Now, also, I want to point out that at this point, that the Government contends that there are six circuits which support this so called per se doctrine that the fraudulent use of a credit card is per se the use of the mails.

Now, if my reading of the cases does not support this view, there are at least two Circuits, the Fifth certainly in the Adams case which was the fundamental case on the per se doctrine supports this view.

The Seventh Circuit does and perhaps, I am sorry, the Second Circuit in the Kellerman series of cases and most recently the Third Circuit in the Ciotti case.

Now, the other cases involved varying kinds of fraud. And as the Eighth Circuit Court of Appeals in the Isaac’s case in 1968 that the forms of fraud which are possible under the mail fraud statute are multifarious as human ingenuity can device, and I think that this should be kept in mind.

Now, the Government case on the knowing use of the mails issue, we submit is built on a series of presuppositions and assumptions.

Now, it’s long been the rule under our system of jurisprudence that we don’t convict people upon presuppositions and assumptions, and that this as were partially at least where the Government case failed.

Now, as I stated earlier in response to Chief Justice’s question, the trouble with the per se doctrine, that is the doctrine that the fraudulent presentation and/or use of the credit card per se involves the mail is that this imposes on the defendant a detailed knowledge of a very complex commercial mechanism.

And again, there is no proof in this record in this case.

Now, the Sixth Circuit in this case stated specifically that they were not holding that credit card abuse could never constitute mail fraud.

They stated in this case, in this case that the Government’s proof had failed.

Now, with regard to the alleged scheme, I think the facts are significant here.

The card was misappropriated stolen on April 10, 1971.

Now, Maze was arrested and in jail on May 9, 1971.

Now, there was no extensive long range scheme such as the one in the Chason case which is the Second Circuit case involving a man who obtained a credit card or series of credit cards and was engaged in procuring airline tickets or in the Ciotti case, Kellerman where you had long range extensive schemes where one credit card after another was used.

Now, also, the other cases that upheld use of the mails as part of the or as covered under mail fraud statute have involved other types of people, businessmen who submitted fraudulent statements for the purpose of getting credit.

The Pereira case, a very sophisticated person who as the Court knows had had frauded a widow over a long period of time.

Now, it is possible.

Now, I want to point out to the Court that I am not saying or arguing this morning that Maze didn’t know that the mails would be used.

The point is that the Government didn’t prove it.

Now, as long as we’re dealing as the Government is in presuppositions and assumptions, I think there are some other assumptions that could just as recently be made.

That Maze presumably could have counted on.

One, Mr. Justice Rehnquist, I think alluded to yesterday and that is the Chief Justice, the fact that the vendors themselves might for some reason delay a week or ten days sending in their invoices.

It’s possible that Maze could have known and counted on the fact that credit card issuer such as the banks customarily collects statements over a 30-day period.

Now, Maze first went to California, that invoice was sent in.

The bank didn’t bill him Meredith right away.

They waited until the end of the month, collected all his invoices, and sent them out.

Another presupposition which could be indulged in this case is that Maze could have counted on the fact of a possible breakdown in the Citizens Fidelity Banks lost card or stolen card procedure.

Obviously, it may take ten days to two weeks for the vendors themselves to be notified and in this case, one vendor did testify that it took three weeks.

Chief Justice Warren E. Burger: Your challenged to the Government’s position is, I take it, that the per se rule approach impinges on the presumptions of innocence by creating a presumption of some kind.

Mr. William T. Warner: Yes, sir that’s --

Chief Justice Warren E. Burger: Now, what if the courts took a different attack and this is, I just want to explore it with you --

Mr. William T. Warner: Yes, sir.

Chief Justice Warren E. Burger: You’re familiar with the rule that possession of recently stolen property gives rise to an inference which the jury may, if it wishes, draw from the totality of the evidence that he knew it was stolen.

That’s a common law type of development --

Mr. William T. Warner: Yes, sir.

Chief Justice Warren E. Burger: -- would it be unreasonable for the courts do you think instead of a per se rule to develop the rule that the possession and use of the stolen credit card creates a basis for inference of one comparable to that in the recently stolen property setting?

Mr. William T. Warner: I think it would be.

I respectfully submit that it would be unreasonable Mr. Chief Justice and I would point in that regard, dealing with such a presumption to the recent case of Rewis versus the United States, a 1971 case, involving the Travel Act.

And there, as the Court recalls, a gambler or a person running a gambling establishment in Florida just over the Georgia land was charged with a violation of the Travel Act and the basis of that prosecution was that he could reasonably foresee that people would travel interstate from Georgia to patronize his gambling establishment.

And the Court struck down that presumption and raised an interesting point that I think may be applicable here.

They stated that this so called foreseeability doctrine which is present in the Maze case is very troublesome when it applies to the Acts of others.

Now, in the -- with regard to possession of recently stolen property, there is the man with the property, he’s got it in his hands.

Now in the Rewis case, as the Court said, I think correctly in that case, that the person who is running that establishment --

Chief Justice Warren E. Burger: But the evidence in this case shows the possession of a recently stolen credit card and the evidence also shows the fraudulent use of it, you’d agree up to that?

Mr. William T. Warner: Yes, sir.

Chief Justice Warren E. Burger: And you say it would be unreasonable for a common law type of rule saying from at that point, the unexplained -- the unexplained situation would give rise to an inference?

I’m not talking about a presumption now.

Mr. William T. Warner: An inference, yes, sir.

Chief Justice Warren E. Burger: An inference that jury might draw if it wished?

Mr. William T. Warner: I think Your Honor, on the -- on the presentation of some evidence to the jury, there’s some proof as to how this could happen.

Chief Justice Warren E. Burger: Such a rule that I am hypothesizing would not -- would not get the Government’s home free by any means --

Mr. William T. Warner: Right.

Chief Justice Warren E. Burger: -- it would mean that there would have to be an instruction along this line.

Mr. William T. Warner: Well, I feel personally and I would submit to the Court that a holding or a doctrine which went the -- totally the other way from the per se doctrine in credit card cases, I think would be inappropriate and I think it’s got to be taken on a case-by-case basis.

And what we are in effect attacking here today is this per se doctrine.

I have one other point sir.

That is that it may not only be unreasonable, but I think in view of the existing state statute since it's a jurisdictional problem, which I want to get to shortly, that it may be unnecessary.

Now, there’s another problem again responding to your question sir.

I think that there is a flaw in logic here somewhere.

The Government says that because the defendant in this case, Maze intended the fraud that which was clearly a criminal act, and the jury so found that is not contested, but because he intended the criminal act, therefore, he intended an entirely separate criminal act which is the use of the mail to defraud.

And in my view, and I respectfully submit to the Court, the two just don’t connect.

Now, the second point that maybe and certainly is we feel applicable here is what we consider to be an unwarranted, unnecessary extension of federal criminal jurisdiction.

Now, it’s an elemental principle that federal criminal jurisdiction can be conferred only by express congressional grant.

Now, this principle does not and we do not argue here this morning, prevent the courts or the Justice Department in any way from a reasonable construction of a criminal statute, but in this case, it’s unnecessary and I’d like to outline why.

Now, in two recent cases, one I have already mentioned, the Rewis case and also in the case of the United States versus Bass which was also a 1971 case, the Court enunciated certain policies.

Now, I don’t submit that these cases are analogous to the Maze case because both of those cases involved a single statute.

Here as Mr. Justice Brennan has pointed out there are in effect two statutes that we are dealing with, but the Court there, in those cases stated that federal jurisdiction should not be unnecessarily injected in the areas which would affect this sensitive state federal balance.

Now, the policy apparently from the teaching in those cases is that without a clear statement from the Congress that no such expansion would be permitted or sanctioned.

Now, we submit in this case, in the Maze case that there has been such a clear statement by Congress and that is in the form of Title 15, Section 1644.

Now, I want to call the Court’s attention to the legislative history of this particular statute which is set forth in full at page 17 of our brief, but I think it’s clear from that legislative history as recited in the Congressional record from statements and remarks made by, particularly by Senator Long on the Florida Senate that the Court, I’m sorry, the Congress felt that there was no adequate protection for credit card fraud.

Now, there’s one other significant point with regard to the enactment of this legislation.

The original Senate Bill as was passed was Section 134 of Title 5, I believe of the Truth in Lending Act.

The original Senate Bill had no jurisdictional limitation other than the interstate commerce requirement.

The Justice Department came in and said, “We want a $5,000 jurisdictional limitation in this because of the administrative problems that we anticipate encountering in administering such a broadly drawn statute” and the statute was subsequently enacted with the $5,000 requirement.

Now, I think it’s clear, again, from statement or policy that can be gleaned from a recent case in this Court, the Erlenbaugh decision which was decided a little less than a year ago, Erlenbaugh against United States, that a later Act in this case 15 U.S.C. 1644, can to a great extent to be regarded as a legislative interpretation of an earlier Act.

And certainly it’s, I think a well-settled principle of statutory construction that whenever Confess passes a new statute it acts aware of all previous statutes in the same general area.

Now, the Rewis case also states, expresses this Court’s concern with the over extension of limited federal police resources.

And I think it’s ironic in this case, to a great extent that the Justice Department in 1970 in urging a jurisdictional limitation upon the Congress expressed almost the same concern.

Now, as we point out in our brief on the necessity issue, each of the four states involved has a specific statute dealing with credit card fraud.

The State of Kentucky where the Citizens Fidelity Bank is located which was the bank that ended up with the payment in this case, Kentucky has probably one of the most detailed tough credit card statutes in the country and it provides for misdemeanor and felony penalties.

Now in this case, Maze would have been subjected to very heavy felony penalties.

So it's not a question, I submit, of either the Federal Government entering the field or having a felon escape punishment, this is not the case.

Now, there has been no showing by the Government in this case that Kentucky Officials, Louisville Police, State of Kentucky are either unwilling or were either unwilling or unable to prosecute Maze for this offense.

Justice Lewis F. Powell: Would Kentucky have had any difficulty in getting evidence from all across the country?

Mr. William T. Warner: Well, sir the postal inspectors acquired the evidence in this case from the Citizens Fidelity Bank and I could only assume the Citizens Bank would have responded to a request from the Kentucky Police.

Now, that’s where the evidence ended up.

That’s where the invoices were and that’s where all the evidence was.

So I can only assume that it would have been no more difficulty for Kentucky Police than for --

Justice Lewis F. Powell: You are saying that federal investigative facilities would have been available to the state?

Mr. William T. Warner: Well, sir I’m sure they would have been, but I think that even absent that consideration that the state investigative facilities could have gone to the bank and said we want to see the same records.

The records were all there, right in Louisville.

Justice Lewis F. Powell: Were any of the merchants who received these invoices or the credit card gives its witnesses?

Mr. William T. Warner: I’m sorry, I didn’t understand the question.

Justice Lewis F. Powell: Some of the merchants who --

Mr. William T. Warner: Oh, yes, sir.

Justice Lewis F. Powell: -- extended credit on the basis of credit card testified --

Mr. William T. Warner: Yes, sir.

Justice Lewis F. Powell: -- they were from other states?

Mr. William T. Warner: Yes, sir.

They were from other states, that’s right.

This was done not infrequently in my experience in Kentucky courts that out of state witnesses are brought in?

Justice William H. Rehnquist: There is a certain facility that the Federal Government has been handling something like that.

If you’re talking about a motel proprietor Fort Lauderdale, if you’re talking about a federal prosecution, the FBI agent in Miami can go out and talk to him.

If you’re talking about a state prosecution in Kentucky, somebody from the local county attorney’s office has got to fly down to Fort Lauderdale and talk to him or else you’ll never see the guy before you put him to stand?

Mr. William T. Warner: Well, this Mr. Justice Rehnquist was a point that was raised by the Second Circuit in the Chason case where they said that obviously, the interstate character and I think that is valid consideration.

But I would respectfully submit that that alone is not enough to warrant federal intrusion into this kind of case.

Now, the problem is and I think it was raised yesterday by Mr. Justice Marshall is and I would submit for the Court’s consideration, where does it stop?

Now, I raise the point in my brief that if the Government’s position is sustained and the per se rule is approved or expressed as policy that every type of commercial fraud would be covered.

Now, I since learned that that’s a mistake.

I want to bring to the Court’s attention an indictment returned recently in the United --

Justice William J. Brennan: Excuse me, Mr. Warner --

Mr. William T. Warner: Yes, sir?

Justice William J. Brennan: -- for interrupting.

You mentioned Erlenbaugh, that’s the one of the racing sheet across the bridge, isn’t it?

Mr. William T. Warner: Yes, sir.

Justice William J. Brennan: Do you have a citation, I notice you don’t have it cited in your brief?

Mr. William T. Warner: No, sir.

I’m sorry, I have a --

Justice William J. Brennan: It’s alright.

Mr. William T. Warner: -- it was decided December 12, 1972.

I don’t have the U.S. Citation.

I have the Lawyer’s Edition Second.

But as an example of the kinds of cases that the courts will face and this Court will face, I want to bring to your attention the case of the United States versus Jasper J. Mirabile under an indictment brought in the United States District Court for the Western District of Missouri in the Western Division.

Its number 73 CR 21060-4, charging of violation of 18 U.S.C. 1341 and the conduct that Mr. Mirabile is charged with is as follows.

That he falsified a state gross receipts tax return and mailed it into the State Treasury of the State of Missouri, and the defrauded party in the indictment is the State of Missouri, stated in the Indictment State of Missouri.

Now, I respectfully submit to the Court that that constitutes the grossest kind of overreaching and that may or may not be dismissed, but I cited as an example of the kinds of things that could be or may be possible if this per se doctrine is not struck down.

Now --

Chief Justice Warren E. Burger: Now some of these arguments you’re making are valid arguments to be addressed to Congress for not trying to give too much of a federal reach for a court to consider and I suppose that’s why you’re urging among us that sort of an extension approach, isn’t it?

Mr. William T. Warner: Yes, sir and I want again to point out that I’m not urging on the Court the view that the use of a credit card can never constitute mail fraud.

And again, I would --

Justice William J. Brennan: No, are you suggesting, I gather --

Mr. William T. Warner: No, sir.

Justice William J. Brennan: -- that Congress couldn’t enact constitutionally a statute which reach this very transaction or are you suggesting that?

Mr. William T. Warner: I have some doubts about that by reading of the Bass case.

Now, I just don’t know.

I’m not prepared to respond to that.

Justice Potter Stewart: Well, how about -- what if they enacted 15 United States Code Section 1644 without the limitation to $5,000 in it?

Mr. William T. Warner: I think, now you’re assuming that the interstate commerce requirement would --

Justice Potter Stewart: It would still be in high probate except for the $5,000 limitation.

Mr. William T. Warner: I think there’s no question.

Justice Potter Stewart: No questions comes to constitutional power -- constitutional power?

Mr. William T. Warner: No sir, there’s not and I pointed that to reinforce my argument that this was what Congress did intend and this is what the Justice Department asked for was jurisdiction only in cases over $5,000.

Justice William H. Rehnquist: But there all you have is that affecting interstate commerce where the use of the mails could be very tangential under the $5,000 statute and still state an offense?

Mr. William T. Warner: Oh, no, sir.

No question about that.

Justice Potter Stewart: You wouldn’t have to have any use of the mails at all under 1644?

Mr. William T. Warner: No, they could be carried across the state line by bicycle or --

Justice William H. Rehnquist: Or send it by United Parcel Service, which is what lots of people do now that the mails are so --

Justice Potter Stewart: Or Western Union or --

Mr. William T. Warner: That’s right, in fact similarly transfer --

Justice Potter Stewart: Mail Express or whatever.

Justice Thurgood Marshall: But if the people that honor this credit card had failed to send it in the mails, then it would be no use at all?

Mr. William T. Warner: That’s a very valid point Mr. Justice Marshall.

Justice Thurgood Marshall: And there’s nothing in this record that Maze used the mails at all?

Mr. William T. Warner: No, sir.

Nor was he asked any questions as to whether he had used the mails or knew that the mails would be used.

Justice William J. Brennan: Well, I gather that’s it, isn’t it that the element satisfied the proof that that he caused or had reason to think that he defrauded people with use of mail?

Mr. William T. Warner: I’m sorry, are you asking if --

Justice William J. Brennan: Isn’t that -- isn’t that all that’s required?

Mr. William T. Warner: That he caused the mails to be used.

Justice William J. Brennan: That’s right.

Mr. William T. Warner: If he doesn’t deposit the letter himself, the statute requires that he caused the mails to be used in some way.

And of course in the Konashiki (ph) case for instance where the life insurance agent went to his boss and filled out a fraudulent death claim.

Now, he was in the business.

He knew that his boss was going to mail that application to the home office because he’d mail them himself.

Now, this is where we think the Maze case works.

Unknown Speaker: Yes.

Chief Justice Warren E. Burger: You said earlier, you knew personally that if the mail had to be used --

Mr. William T. Warner: I said, I thought so, sir.

Chief Justice Warren E. Burger: Were you suggesting then that some people might be held under the statute and others might not --

Mr. William T. Warner: I think --

Chief Justice Warren E. Burger: -- depending on their sophistication about business matters?

Mr. William T. Warner: I think that’s a matter of proof, Mr. Chief Justice and --

Chief Justice Warren E. Burger: I take it all of the points you’re making in this direction go to a failure proof in this particular case?

Mr. William T. Warner: Yes, sir.

And perhaps cases like it.

Now if Maze as an example had been asked directly the question on cross-examination, now you knew that that vendor would mail that invoice back to the bank.

If he had said yes, I doubt that we would be here this morning.

Unknown Speaker: In our cities.

Mr. William T. Warner: Now, one other final point, with regard to a point or question that was raised yesterday by Mrs. Lafontant about this business of concurrent sentences as I point out in our footnote in our brief, I don’t think there’s any question that the five-year sentence at least under the Dyer Act conviction was answered by the four convictions under the mail fraud statute if this conviction or the Sixth Circuit decision stands, we would anticipate a motion under Rule 35 to District Court for reduction of sentence.

A five-year sentence in the District Court of Western District on a Dyer Act conviction is rather unprecedented. Now again, the Government, I think to a great extent in this case, has lit off a kind of a smoky bonfire on this issue of unless the Court overturns the Sixth Circuit decision that the entire credit card system is going to breakdown, I don’t think that’s true.

I think their adequate state laws and I think that the existing federal statutes would prevent that.

Chief Justice Warren E. Burger: Thank you Mr. Warner.

Thank you, Mrs. Lafontant.

Mr. Warner, you have accepted our appointment, you came here at our request to argue this case.

Mr. William T. Warner: Yes, sir.

Chief Justice Warren E. Burger: On behalf of the Court, I want to thank you for your assistance not only to your client, but to the Court.

Mr. William T. Warner: Well, I’d like to state it’s been a real pleasure and fine opportunity.

Thank you, sir.

Featured:

Parr v. United States - Oral Argument

Thu, 29 Nov 2012 22:23:33 +0000

Case:

Parr v. United States

Media File:

391_19600428-argument

Related Transcript:

391_19600428-argument

Transcript:

Argument of Wilkey

Chief Justice Earl Warren: Number 391, George B. Parr et al., Petitioners, versus United States.

Mr. Fortas.

Mr. Abe Fortas: Mr. Chief Justice, may it please the Court.

This is case is here on certiorari to the United States Court of Appeals for the Fifth Circuit.

The Fifth Circuit affirmed these convictions of the petitioners on the various counts of an indictment, 19 counts of which, charged violations of the federal mail fraud statute and the 20th count of which charged the violation of the conspiracy statute.

This Court granted certiorari on two questions, first, whether the mail fraud statute is applicable in -- to this indictment and the facts of this case.

And second, whether the defendants should have been granted access to the grand jury testimony of one of the witnesses at the trial, Diego Heras.

In addition, due to impart to developments after petitioners have filed their petition for a certiorari with this Court and after the Solicitor General had filed his brief in our position to the petition for certiorari and the manner had been submitted to this Court because of events happening thereafter, to which I shall elude.

In our brief, we have suggested that the Court considered whether this case is suitable for the exercise of its supervisory power and whether the case calls for the exercise by this Court of its supervisory power over the administration of the federal criminal process.

Now, with the Court's kind indulgence, I shall commence with a discussion of the mail fraud point, which in our submission will dispose of the case and in our submission should result in a dismissal of the indictment.

Before doing that, I should like very briefly to give the Court, if I may, an idea of our point with respect to the grand jury testimony question and a very brief idea of the reason why we have respectfully suggested consideration of the invocation and use in this case of this Court's supervisory power.

I shall then go to the mail fraud point and shall then return to the grand jury and the supervisory power points.

On the grand jury point, the witness, Diego Heras, was in our submission, the Government's principal witness, the Government disputes that.

His testimony occupied 23% of the record below about 1000 pages out of about 6000 pages.

The Court instructed the jury below that they might convict on the testimony -- on the unsupported testimony of an accomplice.

The Court instructed the jury that Diego Heras was an accomplice.

The Court of Appeals stated that Diego Heras' testimony contained many inconsistencies and contradictions and it's said that the jury might have considered him far from trust -- trustworthy, as we argue in our briefs, those are mild and gentle words.

Chief Justice Earl Warren: Is that the District Court told the Court of Appeals?

Mr. Abe Fortas: The Court of Appeals.

Unknown Speaker: Court of Appeals.

Mr. Abe Fortas: Yes, Your Honor.

Now, subsequent as I said, after the petition for certiorari and the Government's brief had been submitted to this Court, the Solicitor General filed a memorandum in this Court saying in fact, “Oops, we're very sorry.

There is no transcript of Diego Heras' testimony before the grand jury.

His testimony before the grand jury was never recorded.”

That despite the fact that the distinguished prosecuting attorney, in the case in the District Court, Mr. Wilkey who was then United States Attorney in Houston.

Mr. Wilkey had stated trice in the trial court, in response to inquiry that there was a transcript of Mr. Heras' testimony and there are yards of words that were spelled in the District Court and miles of words that were debated in the Court of Appeals on that assumption and the case was litigated by the -- by the defense on that basis.

Justice Charles E. Whittaker: (Inaudible)

Mr. Abe Fortas: Yes, sir.

Justice Charles E. Whittaker: Or that is not just a contained district custody.

Mr. Abe Fortas: He said, “I have the transcript and it is in my office.”

Justice Charles E. Whittaker: (Inaudible)

Mr. Abe Fortas: Your Honor, there is no doubt I believe.

Perhaps Mr. Wilkey will agree.

I believe there is no doubt that the Court was asking him, “Do you have a transcript of Mr. Heras' testimony before this grand jury?”

And that Mr. Wilkey said, “I do.”

When he was asked that question on two additional times, Mr. Wilkey said he has it in his office.

Now, we as -- say as I hope to show in a few minutes that this is a case that falls within the -- this Court's doctrine as laid down in Procter & Gamble and Pittsburgh Plate Glass, that this was a case of ultimate and absolute need because of the critical nature of Heras' testimony and because of his demonstrated unreliability and because he was a witness beholding to the Government.

Now, I feel it necessary again as I profess here to state why we have suggested that this Court consider whether this case is appropriate for invocation of its supervisory power.

In the first place, if the Solicitor General's statement is accepted that Mr. Heras was examined before the grand jury in this case and his testimony was not reported, we believe that that calls for an exercise of this Court's supervisory power.

We do not contend that under the rules, it is necessary as a matter of law for the testimony of every witness before a federal grand jury in Texas to be reported.

We do contend that in the circumstances of this case, it was an abuse not to record the testimony of Heras as an example and now come to others.

The Government knew at the time that Heras was put on the -- on the stand before the grand jury that he had given an affidavit, sworn affidavit to the FBI concerning the petition of Parr, that he had subsequently, given a contradictory affidavit to the FBI on the same matter in which he had said that he had not told the truth in his first affidavit.

The Government knew and Mr. Heras had not been prosecuted as part of this great kettle of fish involved in this part of Texas.

The Government knew that Mr. Heras was dependent upon the Government's mercy.

Every other important witness called before the grand jury, I think there were over 75, the testimony of all except four of the witnesses called before that grand jury was reported.

Of the other -- of this four, one was Heras, then the -- there was another one who was the -- a postal inspector and there were two people who were not witnesses at the trial.

All the others were transcribed.

The grand jury proceedings took place over a long period of time.

Justice Felix Frankfurter: If the Court had -- I happened to be very sensitive to show practices by a prosecutor.

Is there any suggestion that this was a purposeful conduct on the part of the District Attorney?

Mr. Abe Fortas: Your Honor, I -- can I --

Justice Felix Frankfurter: (Voice Overlap) purposefully not to have minute for this testimony?

Mr. Abe Fortas: Your Honor, all I -- I know about this is what is in the papers as to the reasons for it.

And the Government's brief says that the reason that Mr. Heras' testimony was not recorded, was first that it was well known to the Government so they did not mean a recommendation of it for their own use at the trial.

And second, that he was brought in at the last day when the case was fully developed.

Now, that second reason, I find singularly unpersuasive, because Heras was such an important and a key witness and to his suspicious mind and I suspect that I, as an advocate, must have one and who have one, then maybe other reasons for the Government's having delayed and delayed in bringing Heras in as a witness before that grand jury and then finally bringing him in on the last day.

But I am not -- I can't suggest any -- what -- what the -- what was in the Government's mind beyond what in its papers, I do submit, Mr. Justice.

Justice Felix Frankfurter: Makes a lot of difference for me.

Mr. Abe Fortas: It may Your Honor.

Justice Felix Frankfurter: (Voice Overlap) an exercise of discretion by the District Attorney --

Mr. Abe Fortas: Yes, sir.

Justice Felix Frankfurter: Perhaps, because I was brought up when there were no stenographers before a grand jury.

Mr. Abe Fortas: Yes.

Justice Felix Frankfurter: And indeed, it wasn't allowed to have them --

Mr. Abe Fortas: Yes.

Justice Felix Frankfurter: -- and that colors my interest --

Mr. Abe Fortas: Well, I --

Justice Felix Frankfurter: -- in knowing why this was done and it makes all the difference in the world --

Mr. Abe Fortas: Yes.

I should not --

Justice Felix Frankfurter: -- whether there's a slightest basis for inferring shop practice, as I call it my link, or whether it was something else.

Mr. Abe Fortas: Well, I'd -- I'd like to make two points to that, Mr. Justice.

First, I want to say that this grand jury proceeding was prior to the Jencks case and prior to the rush of interest that has since developed in a -- by -- on a private defendant in obtaining grand jury transcripts, I think that is an important point for the prosecuting attorney on his side.

On the other hand, Your Honor, my point is that regardless of whether there were or were not sharp motives, that responsible prosecution in the particular circumstances of Mr. Heras, would certainly have caused the prosecuting attorney to see that his testimony was recorded, the testimony of over 70 witnesses before that grand jury on this same manner were reported.

Heras was a self-confessed liar, thief, embezzler, who had given the Government a false affidavit.

Certainly, the minimum of prudence, the minimum of proper procedure, in my submission, Your Honor, would have meant that the prosecuting attorney would say in the case of this witness, “Above all, we will have a record because it is my duty to see that this man who has perjured, who has falsely testified before does not perjure himself before the grand jury.

And it is my duty to see that the innovations that are necessarily attended upon the presence of a report and the taking down of a witness' testimony are operative in this -- in this situation.”

Justice Felix Frankfurter: Well, you are then -- you are then urging dereliction of duty.

Mr. Abe Fortas: I certainly am Your Honor, which is different from motive.

I may have misunderstood you, but I -- I'm not suggesting sharp practice or anything about the prosecuting attorney's motive, but I certainly am suggesting that dereliction of duty as --

Justice John M. Harlan: Were the -- was the defense furnished the copies of these affidavits?

Mr. Abe Fortas: Yes.

In the course of the trial, while the trial was going on, this Court's decision in Jencks came down and then the defendants were furnished with a large batch of statements by Heras and other witnesses and we have the affidavits --

Justice Felix Frankfurter: Upon request --

Mr. Abe Fortas: -- now in the record, here.

Justice Felix Frankfurter: Upon request or volunteered?

Mr. Abe Fortas: Upon request, as I -- yes, that is correct, upon request.

Well now, I should like to get to the mail fraud point here.

The Government agrees that the mail fraud situation here presents a “unique situation,” that is in quote.

They say that there is no case exactly like this.

It is our submission to Your Honors that the attempt to use the mail fraud statute in this case is not only unprecedented, but it's contrary to the law and that the result of the use of the mail fraud statute in this case, if it is sustained, would be to expand federal jurisdiction over whether are in substance local crimes, to an extent which would leave very little outside of the scope of federal jurisdiction in terms of the -- the heretofore local crimes of embezzlement.

Now, I'll have to just lay the facts out as briefly as I can, Your Honors.

The event in this case involved the Benavides Independent School District, which is located on the Corpus Christi Division of the Southern District of Texas.

This School District had to duty, under the law, to operate two schools and had the power and the duty to levy and collect taxes on property located in the district for the purpose of raising funds for school operations.

Now, there are 11 petitioners here, and six of them were officially connected with the School District.

One of them was the Tax Collector of the School District.

Three of them were on the Board of Trustees and one of them, for a short period of time, was the attorney for the School District and another was for part of the times, secretary of the School District, that's six of them.

The other five were connected with the fiscal affairs of the bank of the School District in this sense.

Two of the other petitioners are banks, one being the official depository for the School District, and then the remaining three persons who are the petitioners here including George Parr, were officials of the banks and it's also alleged that Mr. Parr dominated the affairs of the School District and there is evidence from which a jury might have drawn that conclusion.

Now, the indictment herein and the evidence viewed most favorably to the Government, showed that some of the petitioners misappropriated and embezzled funds of the School District over a period of years.

They -- overpaid of approximately five years, there's some doubt as to when the embezzlement stood.

Now, the technique by which the scheme to defraud the school operated was this, checks were issued to fictitious persons, nonexistent persons and checks were issued to real persons for a work that they did not do and the proceeds of those checks, the jury might have found, were turned over to the petitioner, Parr.

Now, this was the scheme, the scheme to which attention was directing.

These practices, as I said, were indulgent from a period of about five, perhaps six years, the indictment come because of the statute of limitations, covers at period September 1, 1951 to December 1954.

To give you an idea of the magnitude of -- of the embezzlement pursuant to the scheme, a Government -- the Government estimates that the fraudulent checks which I've just described in the five-year period amounted to about $190,000.

Now, because it maybe relevant later on, I'm going to divide that by the period of the embezzlements and suggest that mathematically, the embezzlements amounted to a little over $40,000 a year.

Because I want you to consider that if you will, as against the annual receipt from school tax assessments which -- or the annual school tax assessments in which run from the amount of $400,000 in 1949 to $650,000 in 1952.

Now, in other words, this was just a small part of the school tax assessments although, it was a lot of money.

Justice Charles E. Whittaker: Approximately 10%.

Mr. Abe Fortas: Less than that, I think, sir.

In the later -- in the years --

Justice Charles E. Whittaker: (Voice Overlap) --

Mr. Abe Fortas: -- covered by the indictment, it was substantially lesser than 10%.

Now, most of these petitioners have been indicted in the State courts for embezzlement and for these transactions that had same transactions that it covered in this indictment.

To the present time, they have all either been acquitted or after conviction, their convictions have been reversed in the appellate courts of the State of Texas.

There are a number of state criminal proceedings still pending, however.

Now, I've just described to you the central scheme.

In addition to this scheme, there is some evidence that there were individuals among these petitioners and perhaps other persons, who engaged in sort of folics of their own, petty grafts, thievery, embezzlements.

There are -- the only ones that are involved in this case in that category of this sort of individual frauds.

The -- the only instances involved the individuals Chapa, Garza and Oscar Carrillo.

Those are the only individual cases in which a mail fraud is alleged, as I will come to in a moment, in addition to the general and pervasive scheme.

The Government says that Chapa, who was the Tax Collector, took for himself some of the tax money belonging to the district, instead of this operating as part of the scheme, Chapa took it for himself.

The procedure which Chapa used to get this grant for himself was different from the scheme itself.

But the net effect was the same except that Chapa got the money.

In the general scheme, you will recall the checks, fictitious checks, were drawn against the general funds of the district.

In Chapa's case, he being the Tax Collector, into the two instances that are involved in the indictment, he received checks by mail.

He then cashed the checks, as he had a right to do under Texas law.

Under Texas law, it is not the checks, but the proceeds of the checks that belong to the district.

We've got that brief and I shall pause course to elaborate, that is the fact.

And Chapa, instead of turning over the cash proceeds of these checks to the district, appropriated them for himself.

That's very bad.

It is not a mail fraud as we show in our brief and as I think, I'll -- as I hope come too in a moment.

The other individual frolic, if it maybe called that, involves an item that the Government itself in its brief says is quite small and that is that two of the people here, Garza and Oscar Carrillo got -- bought some gasoline for their personal use instead of paying for that of their pockets, they charged it to the district.

Again, this is no mail fraud violation as we show in our brief, but I want to come in the little time that I have to the central school, because I am confident that the case turns on that.

Now, the essential point, Your Honors, is that this indictment does not charge.

There is no evidence to show that anyone of the fraudulent checks drawn on the funds of the district was sent through the mails at anytime.

It is not those fraudulent checks that are claimed to be violations of the mail fraud statute.

Actually, what happened is that all these people lived in and around this little town and the fraudulent checks were made out, they were then passed from hand to hand, passed over to the bank and then the proceeds were taken over by hand allegedly, to Mr. Parr.

So, the fraudulent checks are not charged as a mail fraud.

Well, held us, where does the Government get a mail fraud in this case?

Now, and here we are right at the nub of point.

The Government says that some of these and some of these petitioners, the three members of the Board and the Secretary of the Board operating they say under the domination on this property, were in charged of the School District and had functions with respect to the collection of taxes for the School District, you say.

And since some of those taxes came in by a mail, they say that is a use of the mails.

Now, I quote the statute for the purpose of executing the fraudulent scheme.

Now, they say that since one of the taxes were collected by mail since the proceeds of those taxes went into the general funds of the school, since persons stole from the general funds of the school, that therefore, the collection of taxes was a use of the mails for the purpose of executing the embezzlements from the fund.

Now, every time I say that, it sounds a little complicated, but we have suggested and I believe what an important qualification the Government has been impressed by this.

We have suggested that the Government's proposition here, as just -- is -- it is like to follow.

Let us suppose that a doctor got a secretary and the secretary sends bills out to all the doctor's patients through the mail and some of the bills are paid by use of the mails and then the payments go into the doctor's account and the girl -- the secretary has a petty cash fund, and let us say every week she dips into the petty cash fund and takes 50 cents or $5 or $10.

Now, in the Government's theory, in this case, on the theory of this indictment, most embezzlements are a violation of the federal mail fraud statute.

Justice Felix Frankfurter: Where is the fraud in the doctor-secretary case?

Mr. Abe Fortas: There is -- the fraud is her -- nothing, but her embezzlement.

I mean to say, in the case that I put to you, she embezzles and that's what happened here.

Justice Felix Frankfurter: There's no fraud at all, is there?

Mr. Abe Fortas: Not in my opinion.

Justice Felix Frankfurter: There's a fraud here, wasn't it?

Mr. Abe Fortas: Not -- not --

Justice Felix Frankfurter: I'm not talking about the mail fraud.

Mr. Abe Fortas: -- in connection with the use of the mails.

Justice Felix Frankfurter: I'm not talking about that.

There was a fraud.

Mr. Abe Fortas: There were many frauds here, Your Honor.

Justice Felix Frankfurter: Many -- and the problem here is --

Mr. Abe Fortas: But they have nothing to do with the use of the mails.

Justice Felix Frankfurter: So, the question is whether there's any relation of the mails to this fraud?

In your doctor's case, there was no fraud.

Mr. Abe Fortas: There -- well, there is a fraud, Your Honor in the sense that --

Justice Felix Frankfurter: The secretary stoles the money --

Mr. Abe Fortas: That's correct.

Justice Felix Frankfurter: -- there was no antecedent fraud, so there couldn't be any connection between a fraud and subsequent conduct.

Mr. Abe Fortas: Well, if Your Honor please, it is our --

Justice Felix Frankfurter: I'm not saying that this is a mail fraud case.

Mr. Abe Fortas: Yes.

Justice Felix Frankfurter: I'm saying there's a distinction between a fraud and -- and subsequent events and no fraud.

Mr. Abe Fortas: That's right.

If Your Honor please, I -- I want to make this clear, but perhaps, I -- and I say we should have.

There were lots of frauds here.

One of the frauds that the Government talks about in great deal is that reports were submitted to the School Board in Austin, Texas by these petitioners and there were fraudulent representations in their report to that School Board, but the report to the School Board is not a use of the mails.

That is relied on in this case, it couldn't be.

One of the interesting and important things about this case, one of the things that we call to the Court's attention in connection with our supervisory power point is this, the venue of this case, this indictment was brought in Houston, Texas which is 250 miles northeast of the Benavides School District and of the area in which these -- the defendants, these petitioners live.

Although everything involved here, all the fraud involved here relates to the Benavides School District.

It was brought in Houston, venue was placed in Houston by the device of saying that the mailings had (Inaudible) in Houston.

What mailings?

The mailings of -- of taxes -- of checks and payment of taxes by the Humble Oil Company, the Texas Oil Company and so on, those are the counts in this indictment that I alleged to be the mail frauds.

Humble Oil Company sends in a check in payment of its taxes, that appears as a mail fraud and the -- and the petitioners are alleged to have committed the crime in Houston, how?

By causing Humble Oil Company to send in a check in payment of taxes, how do petitioners cause him to do it?

Petitioners cause him to do it by assessing the taxes as they have to do it according to law.

There is not a word in this indictment, if the Court please.

There is not a word of evidence, if the Court please.

There is nothing in trial court's charge, if the Court please.

To the effect that any of these tax notices or that if any of these tax payments was itself tainted with fraud, or that the taxes where inflated or that there was any kind of monkey work in connection with the taxes.

And Government, in it's final -- in it's brief here, as rather to my mind, rather extraordinary arguments trying desperately at this last moment to rewrite the indictment by suggesting that now, that there were, that the taxes might have been less, if it hadn't been for the scheme to defraud.

The trial court, their position was not that the taxes might've been less, but that the schools might've been better and I suspect they might've.

Justice Potter Stewart: This is no new idea here.

This is -- this was stated by the Court of Appeals, wasn't it?But no file (Voice Overlap) --

Mr. Abe Fortas: Yes, Your Honor, but the Government has taken -- Government -- so I -- I understand, did not advance that field in the courts below.

The Court of Appeals has -- divides the -- and developed the theory and the Government here elaborates it and we answer it in our reply brief to which I respectfully call the Court's attention.

Justice Charles E. Whittaker: Mr. Fortas, may I ask you please.

I'm intrigued by your hypothetical about the doctor's secretary --

Mr. Abe Fortas: Yes.

Justice Charles E. Whittaker: -- who takes money from the till.

Mr. Abe Fortas: Yes, sir.

Justice Charles E. Whittaker: She there sent out bills that were regular and honest bills.

Mr. Abe Fortas: Yes, sir.

Justice Charles E. Whittaker: Would it make any difference in your view, if with design to appropriate the fund -- if the money came back, she added on 10%?

Mr. Abe Fortas: Yes, sir.

I think there would be a violation of the mail fraud statute.

Justice Charles E. Whittaker: Does the Court of Appeals proceed, in your view, on the basis that the evidence here established an increase in assessed valuations for the purposes of the bringing in an amount in excess of need in order to supply appeal for loot?

Mr. Abe Fortas: The Court of Appeals indicates something to that general effect and the Government here elaborates on it, but more cautiously.

The Government here says more cautiously than the Court of Appeals that the taxes might well have been lowered, if it had not been forfeits.

Our answer to that, Your Honor, it is very claimed, if only maybe so bold as to say so, there's nothing to -- to that effect in the indictment.

There is no evidence to that effect.

There is nothing in the charge.

That's not the theory of this case.

That is no the theory of this indictment or the theory on which this case was tried.

The theory very plainly was this.

Remember, venue in Houston, the theory very plainly was that taxpayers in Houston send in checks in payment of taxes and the Board in Benavides sent out a few notices to people in -- in Houston that this tax collection process resulted in part, in the creation of a fund, which belonged to the School District.

I say in part, because there were funds from other sources too.

And these people embezzled and stole money from this fund.

It's exactly like the doctor's case.

There is no allegation in the indictment to the effect that the taxes that either -- that tax is whether in the aggregate or in individual cases were affected by this fraud.

Justice Charles E. Whittaker: And no evidence and no charge on that.

Mr. Abe Fortas: That's correct, Your Honor.

That is correct.

Justice William J. Brennan: Well, Mr. Fortas, is there anything that the budget for the School District was bloated?

Mr. Abe Fortas: If Your Honor please, I don't recall anything about a budget here because the fact of the matter is --

Justice William J. Brennan: I gather the taxes are raised against annual requirements for school purposes on that --

Mr. Abe Fortas: And the fact of the matters is that the tax assessing process is composed of two parts.

One is the valuation of property, of course, and the other is fixing of the rates.

So far as the valuation process here is concerned, that was done by a Board of Equalization in the -- with respect to Government estimate 75% to 85% of the property as a matter of value here.

That was done.

The valuation was fixed on recommendations of concededly independent engineers.

Most of the important property in this district is oil property and Humble Oil and Texas Oil Company only and there was a firm of independent engineers and appraisers who made the valuations and turned it over to the Board of Equalization, which was separate from -- that is composed of different people although they may have been nominated by the School District, but they weren't the same people.

And there were sorts of procedural rights.

The usual kind, taxpayer didn't like it he could apply for a hearing at the Board of Equalization and go -- go to the courts.

So there's no -- no question about the -- the valuation and no -- no such charge is made.

The second thing is the level of the rates.

The rates here were fixed, the -- the maximum that could be assessed was fixed by the -- by a state law and of course, one might argue that the -- the Board might have fixed the rates at anything lower than that.

At something lower than the maximum, that would've been rather -- that would have been --

Justice William J. Brennan: Well -- well is it --

Mr. Abe Fortas: -- precedents --

Justice William J. Brennan: Isn't the kind of system where the rate is determined by dividing requirements by rateables?

Mr. Abe Fortas: Your Honor, that's not the way it has worked.

It is worked on the basis of a maximum rate prescribed by the State applied to the valuation of the property.

Now, the record is replete with evidence.

As we construe it, that even that systems did not bring in what would've been an adequate amount of money for (Voice Overlap) --

Justice William J. Brennan: I would change to see its established requirements.

Mr. Abe Fortas: I would --

Justice William J. Brennan: But --

Mr. Abe Fortas: I -- it must've been -- it must've been the School District, Your Honor.

But the tax -- but that is not rate that the taxes were assessed here.

They were assessed on the basis of the valuation of the length and the rate was applied to it.

Justice William J. Brennan: (Voice Overlap) fixed rate by state laws?

Mr. Abe Fortas: It was fixed at the maximum.

They could go lower than that, but they never have.

And they -- and so far as the record shows (Voice Overlap) --

Justice William J. Brennan: So what determine it, whether they -- whether they assessed the maximum or at some lower rate requirements?

Mr. Abe Fortas: I suppose so, Your Honor.

Justice William J. Brennan: So that I take it as there where any evidence and requirements would inflate it, for the purpose of --

Mr. Abe Fortas: Exactly.

Justice William J. Brennan: -- applying the maximum rate.

Mr. Abe Fortas: Exactly.

Justice William J. Brennan: And that circumstance, would you say that the mails then had been used?

Mr. Abe Fortas: I would indeed, but the evidence is to the precise contract.

The evidence is replete and Mr. Wilkey put a lot of it in, in the Court.

And he argued it very stirringly to the jury that this School District, its facilities, its teachers, its children were in dire need of additional revenues.

There's nothing in this record to indicate either an inflation of -- of the rates, because of the scheme or that the total amount collected was in excess of the reasonable needs of the district.

There's nothing like that in this case which, Your Honor, in order for it to be a federal crime, of course, that theory would have had to be alleged in the indictment, too.

You say so that the defendants would have had an opportunity to meet it.

I point out two things to you, one that it is not in the indictment and two that it is not in the evidence.

Justice William J. Brennan: Can I trouble for the volume in which the indictment is set forth?

Mr. Abe Fortas: Yes.

It's in the first volume, Your Honor, and --

Justice Potter Stewart: Well, I have the -- I have --

Mr. Abe Fortas: It's at page -- begins at page 10.

Justice Felix Frankfurter: I'm arguing Volume 1 of the record.

Mr. Abe Fortas: I should like the Court's permission to reserve the remaining of my time for rebuttal and the rebuttal will be handled by Mr. Sharpe, who is on trial counsel of the case.

Before sitting down, I should like to call the Court's attention to the fact that in the reply brief, which we have filed, as the Appendix B, which we have set forth in fact, similarly the specific mailings, which are charged as the price in these indictment and a glance that those, well, I believe clearly demonstrate the remoteness of those mailings from the frauds.

Thank you.

Chief Justice Earl Warren: Mr Wilkey.

Mr. Wilkey: Mr. Chief Justice, may it please the Court.

First, I should like to say --

Justice William O. Douglas: Are you the Wilkey at the trial?

Mr. Wilkey: Yes, indeed.

Justice William O. Douglas: I -- I've been greatly puzzled.

I'm greatly disturbed I might say that to read it over it again, statements that I have these in my possession.

And then to have Government from the case get serious say well, that was as an error.

Mr. Wilkey: Mr. Justice Douglas --

Justice William O. Douglas: How -- how can that be explained?

Mr. Wilkey: I intend to explain that fully and if you say that you were stirred to read that over and to find out that they did not exist, that is a mild statement as to how I felt when I found out that the grand jury statement in the court -- in the -- before the grand jury the mail fraud case did not exist.

I will go into that immediately, first, but I would like to ask the Chief Justice to --

Justice William O. Douglas: Well you did -- you did.

You're the one that did say over again that I have them in my possession, is that right?

Mr. Wilkey: I stated three times that I had the grand jury transcript on Mr. Heras' testimony in my possession and -- in my office, not in the courtroom, and I meant the mail fraud grand jury and on the third time, I specified that it was the mail fraud grand jury.

I was flatly in error and --

Justice William O. Douglas: Were -- were those at any time in existence?

Mr. Wilkey: No, sir, never.

Justice William O. Douglas: Were they -- were they in -- in existence, but destroyed or --

Mr. Wilkey: Oh, no.

Never -- never.

And we are --

Justice William O. Douglas: How do you happen to take the testimony of some witnesses not testimony of other witnesses before a grand jury?

I do not understand not taking any witness' testimony, but I don't -- I never heard of it on a selective basis.

Mr. Wilkey: Let me assure you that the selective basis was not intentional in regard to not having a transcript of the witness, Heras', testimony.

Let me outline, if I may, the circumstances at the time and the reasons why we did not take a transcript of the testimony before the mail fraud grand jury.

Justice Hugo L. Black: I don't want to delay it, but who conducted the grand jury?

Mr. Wilkey: Mr. Bottler, my assistant, who is at the table here and I.

Justice Hugo L. Black: And you.

Were you there when the evidence was taken in this case?

Mr. Wilkey: Yes, I was.

Justice Hugo L. Black: During the entire evidence?

Mr. Wilkey: Before the grand jury?

Justice Hugo L. Black: Yes.

Mr. Wilkey: No.

I don't think before the entire evidence.

We shared the responsibility, but I was there.

I'm satisfied during the entire interrogation of Heras.

Justice Hugo L. Black: Then who -- was -- was the stenographer, the regular court's stenographer or grand jury stenographer?

Mr. Wilkey: The stenographer was one of the regular court stenographers, who was either habitually or occasionally employed before the courts here in the United States courthouse.

Whether he had an appointment as official court reporter, I do not know, but he had that status and we have used him in one of the grand jury, I think.

Justice Hugo L. Black: Why did he sit in the grand jury room with reference to your seat?

Mr. Wilkey: I think, we generally put the court reporter right beside the witness where he could hear the witness' testimony clearly.

And as to where I customarily set an interrogation, I -- frequently, I would sit on the other sides of the witness.

Justice Hugo L. Black: Across the table, did you have a table?

Mr. Wilkey: Yes.

We have a table.

Justice Hugo L. Black: You have --

Mr. Wilkey: Across the table.

Justice Hugo L. Black: Like a grand jury room, usually as there was a table, the grand jurors were on both side of the table?

Mr. Wilkey: Yes.

They were on the both sides of the table and siting around the room.

Justice Hugo L. Black: Did you sit at the end or on the side of the --

Mr. Wilkey: I -- I forgot, sir.

I could not say exactly where I sat.

Justice Hugo L. Black: But the other man sat right across from in the stenographer?

Mr. Wilkey: The court reporter, yes.

Justice Hugo L. Black: Court reporter?

Mr. Wilkey: That is correct.

Now, let me explain and I want to do it at the outset and I can see, I know Mr. Justice Douglas' concern, but I know that the rest of the Court is concerned.

That's why we made no transcript here of the witness errors.

We had either 12 or 14 statements of Heras taken by various investigating agencies during the past two years of 1950 -- during 1953 and 1954.

We had 12 or 14 at that time and we subsequently acquired two or three more.

17 statements of Heras were turned over to the defense at the trial.

Now, in addition to that, I have the grand jury transcript recorded on Mr. Heras, before a grand jury which met in October 1954, concerning the affairs of Mr George B. Parr and concerning, in part at least, these matters made the subject to this mail fraud indictment.

When the last day came up and there was no particular reason why Heras would -- there on the last day, he could've been earlier.

Heras lived in Houston at that time and -- and was available anytime that we needed to call him.

When the last day came up, we had only two witnesses left, Mr. Heras and Postal Inspector, Mane (ph).

We did not need a court reporter and we told the court reporter, his services were not needed that day.

And there was no transcript made of either Heras or Inspector Mane.

Now, we hadn't made a transcript of Inspector Mane when he appeared on the first day of the grand jury and the reason was as in the case of Heras, Mane was there in Houston, we had reports of Mane, if we wanted to ask any questions of Inspector Mane we could have call him up on the telephone and ask him to come down to the federal building.

We had as I say 12 or 14 statements for Heras, taken on these matters and there was simply no need to make a transcript.

Justice Hugo L. Black: Mr. Wilkey, I -- I don't want to disturb you but that fact that disturb me most frankly, is the fact that if all had occurred you knew you had these statements and that was the reason you did not have the reporter.

You should have forgotten it, so that you would have made the statement later, as you did several times that you had his evidence.

Well, if you were sitting there in the grand jury when he testified and knew that you didn't take his testimony because you had the statements.

But that -- that's I (Voice Overlap) --

Mr. Wilkey: You mean, I -- you -- you don't understand how I failed to recall?

Justice Hugo L. Black: Yes, under those circumstances.

It's -- it's --

Mr. Wilkey: Mr. Justice Black, I, myself, have no independent recollection, of course, as to why I made the error in the courtroom.

I assure you it was a flat misstatement, unintentionally made and I was not aware that this did not exist until we ascertained it later on.

And in reconstructing it, all I can say is that I must have been thinking of the tax grand jury transcript, which I hold here in my hand and which we did have, a record on Mr. Heras' testimony back in 1954.

Now --

Justice Hugo L. Black: Do you -- do you now remember definitely that you did not take it that much because you already had the statement or is that -- do you remember that definitely?

Mr. Wilkey: I can't remember that definitely but by going back as to what happen in the circumstances, I'm satisfied that that is true and there -- that was the reason we did not record them.

We could have had no other reason than the fact, we simply didn't mean it and I want to point out that in my two years as United States Attorney there, in March 1956, I had never had a demand for a grand jury transcript except in this case.

The Jencks decisions did not come until a year and a quarter after this mail fraud grand jury.

And it never occur to -- to us -- to me that there was any obligation on us to make a grand jury transcript for the benefit of the defendants.

Justice Hugo L. Black: I can -- I can understand that.

How long was it after the time the -- this gentleman testified before the grand jury, until you made the statement in court that you had the transcript of his evidence?

Mr. Wilkey: He appeared before the grand jury on March the 6th, 1956.

I made the statement, I suppose the first time, thinking I had the transcript on June the 5th, 1957, a year and three months later.

And I will call your attention further that the case has been tried once before in November and December and that I did not have in the courtroom, the transcripts and it had been, I'm satisfied, prior to the first trial that I have had occasion even to refer to the grand jury transcripts.

By the time of the second trial, in trial preparation, as counsel at the table, I had all of the information on all of the witnesses, pretty well reduced to notes that I could hold in my hand and use for examination.

In some instances, in this second case, I used a transcript made from the first trial.

But in most instances, I had (Inaudible) the thing down to the very essentials that we needed to present our case, and since we were doing it for the second time, we pretty well new what that was.

And so, I did not refer to the grand jury transcript of errors or any Government witnesses and I don't think I had any occasion to do so, at any time during the trial.

I have no recollection, but I don't think there was any reason for it.

They were all back in the files in the office.

Now, in the files was a grand jury transcript of Heras and that I'm satisfied in -- looking back on it now, was both what I had in my mind when I say I had a grand jury transcript and secondly, it, along with the 12 or 14 statements that we have of Heras, was the reason that we made no transcript of this witness' testimony.

This, I assure the Court, was not a selective effort to avoid making a transcript of Mr. Heras for any purpose whatever.

We simply didn't need it.

And we knew of no obligation toward the defense.

We never thought of it that would've required us to make a transcript.

Now, the petitioner says and admits that there is no requirement that the United States Attorney make a transcript.

But they say, the extraordinary cases, they actually -- that this is an extraordinary case and therefore, under these circumstances, it was an abuse of prosecutorial discretion, not to make a transcript.

Now, if we had a discretion, then the question is, whether or not, I exercise that discretion properly.

And the reasons that I have given are the reasons on which I acted.

Justice Hugo L. Black: Did the man have the kind reputation that has been asserted here if he had at that time?

Mr. Wilkey: Only in part and on a small part.

And I want to get to that because I think what -- what we knew about Mr. Heras' reputation, bears on whether or not, it was proper not to make a transcript.

Chief Justice Earl Warren: Well, Mr. Wilkey, before you get to that, may I ask if the time that he appeared before the grand jury in this case, had he made those two conflicting affidavits one of which was admittedly false?

Mr. Wilkey: Yes.

And that is the part that we knew about.

Chief Justice Earl Warren: Yes.

Mr. Wilkey: And that I want to mention that along with the others.

Chief Justice Earl Warren: Well, I was going to -- I was going to ask you this, if you had a -- have a witness that you're going to rely on at a trial and you find that that witness in the same proceeding or collateral proceedings has made two affidavits, so the facts one of which is admittedly false, is it not common prudence to -- to have his testimony at the grand jury recorded so you will -- you will have something, at least, for yourself to rely on, if you have to impeach him?

Mr. Wilkey: Mr. Justice -- Mr. Chief Justice, we did it once.

We simply didn't do it twice.

Chief Justice Earl Warren: Well, no.

Not in that in that proceeding.

Mr. Wilkey: Yes.

Chief Justice Earl Warren: Are this -- this you're indicting -- you're indicting some people in this proceeding and you are taking the testimony of an important witness and you know that in the same subject matter, he has made two affidavits, one which, he admits to be false.

Do you not think for the protection of the Government, they are leaving the defendants aside that it is prudence to record the testimony of that man so you'll know, have something that you can impeach him on in that particular proceeding?

Mr. Wilkey: I certainly would, if his previous, erroneous or false statements had been concerned with the subject matter that we were inquiring about.

But, Mr. Chief Justice, I want to emphasize this and a -- you -- of these two statements are in the record and you have not only my opinion on it, but also the opinion of the trial court.

The two -- the only two really contradictory statements, the only two were some defense brought were sufficiently contradictory put in the evidence.

They didn't put these others in evidence.

The only two were on a matter not related to this indictment.

The judge -- the trial judge examined that and look at both of these statements.

They did not concern the subject matter of this mail fraud indictment in any fashion.

Now, they did show that this man had made a false statement and he gave us the explanation of that and he gave the explanation on the stand under cross-examination.

But on the subject matter of the mail fraud -- all of the matters related to this case, the witness, Heras, not only was accurate and truthful from the stand, but he was accurate and truthful in the preceding statements which we have.

Now, we have lodged of this statement, which we had at the time of the grand jury and all the other statements of Heras which were tendered to the defense.

We have lodged those with this Court, where they are available for inspection.

They were not in the Court of Appeals and we lodged them on the basis and in relation to whether or not, we properly exercised a discretion in not recording Mr. Heras' testimony.

I have read those three grand jury statements yesterday and today.

I say, I reread them, because it was on the basis of those that we interrogated to Heras before the two grand juries.

I have reread them yesterday and today and I think that any fair minded man with the facts that just the basic facts of Heras' testimony in the -- a trial court in his mind, could read those statements and see that Heras was a consistent witness.

He was not a misleading or evasive witness.

His story was straightforward and consistent and it was that on which we had to rely when we put him before the grand jury.

Justice William J. Brennan: What was the subject matter, Mr. Wikey, of the conflict -- and that you state?

Mr. Wilkey: The subject matter of the two statements which are exhibits -- defendant's Exhibit 213 and 214 and are printed on the record.

The subject matter involved an alligation that George Parr had Heras transport a sealed envelope to Corpus Christi for eventual -- $5,000 for eventual payment to an FBI agent.

That story was false and Heras said it was false.

In both affidavits -- in both affidavits, there's no question about preoperative facts.

In the first affidavit, he said the story is false and I never told any such story.

All I said was, I told the facts and I related this -- a phone call that Mr. Parr got at the same time from this FBI agent.

And all I told was the -- we're trying to fix a date and a time of -- and things that occurred.

And somebody else may -- must've put the things together and got this rumor started.

Now, in the second affidavit, Mr. -- Mr. Heras said, the -- it is not true that any such money was conveyed to the FBI agent, which he'd said in the first affidavit.

But in the second affidavit, he said, “Yes, I did put out that false rumor.”

Now, let me give you the circumstances of that which were known to us before this grand jury and which he testified to on trial.

Heras, on trial said, “The first affidavit is true.

I just recited the -- the facts in fixing the time and I've never spread and originated this rumor, but putting two and two together to make four here, which was false.”

Justice Hugo L. Black: What volume are those statements, does the (Voice Overlap) --

Mr. Wilkey: Those two statements are --

Justice Hugo L. Black: (Voice Overlap) get it.

Mr. Wilkey: I had it here just a moment, Mr. (Inaudible) --

Justice Hugo L. Black: Maybe someone else could get it while you proceed.

I don't want you to take your time for (Voice Overlap) --

Mr. Wilkey: Well, they are in the record and I'll get first to you later.

Justice Hugo L. Black: Somewhat (Voice Overlap) --

Chief Justice Earl Warren: Well, Mr. Wilkey, when he was on the stand then, he didn't stand on his second affidavit.

He repudiated the second affidavit and went back to the first affidavit and reaffirmed the truth of that, is that correct?

Mr. Wilkey: Exactly, which he had told us and which we knew or believed to be true by facts not known to other people at the time for those affidavits.

Chief Justice Earl Warren: Did he testify that way for a grand jury?

Mr. Wilkey: He was not asked about that I believe.

I don't know why it would've been because this, you see, did not relate in any way, shape, or form to any allegation in this indictment.

It was -- no relation whatever to this indictment.

The only connection with this indictment was it mentioned the name of the petitioner, Parr, and that's all.

And the trial judge examined these two and said that there was no relevancy to the Diego Heras' trial testimony, whatever in these two.

But he did admit it for the consideration of the jury as bearing on his credibility and that was all for impeachment purposes and it was before the jury.

Now --

Chief Justice Earl Warren: So, he twice repudiated his testimony though, in his second affidavit, he repudiated the first affidavit --

Mr. Wilkey: He -- he repudiated part of the first.

Chief Justice Earl Warren: -- and -- and on the -- on his testimony at the trial, he repudiated the second affidavit?

Mr. Wilkey: He went back to the first, Mr. Justice.

Chief Justice Earl Warren: Well, isn't that t a repudiation?

Mr. Wilkey: Yes, it is.

Chief Justice Earl Warren: Well, that's all I ask.

Mr. Wilkey: He said that was the truth of the matter.

Now, let me give you the circumstances which are in the record under -- under which he made these affidavits, each of them, they are made two days apart.

The one on April the 9th, 1953, was made while he was in the hospital at Galveston, being treated for nervous disorder, upset stomach, et cetera.

He was treated with -- he testified with injections of something to calm his nerves and to -- he was fed liquids and he was in a state of a virtual nervous breakdown and nervous exhaustion.

He then -- that was when the first time affidavit was taken.

He then was transported, accompanied by either his father and a nurse or maybe only his father, to 275 miles to his house in Benavides, where he was in bed and had called the doctor and then received another injection to quiet him at the time the second statement was taken.

Now, it was under those circumstances that the contradictory statements were made, all of which was brought out in the record to the jury.

And we knew the facts of that beforehand and --

Justice Charles E. Whittaker: Mr. Wilkey --

Mr. Wilkey: Yes.

Justice Charles E. Whittaker: -- can I ask you please, had both those statements been made before he testified before the grand jury in 1954, taking --

Mr. Wilkey: Yes, Your Honor.

They both had been made, they were made in April of 1953, both statements.

That was a year prior to the time I took office incidentally.

Justice Charles E. Whittaker: And you did testify before the grand jury in 1954?

Mr. Wilkey: That is correct.

Justice Charles E. Whittaker: And both the statements were maybe prior to that time and then exist as to that time?

Mr. Wilkey: That's right.

And I knew about the statements.

I was informed of them and I reported his testimony in 1954.

Justice Hugo L. Black: Why -- why was the grand jury not entitled of no -- connection with the charge against people?

One of the witnesses, chief witnesses against them, had previously sworn falsely --

Justice Charles E. Whittaker: And this --

Justice Hugo L. Black: -- against that witness -- against that defendant.

Why do you say that was not relevant?

It would seem to me that it was an alibi, but the jury considered it?

Mr. Wilkey: Well, it is relevant --

Justice Hugo L. Black: I don't believe it.

Mr. Wilkey: -- to his credibility.

But let me put this, Mr. Justice Black, we don't agree with the petitioners' contention that Heras was the vital witness to this prosecution, nor we'd agree, is the most important witness.

In fact, we say that this case could've been tried without Heras.

Justice Hugo L. Black: Well, was he an important witness?

How much evidence -- how many pages of the testimony did he give?

I understand to say some tremendous number.

Mr. Wilkey: Yes, Mr. Justice Black.

And I want to get to that.(Inaudible)

Mr. Heras gave about -- they say about 1000 pages of testimony.

My direct examination of Mr. Heras was only 107 pages, I think -- 100 -- my direct examination was 107 pages.

Justice Hugo L. Black: How long did that take?

Mr. Wilkey: And that took less than a day.

He came on the stand in the middle of an afternoon and I had three pages after lunch the following day.

And during that time, there was about 46 pages of colloquy on the meaning and import of the Jencks decision.

Justice Hugo L. Black: Well, he was a very important witness, I just (Voice Overlap) --

Mr. Wilkey: He was one --

Justice Hugo L. Black: I -- I -- I'm asking that question for this reason.

I had suppose that it was as much the duty of a prosecuting attorney to protect the defendant against bad evidence, as it was to bring out evidence against him.

Do you agree to that?

Mr. Wilkey: I certainly do.

And we --

Justice Hugo L. Black: Why was the grand jury not entitled to that evidence?

Mr. Wilkey: Well Mr. --

Justice Hugo L. Black: And this man was this person that -- drawn personally against him?

Mr. Wilkey: I don't know that the grand jury was not entitled to it.

I only feel that was not relevant.

Justice Hugo L. Black: Well, it was not relevant.

And the standpoint maybe to this particular stand, but I was just thinking about the -- I've always hold, that this much a duty of a prosecuting attorney to protect the innocent as was to convict the guilty.

Mr. Wilkey: Absolutely.

And there was no --

Justice Hugo L. Black: I don't mean to say by that innocent here, but I -- I mean introducing evidence that -- against a man from an important witness and that was known to be would -- would reflect on his credibility for this severeness.

Mr. Wilkey: We did not conceal anything about Heras' culpability in this -- that from the grand jury or from the trial jury either.

When we present --

Justice Hugo L. Black: (Voice Overlap) I just understood you -- I thought I understood you to say, you knew at the time you brought it before the grand jury that he had made these false statements against one of these defendants.

And if you did not think that was relevant for you to put in before the grand jury.

Mr. Wilkey: I could've put it in.

I could've told the grand jury about that.

That -- but the things I -- I suppose that I have no independent recollection now, the exact questions that were asked and so on.

But the things that we presented to the grand jury were concerning this case and we also presented the derogatory information on the witness, Diego Heras.

Now, I want to make that clear that we did not paint this witness as being in himself of unimpeachable veracity and I so stated in the record on the stand when the opposing counsel put me on the stand and asked me about vouching for the witnesses and so on.

And I said, in effect, that we had to take them as they were and that I told the jury an argument that we had labelled this man as a coconspirator.

He is labelled in the indictment as a coconspirator.

He is labelled as a participant in these offenses up until July of 1951, which he was.

And the -- no item or material proof that we offer before the grand jury or before the trial court was not completely supported by other witnesses, other testimony, and best of all the documentary proof with the proven signatures of most of the defendants thereon.

Chief Justice Earl Warren: Mr. Wilkey, at the time that he testified before the grand jury, did you have any understanding with him that if he did testify, he would not be prosecuted?

Mr. Wilkey: Absolutely not.

At no time and if --

Chief Justice Earl Warren: The -- then was there any explanation to the grand jury or any suggestion to the grand jury that he be not indicted?

Mr. Wilkey: The indictment which we eventually drew and presented to the grand jury labelled Heras and the witness -- not a witness, she wasn't called as witness, before this trial, she may have been the jury.

A jury may feel as coconspirators.

That was submitted for the grand jury's consideration and was returned.

Now --

Chief Justice Earl Warren: The grand jury declined to indict Heras, is that what you mean?

Mr. Wilkey: Yes.

If they had -- if they had said they wanted to indict Heras, we would have done so.

Chief Justice Earl Warren: Yes.

Now, did the --

Mr. Wilkey: The only --

Chief Justice Earl Warren: -- did the grand jury know -- did the grand jury know that he had made these false affidavits before that?

Mr. Wilkey: These two --

Chief Justice Earl Warren: Yes.

Mr. Wilkey: -- their FBI statements?

Chief Justice Earl Warren: The two we've been talking about.

Mr. Wilkey: I don't think they did.

Chief Justice Earl Warren: Alright, now, when he testified in the grand jury, you say he testified the same as he testified in court.

Now, if that -- if that is true, why wouldn't you call the attention of the grand jury to the fact that he was repudiated -- he had first repudiated one affidavit and was at that particular time repudiating the second, if you wanted the grand jury to rely on -- on his testimony to indict these other people?

Mr. Wilkey: Mr. Chief Justice, I -- I can only say in reconstructing, while I think was my conduct there that I simply did not go into these two statements because they weren't relevant to any of the matters there being concerned.

We did go into the fact and spread on the books fully that Heras had signed these fictitious checks that he taken them to the bank that he had participated returning the proceeds to Parr.

He had signed other fictitious checks.

In other words, the -- the jury knew all about Heras' conduct here.

And that if the matters of these two conflicting statements were not something that was before the jury for consideration for an indictment.

Chief Justice Earl Warren: Did you see any reason why he should not be indicted when the others were?

Mr. Wilkey: Yes, for a good reason.

Chief Justice Earl Warren: What -- what was the reason?

Mr. Wilkey: Statute of limitations.

Chief Justice Earl Warren: On everything he had done?

Mr. Wilkey: If you'll -- our testimony of -- the testimony of Heras is set forth in the record.Heras' participation in the fraudulent scheme ended July 12th, 1951, when the books and all were moved from Parr's office back to Benavides.

Every check in evidence and we've gotten -- we've got a huge batch of checks from the microfilm of another bank, besides the Parr banks, which shows who signed all of the checks.

And Heras testified he never signed a check after July and all these checks in evidence bear him out.

He didn't sign any of these fictitious checks after July.

He was cut off from the confidence of the participants in this scheme.

The direction and control of it was taken over in Benavides by the two people, Chapa and Carrillo.

The bank -- we don't have to rely on just Heras and the checks for that either.

We have the eyeball testimony of four bank tellers in Parr's own bank, as to what went on there.

Their testimony is that Heras did not come in with these checks.

We have able to fix the date as being definitely November the 1st, 1951, and there is no check after June, so we have no proof and all the evidence is he had no participation in the scheme after July 12, 1951.

Chief Justice Earl Warren: But you did name him in the indictment as one of the conspirators.

Mr. Wilkey: That's right, for the period of time he was in the conspiracy.

Chief Justice Earl Warren: Did you -- did you distinguish between the time he was in and -- and the time his is not --

Mr. Wilkey: We --

Chief Justice Earl Warren: -- in the indictment?

Mr. Wilkey: We certainly did, before the jury in the (Voice Overlap) ---

Chief Justice Earl Warren: Well, I mean in the indictment.

Mr. Wilkey: I don't -- I don't know how we would've done that.

The various compensators were -- not all of them were in the conspiracy for the entire time.

It would -- but that was a matter a proof at the trial, we didn't distinguish any of them at the indict -- in the indictment, Mr. Chief Justice.

Chief Justice Earl Warren: Well, I suppose you alleged that he was a conspirator between such and such dates, the same dates that you -- that you -- you alleged the defendants were in a conspiracy, did you not?

Mr. Wilkey: We alleged that the conspiracy existed from a certain date until February 1954.

Chief Justice Earl Warren: Yes.

And that he was member of it?

Mr. Wilkey: And we -- yes.

Mr. Wilkey: And we've alleged that various people were members of that conspiracy.

Justice Felix Frankfurter: Was your initial date -- would your initial date antedate the statute of limitation?

Mr. Wilkey: Yes, Mr. Justice Frankfurter.

And the testimony of errors, as the fraudulent scheme, was admitted only to show the origin of the scheme.

And the jury was so instructed and the testimony was so limited at the trial.

Now, of course, Mr. Chief Justice, in addition to the fact that he was barred in the statute of limitation on March the 6th, 1956, when the indictment was returned, in any conspiracy, you have to take -- frequently have to some of the witnesses, some of the conspirators and use them of -- as witnesses, if they are willing.

Now, Heras was willing to tell all he knew about this, and he did, he testified freely before two grand juries.

Chief Justice Earl Warren: Well, I understood you to say a few moments ago that you prepared the indictment with Heras in it, but the grand jury did not indict and they -- they returned (Voice Overlap) --

Mr. Wilkey: Oh, no -- no, Mr. Chief Justice.

Chief Justice Earl Warren: -- if I'm wrong in that?

Mr. Wilkey: Mr. Chief Justice, you misunderstood me --

Chief Justice Earl Warren: I -- I'm sorry.

Mr. Wilkey: And I wouldn't mislead you for the world.

Chief Justice Earl Warren: I'm sorry.

Mr. Wilkey: You asked me if I made any suggestion to the grand jury that they not indict Heras.

Chief Justice Earl Warren: Yes.

Mr. Wilkey: I said in answer to -- to that, that we prepared the indictment which named him a coconspirator, but did not name him as a defendant.

That is only suggestion that I can recall and that was my answer to your question.

And that was an indication, of course, to the grand jury that we wanted to use Heras as a witness, which we did.

Chief Justice Earl Warren: And they used him as a witness.

Mr. Wilkey: Oh, yes.

Oh, yes, absolutely.

Chief Justice Earl Warren: Alright.

Mr. Wilkey: Now, I --

Justice Felix Frankfurter: Is that part of the grand -- Mr. Wilkey, is that part of grand jury for this -- for as your statement that I might call your adviser instruction, your legal statement to the grand jury as to who is indicted and who is not for their -- for their consideration.

Is that transcribed?

Is that in the minutes?

Mr. Wilkey: No, Mr Justice Frankfurter.

It's not, but I have no hesitancy in saying that --

Justice Felix Frankfurter: I'm not touching the word --

Mr. Wilkey: Yes.

Oh, yes.

I have no hesitancy in saying that after we had heard all of the evidence and I will point out that while Mr. Fortas wants to draw some adverse conclusion from our reserving Heras, he's appearing on the last day, my conclusion would be that the jury had all of the evidence about Heras as well the other conspirators before they heard him and we're thus free to ask him any questions they want with all the facts before them.

I have no hesitancy in saying that after all of the evidence have been brought before this investigative grand jury, we, attorneys -- they hadn't analyze it and decided which in our judgement a -- a prosecutable case was there to be made.

Justice Felix Frankfurter: You mean in the privacy of your office you analyzed --

Mr. Wilkey: Yes, yes.

Justice Felix Frankfurter: Did you then make some kind of analysis or summary of what the evidence -- what prosecutable offenses were made out by the evidence, what were not to the grand the jury?

Mr. Wilkey: I have no recollection, sir.

In some cases, it's -- I'm -- I'm speaking generally not of this case.

Justice Felix Frankfurter: Yes.

Mr. Wilkey: In some cases, I -- I know I've have done that in other cases, the matter is clear, the indictment is laid before them and that's it.

Now, in -- in this case, we might have.

I have no recollection, nowhere one or another, or if anything like that was said, what was said.

Justice Felix Frankfurter: You happen to know what -- what was your practice, if you had a practice of having youre statements to the grand jury in summary or explanation of what the evidence disclosed or manifest, was that taken down by a stenographer?

Mr. Wilkey: No, I don't recall it ever being done and --

Chief Justice Earl Warren: Did Heras adjure the conspiracy or did -- or did you just not have enough -- have recent acts on his part?

Mr. Wilkey: Well, in all frankness, I don't think that Heras have adjured the conspiracy.I think in July 1951, the conspirators adjured him.

And in December 1952 --

Chief Justice Earl Warren: And may -- they held that on him?

Mr. Wilkey: They -- they cut him out of anything to do with it entirely.

And in December 1952, they discharged him from employment with the School District, although for, later on, for three -- three months period, they asked -- asked him to do some specialized work in concerning city lots of Benavides, in his own office and paid him for that.

I -- but the evidence is very clear that in July of 1951, the books in records were moved, Heras was -- meant he no longer had any part -- and in his responsible part, he had it no longer, any part in the basic elements of this scheme here.

I want to say also that making a grand jury transcript is unusual in our district.

In fact, in most districts and the only reason that we made a transcript (Inaudible) was that this was a investigative grand jury, in which we were seeking information from witness which we did not have in full and therefore, we made records of it.

In the case of Heras, we had 12 or 14 statements and this grand jury transcript and we saw no reason to make another record of Heras.

And at that time, we had no idea that the Jencks decision was a year and a quarter away, or that any demand would be made for his transcript.

Whether we had any obligation to at all, that simply was not in my mind or to mind of any my assistants, or in fact, within the knowledge of our experience.

Now, I -- I want to -- I want to go over some of the things which Heras testified about and which were confirmed absolutely by the testimony of all the other witness called.

These are matters that we knew about when we put him before the jury.

As far as -- with the exception of those two, contradictory FBI statements, as far as we knew, he was reliable.

He had told the truth that we have checked out, about this case.

Now, let's see that, Heras was the one who first in -- early in 1953, after he was discharged from the School District, he made statements to state and federal investigators in -- in regard to the fictitious names on the report.

We checked that out with the postal investigators and the others, interviews with postmasters in this county.

And at trial, we put on eight post masters and three or four other witnesses who testified that these names were indeed fictitious.

And this we knew, as to the practice of cashing these checks at the bank, we didn't rely entirely on Heras for that.

We had Carl Williams, Edna Fitch, Cristine Ray and Reed Nunnally (ph) who had either dealt with Heras three of them had dealt with him and -- correction, two of them had dealt with him, the other one that seen him in there, and Mrs. Cristine Ray, who went to work November the 1st, 1951 taking Carl Williams' place, testified that she had never dealt with Heras and had never seen him in connection with this, but the fictitious checks kept coming in.

And Reed Nunnally testified that Oscar Carrillo's visits to the bank increased noticeably and -- number at that time and he went to see Donald.

Now, the scheme at the bank as revealed by this eyeball testimony of this witness was that Heras normally went to Donald and Donald went the individual teller and picked up the bundles of cash.

So that was confirmed in every way, even the incident about Heras being shortchanged $1000 in which he had, one time, dealt with Mrs. Fitch.

She made a mistake.

She was interrupted by a telephone call and she put only $3000 instead of $4000 in the envelope.

And when he saw that, he had only three packs, he came back and she found she was $1000 over and he got the extra thousand.

That was remembered by the other people, he took her a box of candy in gratitude, and as Carl Williams testified, he ate some of the candy, the whole bank knew of this.

This was no secret going on in the Parr bank desk.

Now then, as to Benson, and Benson who was a much more jolting witness to the defendants then was Heras.

Benson was the auditor.

He had handled some of these packages of money in one case.

He had gone to the bank for Parr.

In another case, he had conveyed a package from Heras to Parr, which Heras told us about.

And furthermore, Benson had made out the income tax returns, not only at Parr, but at Chapa and Carrillo.

And he knew about this extra funds coming in.

And in 1953, long after, Heras have severed any connection with the School District, Benson testified as to the $19,667 of unidentified income in Chapa's return and a $10,200 unidentified on Carrillo's return.

And there were others years prior to that in which you see the thing just building up.

Now, as to obtain your signs, Mr Heras told us that signs and I think this was after the grand jury, but it confirmed the whole thing.

Then Mr. Saenz had an account with the Hebbronville Bank and we went down there and we found there the microfilm and you see the microfilm had disappeared for this five years from the two Parr banks.

We went down to the Hebbronville and we got this photostats of checks, which cover from 1949 to 1953.

And they showed that Benson signed -- countersigned the checks until 1950.

That George Parr countersigned thereafter, with exception of the last month or two when Milligan signed.

They show that Heras signed as makers, until June of 1951, that's the last check, June 1951 and thereafter, the factitious checks to the petitioners signs, which were in eight different names deposited to his account, were signed as maker by Oscar Carrillo and Octavio Saenz, which confirmed, what Heras said -- told us as to the practice in the office of who signed the checks and who prepared them.

Now then, in addition to these checks, we had literary hundreds of documents, tax notices, receipts, deposit slips, annual reports and a great number this had the signatures of Parr, Chapa, Saenz, Oscar Carrillo, I think those four principally on them.

There are any others I don't recall.

The FBI handwriting expert analyzing this for us and we knew that the signatures of the petitioners here on this fraudulent instruments were authentic.

There -- the petitioners had actually participated with there own hand.

In every respect, as to what had gone on, as to the origin of the scheme, Heras was confirmed and furthermore, by all this evidence, we carried the scheme on during the period of -- where limitations had not run.

As I say --

Chief Justice Earl Warren: Mr. Wilkey would you mind -- would you mind telling us what the distinction is between this case and the hypothetical case that Mr. --

Mr. Wilkey: Oh, the --

Chief Justice Earl Warren: -- Fortas -- Mr. Fortas made.

Mr. Wilkey: I -- I'm glad you reminded me of that.

Chief Justice Earl Warren: I think it's important that we get --

Mr. Wilkey: It -- it is.

Chief Justice Earl Warren: -- to that for --

Mr. Wilkey: On the -- on the mail fraud.

I'm interested in the -- doctor's secretary about which you and Mr. Justice Whittaker inquired.

It's cited about three times at each brief of petitioner and I think one of the Justices in questioning, pointed out the fundamental, fallacy in it.

And it's simply is that there is no use of the mails in the execution of any fraudulent scheme.

Now here, we have a fraudulent scheme of a giant (Inaudible).

In doctor's secretary case, we don't have any scheme at all and we don't have any use of the mails to carry it out, all we have there is a simple embezzlement case.

But and I -- if you add to it, as I think was suggested by Mr. Justice Whittaker, if you add to it, the element of the secretary increasing the bill to the patient fraudulently and procreating the extra proceeds and then remitting to the doctor the legitimate one, you have a mail fraud scheme.

I think Mr. Fortas admitted that (Voice Overlap) --

Chief Justice Earl Warren: That's right.

Mr. Wilkey: Yes.

Chief Justice Earl Warren: Yes.

Mr. Wilkey: Now, we have not only that.

But we have a case where the secretary controls the legitimate expenditures of the office.

The secretary controls all of the depositing in the banks.

The doctor's secretary controls both banks where the money goes and then as in the case of Chapa, fraudulent tax receipts which never appear on the tax rolls as in the year 1953, are set out in the proceeds appropriate.

We have a classic mail fraud scheme here.

Chief Justice Earl Warren: Suppose -- suppose I -- I change his hypothetical case just a little and suppose there were two girls in that doctor's office and they said, “Well, we'll induce more people to -- to pay money into the cash by cash than by -- than by check.

So we'll have more money, a -- a larger fund to steal from and we'll steal from -- from that.” So they induced people to -- to pay in -- in cash rather by -- rather than by check.

And then the two of them exploit that -- that fund, would that change the situation in any?

Mr. Wilkey: Yes, it would.

Chief Justice Earl Warren: Now -- now, would that be mail fraud?

Mr. Wilkey: As I understand your example, Mr. Chief Justice, I don't think it -- if they -- it would be that the patient comes in the office and pays by cash.

I don't think the use of the mail is -- is there, if I beg your example right.

Chief Justice Earl Warren: Well, I -- I just changed his -- his case by saying that they induced people to put more money into the -- into the cash funds instead of paying it by check, it came through the mails.

And -- but some of the checks did come through the mails and they -- those they turned into the -- into the doctor.

But -- but the rest of it, they kept for them -- kept them for themselves, so this fraudulent scheme (Voice Overlap) --

Mr. Wilkey: I think I have your example now.

Chief Justice Earl Warren: -- will that -- will that be a mail fraud?

Mr. Wilkey: You have posed the situation in which there is a fraudulent scheme.

Chief Justice Earl Warren: That's right.

Mr. Wilkey: With no use of the mails to execute it.

Chief Justice Earl Warren: Well --

Mr. Wilkey: So there'll not be mail fraud.

Chief Justice Earl Warren: Well, then --

Mr. Wilkey: Because the -- the money coming in, it brought in the checks and the mail is not (Voice Overlap) --

Chief Justice Earl Warren: Yes.

Mr. Wilkey: -- appropriate.

It's the cash that's appropriate.

Now, if you mix the --

Chief Justice Earl Warren: Yes.

Mr. Wilkey: -- two together, you mix the two together in someway and you posit the -- all these principles of control here, which we have in this case, then you have different situation and perhaps, the mails would be used there.

Justice Felix Frankfurter: If you comingle -- if you comingle the two funds that the Chief Justice question's possible, you comingle the two funds namely, they get a lot of patients to leave their X dollar behind, but some patients they -- they bill and they get a -- an amplified fund and the funds go -- and the money that comes in through the -- through the checks in the mail, they have a full control of depositing the checks and getting them cashed on the bank.

Mr. Wilkey: I -- I don't think that that has in it the elements of a mail fraud scheme.

But in our case here, we have the complete control of the operative process of the -- all of the collections and disbursements and the distribution of the dividends to the participants in the fraudulent scheme.

Justice Felix Frankfurter: But as every -- but every piece of -- of every document that is deposited in a mail chute or a mailbox or a drop in the -- in the post office substation, would everyone of those documents innocent -- I mean such that -- the bills that was sent out for the taxes and what the taxpayer returned, the Humble Oil Company and the others, but each one of those in and of itself, in isolation, innocent?

Mr. Wilkey: No.

It -- it was and -- and I won't get to that.

In the -- in the first place, I'll point out very quickly that Counts 15 and 16 of the indictment to substantive counts, involved under anybody's theory, a classic case of mail fraud because here are the proceeds of the checks coming in through the mails, which are misappropriated by one of the conspirators and this one (Voice Overlap) --

Justice William J. Brennan: Wel, Mr. Wilkey, you said -- we said that we had here something like the doctor's secretary adding $5 to everyone of the bills, getting a check $5 more than the patient owed and then cashing the checks and then taking the $5 do -- is that this case?

Mr. Wilkey: Yes, it is.

In this respect, we have two -- where we have two instances or -- or two ways to -- to look at that, which says that this is, in effect, this case.

In the first place and this is the -- you must appreciate this to the size of the scheme and the continuous nature of it.

We have here a five-year continuous scheme.

Justice Hugo L. Black: What difference does that make --

Mr. Wilkey: That means --

Justice Hugo L. Black: (Voice Overlap) covers --

Mr. Wilkey: That means that it would've come to a grinding halt, if the mails had not been used.

Justice Hugo L. Black: You mean, if they had not sent out bill for the taxes (Voice Overlap) --

Mr. Wilkey: Absolutely.

Mr. Justice, what the petition --

Justice Hugo L. Black: But -- you based wholly on the fact that they used the mail to send out legitimate tax bill?

Mr. Wilkey: Well, they were (Voice Overlap) --

Justice Hugo L. Black: But they -- is there any evidence that -- or charge they were illegitimate tax bill?

Mr. Wilkey: Some of them were, yes.

Justice Hugo L. Black: You have that evidence in that regard?

Mr. Wilkey: Yes, in the year 1953.

Yes.

Justice Hugo L. Black: Now, what count is that and what --

Justice Felix Frankfurter: Or it has been your --

Mr. Wilkey: (Voice Overlap) --

Justice Felix Frankfurter: -- doesn't it?

Mr. Wilkey: -- the legitimate tax bills support the conspiracy count, Count 20, on which all of the petitioners were convicted.

Justice Felix Frankfurter: Is that late as in know where it happens, Mr. Wilkey?

Mr. Wilkey: I don't know.

Justice Felix Frankfurter: Doesn't it have to be?

Mr. Wilkey: Oh, it doesn't have to be spelled out as an overt acting, which proved there's an overt act in the record, Your Honor.

Justice Felix Frankfurter: No, but over the acts conceded that the mail fraud statute require overt act, the conspiracy statute does, doesn't it?

Mr. Wilkey: Yes.

Justice Felix Frankfurter: (Voice Overlap) overt act.

Now, do you not have to prove the overt act was lame?

Mr. Wilkey: We did.

And additional --

Justice Felix Frankfurter: What's that?

And so I ask, whether one of the overt acts that you laid, was this 1953 illegal or bloated tax claims.

Mr. Wilkey: Mr. Justice Frankfurter --

Justice Felix Frankfurter: (Voice Overlap) can you by evidence, to state in your conspiracy charge as being effectuated by an overt act, unless you laid the overt act?

Mr. Wilkey: Yes.

We proved the over acts which we alleged and we proved others in addition.

And they're always clearly admissible and the -- the fraudulent fictitious tax notices set out by Chapa in 1953, were admitted on the conspiracy count to support it and also as part of the general scheme on the substantive counts.

Justice Hugo L. Black: May I ask you a question to be sure that I understand.

I'm not sure that yet I do understand.

Are you saying that a county's Tax Collector, who sends out bills for taxes each year and who for five years, after that money comes in and steals it systematically, or embezzled it, can be tried for violating the mail fraud law?

Mr. Wilkey: If his business is operated essentially through the mails, yes.

Justice Hugo L. Black: But I'm talking about -- the only part of it is operated through the mails, as I asked you.

Is that the Tax Collector sends out bills I'd get them and I suppose you do, for taxes that are due?

That's all he does, that's the only way he uses the mail, but for five years he -- he continuously pilfers money that should be -- go -- go to the governing bodies, are you saying that under those circumstances, that's a violation of the mail fraud law?

Mr. Wilkey: Yes.

If the man who pilfers some money, has control of the use of the mails and the mails are used to get in the money --

Justice Hugo L. Black: That --

Mr. Wilkey: -- over a period of time, which he pilfers.

Justice Hugo L. Black: Well, I'm -- I am conceiving that the man has the right to mail tax bills.

Tax Collector has, he does it all the time and nothing wrong about it.

The bills are all 100% right.

They hold the money.

They send it in.

That's the only you see -- you'd make of the mail.

But for a period of years, he's just a little -- he's thief that steals -- in along -- during that time.

I can understand how he'd be guilty of theft, of course, embezzlement.

If your claim as I understand it and you have to depend on that that would also make him liable for violating the mail fraud statute?

Mr. Wilkey: Yes, if it was a continuous scheme, which, I think, your example poses.

Justice Hugo L. Black: I suppose a bookkeeper, one of the big department stores here, sends out bills constantly for the store, send them out each month.

They'll -- they'll pay legitimate, honest bills and that bookkeeper, during that time, is stealing from the employer, the department store.

Under your statement, he would be guilty of not merely of theft and embezzlement locally, but would also be guilty of violating the mail fraud statutes?

Mr. Wilkey: I don't think so in that (Voice Overlap) --

Justice Hugo L. Black: Why, he does it five years.

Mr. Wilkey: Because --

Justice Hugo L. Black: All the time, he's sending out the bill.

Mr. Wilkey: Because the bookkeeper is not in control of the store.

What happened here is --

Justice Hugo L. Black: Well -- well, suppose it was the manager of the store?

Mr. Wilkey: Well do you have a different case.

Justice Hugo L. Black: In other words, the manager, who sends out the bill is perfectly ligitimate, and -- through the mail -- and stealing from his company, would be guilty of violating a mail fraud statute, in addition to theft and embezzlement.

Mr. Wilkey: If he --

Justice Hugo L. Black: And that's what your case depends on here, isn't it?

Or if --

Mr. Wilkey: (Voice Overlap) no, not that entirely, by no means.

We have this situation and I want to argue this case and I perfectly -- I don't want to be -- I -- I -- if I was made Mr. Justice, I don't want to be pinned down to a narrower proof or -- or far list evidence of mail fraud than we have in this case.

Justice Hugo L. Black: Well, is there any mail -- does there any mail fraud -- any -- any use of the mail here for any purpose except to collect bills, any of that, or anything else, except to collect bills?

Mr. Wilkey: I know that was what (Voice Overlap) --

Justice Hugo L. Black: Is there any -- are there any bill -- are you claiming that there any of those bills were illegitimate bills?

Mr. Wilkey: Yes, the --

Justice Hugo L. Black: In -- in what respect?

Mr. Wilkey: The evidence shows uncontradicted, that in 1953, a whole string of taxpayers were left off the tax rolls.

And that a special (Voice Overlap)

Justice Hugo L. Black: Well, did they send them bill?

Mr. Wilkey: They certainly did.

Justice Hugo L. Black: Through the mail?

Mr. Wilkey: We have the receipts and evidence.

Justice Hugo L. Black: Through the mail?

Mr. Wilkey: Through the mail.

Justice Hugo L. Black: And you are depending on -- you say now, as I understand it that introduces to the fact although I haven't -- hadn't understood you rely -- you say that they sent out bills to people that didn't know them?

Mr. Wilkey: Oh, they owed them.

Justice Hugo L. Black: They owed them?

Mr. Wilkey: But they decidedly, have planned in advance to appropriate the proceed (Voice Overlap) --

Justice Hugo L. Black: Well, I -- I understand that.

That you did, goes on the idea that they sent out legitimate bill and they intended at that time hoped -- hoped to and did succeed in stealing money as it got in.

Mr. Wilkey: That is correct, for the -- for the major portion of the scheme here, over the five-year period.

But let me go -- let me explain what we have here, we don't have that simple scheme.

We have a situation where the money was at all times in no manner was cash or taxpayer's checks, or on deposit, in the control of the conspirators whether it was in the -- the Tax Collector's office, which was Mr. Chapa and Carrillo, Parr's banks which is Parr and Donald and it was a design, intent and premeditation, as shown to this evidence, to appropriate and split the proceeds of this over the period of five years.

And the petitioners have never answered, I point about this being a continuous -- continuous scheme and the point about control, which makes it different.

Justice Hugo L. Black: And they or any of them, been tried in a state court about theft or embezzlement (Voice Overlap) --

Mr. Wilkey: Some of them have -- some of them have.

I don't know.

Justice Hugo L. Black: What happened to those cases?

Mr. Wilkey: The convictions that I know about.

They were convictions of Parr, Donald and Chapa and they were reversed.

Justice Hugo L. Black: Then, what happened?

Mr. Wilkey: I don't know.

I -- I don't know whether the -- I don't know where they -- those -- those people have not been retried.

I don't know about any others that maybe involved.

Justice Hugo L. Black: Not been retried in the State?

Mr. Wilkey: Not been retried in the State.

And those reversals took place long after this indictment.

I want that made clear because the petitioners' brief doesn't.

But I want to make clear that's there's not 10% of the proceeds involved here, as was suggested by -- colloquy between Mr. Justice Whittaker and counsel.

The evidence shows, for example, in 1953, that the receipts from the State and taxes amounted to $790,000, that the budget of the two schools was a little over $400,000 plus six employees in that claim office at Benavides, which left an enormous amount of money for the conspirators to appropriate.

What we prove specifically, check by check, was only a small part and it is that the operation of a public mail order business which made it over a period of five years, which made this a scheme to defraud --

Justice Felix Frankfurter: What was the relation --

Mr. Wilkey: -- the mail fraud statute.

Justice Felix Frankfurter: What was the relation between the $700,000 part and the $400,000 that you've just mentioned?

What --

Mr. Wilkey: The --

Justice Felix Frankfurter: -- was the $400,000, what was that?

Mr. Wilkey: The evidence on budgetary figures showed that between Benavides and Freer, the revenues were split exactly equal and the budget in each case was almost exactly $200,000 for the two schools that made $400,000.

In addition to that, the school had to maintain the small office at Benavides which employed about six people.

Now then, in the same year, 1953, the evidence showed that the tax revenues were $650,000.

Justice Felix Frankfurter: By tax revenue, you mean, the money they got in from sending out bills?

Mr. Wilkey: Yes, plus --

Justice Felix Frankfurter: Well, you know why -- why was more money received in the $400,000 amounting to the budget of the two towns?

Mr. Wilkey: We say, because the petitioners' plan and did appropriate it to their uses and that they were operating this public business for their own benefit.

Not on school (Voice Overlap) --

Justice Felix Frankfurter: (Voice Overlap) how -- why was $700,000, why were tax bills for $700,000 sent out?

It must've been sent out in order to come in, if the budgetary requirements were only $400,000?

Mr. Wilkey: To provide the (Inaudible) for the conspirators to enjoy.

Justice Felix Frankfurter: But then, it isn't a case of sending out compulsory legally required taxes?

Mr. Wilkey: It isn't, Your Honor, because they have the option to put the rate anywhere they want it.

In 1951, they raised the rate to the legal maximum.

Justice Felix Frankfurter: So that they meant -- they manipulated the tax system in order to have revenues out of which to spoon out or to -- to spoon out moneys for their own feeding, is that right?

Mr. Wilkey: Exactly and there's had to be --

Justice Felix Frankfurter: (Voice Overlap) --

Justice Hugo L. Black: Now, where is that part?

Mr. Wilkey: -- proof of that of every tax bill that went out.

Justice William J. Brennan: What's that?

There have to be bloat in every tax bills that went out.

Mr. Wilkey: Right.

That is why we say that all of these mailings were necessarily an execution of the scheme and were in themselves, carried fraudulent misrepresentation.

Justice William J. Brennan: Are you telling us this that when they manipulated the tax bill, they immediately divided it without regard the requirements except to be sure that they got something above requirements in the way of tax receipts.

If $2.50 would've raise requirements, they fix the rate of $3, so that they get more than the requirement, is that it?

Mr. Wilkey: Exactly, only if you'll look on Government Exhibit 1 on page 137 to 138, you'll see that your exact figures are that the tax rate was raised from $1.50 for the year ending August 1950 and on Government Exhibit -- well that's the rate in -- in August 1950 and on Government Exhibit 4 and about page 132, the tax rate is now $1.75 which was the legal maximum.

Justice William J. Brennan: Well, I don't think (Voice Overlap) --

Justice Felix Frankfurter: (Voice Overlap) --

Justice William J. Brennan: Excuse me, I just want to get clearly what the Government's theory was that they didn't need the raise if the rate -- the additional 25 cents for the purpose of covering requirements --

Mr. Wilkey: Absolutely.

Justice William J. Brennan: -- that they didn't raise it for the purpose of giving in the surplus which they could steal?

Mr. Wilkey: Absolutely.

And as proof of that Mr. Justice Brennan, in the following year after these people were kicked out of the School District, in Freer, the school kids instead of having a budget of $200,000 as they'd had approximately the past few years, had a budget of $278,000 spent on them, without any change in the tax rate.

Justice Felix Frankfurter: In other words, when Mr. Black and I get our tax bills, we get bills that are fixed by law.

These people were the law?

Mr. Wilkey: Yes.

Justice Felix Frankfurter: In fixing the amount of tax bill that they sent out?

Mr. Wilkey: Yes.

And they had no way of being caught up with because all of the facets of the scheme were within their power and as Mr. Parr said to Mr. Benson, it won't happen here.

I have got control.

Justice Hugo L. Black: Now, Mr. Wilkey, you presented the -- the last two, three minutes, you presented the case which so far as I'm concerned is entirely different to the case you heretofore presented.

Where did the court charged the jury along the line that you have suggested and why is it not in your brief?

Mr. Wilkey: Mr. Justice Black, I believe that it is --

Justice Hugo L. Black: Where is it?

Mr. Wilkey: -- in our brief.

Justice Hugo L. Black: Where is it?

Where was any such question submitted to the jury on the guilt?

Mr. Wilkey: The giving the indictment, if you will, if you will refer to -- at page 12 of the record and 13, you -- you will see that the charge of the indictment in the first count in paragraph 14 --

Justice William J. Brennan: Instead (Inaudible) Mr. Wilkey, we don't have anything here at all.

Mr. Wilkey: Oh (Inaudible) a charge of the indictment was that the defendants devised and intended to devise a scheme, an artifice to defraud one -- but I'm putting in these numbers, to defraud one that Benavides Independent School District, BISD.

Two, persons obligated by the laws of the State of Texas to pay taxes to the BSID herein called the taxpayers.

That's your bloat in every bill that went out.

Three, the State of Texas, that's the 140,000 a year, in addition to the 650,000 that they got by filing the fraudulent annual reports with the State, which contained all these fraudulent checks (Inaudible).

That's the only way they found out about the checks.

Four, and the persons obligated by the laws of the State of Texas to pay taxes to the State of Texas and to obtain the money and property of the BISD and the taxpayers for themselves, their relatives, associates and supporters.

Now, those are the people who were defrauding those four categories.

Now, then (Voice Overlap) --

Justice William O. Douglas: But there nothing in there about bloating the -- the --

Mr. Wilkey: No.

Justice William O. Douglas: -- assessments, so that, you --

Mr. Wilkey: No.

Justice William O. Douglas: -- you said that was just in the cases.

Mr. Wilkey: It was the -- it's a -- it was our proof at the trial that as I've referred to the record that the assessment did go upnd --

Justice Hugo L. Black: Well, if that's the (Voice Overlap) --

Mr. Wilkey: -- the money was appropriate.

Justice Hugo L. Black: Quite a different thing from what you argued a while ago, the assessment goes up, the assessment goes up frequently.

The Tax Collector raises the assessment --

Mr. Wilkey: (Voice Overlap) --

Justice Hugo L. Black: Tax Assessor raises the assessment.

I understood you that the last to be said, that there was a certain amount of percentage of legitimate tax that these people owed.

And that the bills were sent out for that plus something over the tax as fixed by law.

Is that what you're saying?

Mr. Wilkey: There are two things said.

Not over the tax is fixed by law --

Justice Hugo L. Black: Well, are you challenging the law of Texas as unconstitutional or the way they fix the taxes?

Mr. Wilkey: By an oath.

They operated within the legal limit fixed of the -- rate of 175 -- $1.75.

Now, within that limit, they fixed the budget for the school kids and kept it at such and they fixed their receipts at such to allow this (Inaudible) for themselves.

Justice Hugo L. Black: What you're saying now, as I gather, and maybe that's the cost of this.

As I understand it, what you're saying is these people are charged with the duty of setting assessments.

And that they set it too high in order that they can collect more.

Mr. Wilkey: They set it -- we are -- we are not explaining.

Justice Hugo L. Black: Did they set it contrary to the law of Texas?

Mr. Wilkey: No.

No, no Mr. Justice Black.

Justice Hugo L. Black: Did they send out a single bill that was more than the law of Texas made legal?

Mr. Wilkey: No, because they were out of control of --

Justice Hugo L. Black: Well, I'm not talking about who had control.

The Tax Assessor and Tax Collector have control.

Are you charging that they used their power to tax in a way that you can take it here collaborative to show that they raised the tax too high in order to collect money fraudulently?

Mr. Wilkey: Our -- we do not presume to say whether the tax rate should have been lower or the school budget should have been higher, because that would be at matter of judgment, if the judgment were harnessed.

But what we are saying is that the -- the rate was fixed at the maximum permitted by law and that the budgetary expenditure for the school children was kept at a figure, which in 1953, allowed a -- a visible gap of the margin between a little over $400,000 and $790,000.

Justice Hugo L. Black: You're --

Mr. Wilkey: That's --

Justice Hugo L. Black: -- collaterally attacking -- you're collaterally attacking the tax assessment.

Maybe you can.

Mr. Wilkey: We're --

Justice Felix Frankfurter: Or just saying -- are you saying that having power to fix a rate within a statutory limit, they fixed it not from the point of view of procuring taxes, to serve the public, they fixed it with a deliberate scheme to get money, go for chance within the legal limits in order to funnel it into their pocket.

Mr. Wilkey: Absolutely, and that's our --

Justice Hugo L. Black: When we get through, when you have time, would you send us references in the record, to the charges does it show us, so that we can see that the case was tried, indictment charged that case was tried on that basis, were submitted to the jury on the basis that you're charging them with fraud and that they assessed higher than they should have.

Mr. Wilkey: Fraudulent.

Justice Hugo L. Black: And they get money for themselves.

Mr. Wilkey: Mr. Justice Black, I can tell you that we didn't request any such charge on that.

Justice Hugo L. Black: Well, we did they give any?

Mr. Wilkey: And --

Justice Hugo L. Black: Was any such thing submitted to the jury?

Mr. Wilkey: Not in -- in that -- in that language, but we --

Justice Hugo L. Black: I don't care what language --

Mr. Wilkey: Will not -- not on that -- not the way you put it there, but the fact --

Justice Hugo L. Black: But, with -- will -- will you -- will you -- when they later send us the references to the record showing where the indictment charged what you've just said.

Where their evidence was submitted on that point and where the Court made that the issue on -- upon which the guilt or innocence of these defendants depended?

Mr. Wilkey: We'll be glad to send you those references, but I want to say now that we didn't take in position here or at the trial that the rate had to be so and so or that the budget for the school had to be so and so.

We simply proved that so much went for legitimate purposes and there was a huge amount that was left over and we proved they've paid them by item on checks -- totally got $190,000 on the items plus others.

And many others on the taxpayer's check, that it went to the conspirators.

Now, that was -- that was our -- our proof for the trail, but we will send you this, you must --

Justice Felix Frankfurter: You've heard what -- you've heard what Justice Black wants.

Mr. Wilkey: Yes.

Justice Felix Frankfurter: Would you keep in mind what I like to your testimony.

As I understand your case that these people having legal machinery in their hands, designed a scheme to use that legal machinery so as to produce funds out of which they could scoop illicit profits for their pocket.

Mr. Wilkey: Yes, Mr. Justice Frankfurter.

Justice Hugo L. Black: You referred to the record of that charge in the -- and so-called on that.

Justice John M. Harlan: Is your summation printed?

Is your summation to the jury printed?

Mr. Wilkey: Yes, it's in the records.

Justice John M. Harlan: Is that in the record?

Is that available here in the Court?

Mr. Wilkey: Yes.

It will be found -- in the Volumes 14 and 15 of the --

Justice John M. Harlan: (Voice Overlap)

Mr. Wilkey: -- of the printed record.

It will be the (Inaudible) counsel.

Justice William J. Brennan: How many thousand pages do we have?

Mr. Wilkey: It comes to about 5800 and something that's where the Court of Appeals opinion is printed.

Justice Potter Stewart: That's why we have (Inaudible)?

Justice Felix Frankfurter: What did it -- it say?

Justice Potter Stewart: Yes and had any of it (Voice Overlap) --

Justice John M. Harlan: I'd like to ask you one question.

I'd like to ask you one question out of curiosity, for having you here or a wide territory.

I notice in the record that you were called to the witness stand.

Mr. Wilkey: Yes, sir.

Justice John M. Harlan: What issue do you call on?

Mr. Wilkey: I was asked about several different things.

One, I recalled, being asked about how we happened to get a copy of the state grand jury transcript which we turned over to the defense.

The answer to that was that the grand jury had been held to be invalid with just a body of men having no significance in law and after that, the prosecutor furnished to exist as a statement.

And we turned those over in the part of witnesses.

As to the rest of my testimony, I --

Justice John M. Harlan: Well don't be, is it printed?

Mr. Wilkey: It's -- it's printed, it's there, yes it's there.

Chief Justice Earl Warren: Very well.

Mr. Wilkey: Mr. -- Mr. Chief Justice, I started out to ask you.

I'm going to file something in regard --

Chief Justice Earl Warren: Yes.

Mr. Wilkey: -- in the questions of Mr. Justice Black and Mr. Justice Frankfurter.

We were served with a reply brief here that in (Inaudible) 31 pages plus 41 of the exhibits.

I haven't had the chance to look at all of the exhibits, although I've read the brief.

I would appreciate leave to file of whatever an answer seems to be called for there and no questions they suggest, we should've filed an affidavit of the grand jury secretary.

We have that affidavit.

We would like to print that.

Chief Justice Earl Warren: But we don't need the whole brief and others.

Mr. Wilkey: Yes, I understand.

Chief Justice Earl Warren: We don't need the whole brief.

Mr. Wilkey: Thank you.

Chief Justice Earl Warren: Alright.

Mr. Sharpe.

Argument of T. Gilbert Sharpe

Mr. T. Gilbert Sharpe: Mr. Chief Justice, may it please the Court.

Chief Justice Earl Warren: And Mr. Sharpe, you may -- you may respond if you wish to the memorandum that counsel is going to -- to furnish for Justices Black and Frankfurter.

Justice Hugo L. Black: Would you mind -- did you try the case?

Mr. T. Gilbert Sharpe: Yes, Your Honor, I was a trial counsel.

Justice Hugo L. Black: Would it bother you to state immediately whether the issue that had just been stated here was tried out in this case?

Mr. T. Gilbert Sharpe: I was preparing to do that, Your Honor.

The Government's theory that you have just -- just heard here was not its theory in the trial court.

There is not a line in the indictment which alleges that the tax bill, since the taxpayers were inflated or were excessive or illegal.

And there is not a line of evidence in the record that would support that theory even if had been alleged.

That theory -- I've lived to this case four years and the first time I heard of it was when the opinion of the Court of Appeals has handed down last year.

It was not even urged by the Government at the trial court.

We --

Justice Hugo L. Black: No mention of it in the charge to the jury?

Mr. T. Gilbert Sharpe: No, Your Honor.

None whatsoever.

Justice Felix Frankfurter: May I rephrase what I understand to be the claim of the Government?

Mr. T. Gilbert Sharpe: Yes, sir.

Justice Felix Frankfurter: Not that the rate was excessive or bloated, but it was so fixed at such a rate that money would be forthcoming out of which, they could take what they schemed from the beginning to take.

Mr. T. Gilbert Sharpe: I understand that to be in Mr. Wilkey's contention --

Justice Felix Frankfurter: Yes.

Well, that's a very different thing --

Mr. T. Gilbert Sharpe: -- Mr. Justice Frankfurter.

Justice Felix Frankfurter: -- for things that bloated.

Mr. T. Gilbert Sharpe: Yes, sir.

We say that that was not their contention in the lower court if the record would bear us out.

The contention of the Government in the lower court was that money came in sufficient for the school needs, but was not spent for proper purposes.

And I can give you a record reference the argument of counsel is printed to Volume 14 of the record at pages 5006, 5007, were Government counsel and his submission, points out that very theory that the money came in, but was used for wrong purposes.

Justice Felix Frankfurter: Would you regard -- and if there was such a scheme to do that, if there was a designed scheme to fix the rate, held be it, it might be a legal rate to fix a rate to the end, that the school purposes maybe satisfied thereby, but also some cream maybe skimmed off and then the mail was used.

The mails were used the way they were used here, would you say that was or was not within the statute?

Mr. T. Gilbert Sharpe: Mr. Justice Frankfurter, let me answer you this way, if the indictment alleged what you have just said and the evidence supported it and showed that the amount of money raised in each fiscal school year, was so clearly excessive and beyond --

Justice Felix Frankfurter: That was not my question.

Mr. T. Gilbert Sharpe: Yes, sir.

Justice Felix Frankfurter: That was not in my question.

Mr. T. Gilbert Sharpe: Well, sir, I -- I'm trying to answer it.

Justice Felix Frankfurter: Alright.

Mr. T. Gilbert Sharpe: No, sir.

I don't think that that -- I don't -- I wouldn't be with that position.

And read -- and then say so, as that we have cited the court a case in our reply brief, Madely versus the Trustees of the Conroe School District, decided in 1939, by Court of Civil Appeals of Texas, 130 S.W. 2d 929, which clearly holds that it is not improper for a Board of Trustee to accumulate moneys at the end of the year and that case, they accumulated some $150 -- $200,000 of maintenance tax money, which the district used for construction of buildings which ordinary will be supplied by a bond issue.

So, it is not illegal for a School District to set a budget which has a number of variable factors and that one would be the percentages of collections, the others would be expenditures, I serve as a School Board Trustee for six years, in the Brownsville District.

And I know what any School Board Trustee knows that you can't set a budget with accuracy, you have some variables on it.

But under the Government's theory, if the School Board Trustee fixes a budget of lets say, were an expenditure of $10,000 is required for utilities, gas and electricity and so forth and so on, the tax bills are sent out and the money comes in, and only $5000 are used for that purpose, the other $5,000 in -- is embezzled, that would be mail fraud case.

Now, Justice -- Mr. Justice Brennan asked the question -- asked us a question a while ago that I want to address myself to.

Under Texas law, each year a Board of Trustee is required to fix a budget and the collections, that is tax collections, are based upon, one valuations fixed by a separate Board of Equalization to the rate which is fixed by the School Board.

Justice Potter Stewart: Well, I -- what I --

Mr. T. Gilbert Sharpe: Yes.

Justice Potter Stewart: -- still don't quite under -- understand about your Texas law, don't you strike a tax rate?

Mr. T. Gilbert Sharpe: Yes, sir.

Justice Potter Stewart: As the consequence of dividing the rateables into the requirements?

Mr. T. Gilbert Sharpe: Either the tax rate has to be adjusted or the valuations and usually ---

Justice Potter Stewart: Well, I understand it as a maximum --

Mr. T. Gilbert Sharpe: Yes, sir.

Justice Potter Stewart: -- tax rate of $1.75.

Mr. T. Gilbert Sharpe: Yes, sir.

Justice Potter Stewart: But assume you had rateables with requirements which dividing the latter by the former, would give you a tax rate of $1.25, well within the statutory -- the statutory limit, is that the way you arrive in a tax rate in Texas?

Mr. T. Gilbert Sharpe: In sometimes, but in exceptional cases arrived at that way.

Usually, the Board takes the evaluation submitted to it by the Board of Equalization.

The needs, in most instances, exceed the amount of money the Board is going to get anyway and applies the maximum rate to it.

That is the usual procedure.

Justice Potter Stewart: Well, this is -- this is because in order to raise as -- an amount this close as possible to the needs, you then apply the maximum tax rate?

Mr. T. Gilbert Sharpe: Yes, Your Honor.

But it is not illegal in Texas to raise money in excess of actual needs as is shown by the budget.

Now, I'd like to say that --

Justice Potter Stewart: Now, this -- this I appreciate.

In other words, you might have a -- a provision in a budget which you -- everyone knows is going to -- to result in a surplus.

Mr. T. Gilbert Sharpe: Yes.

Justice Potter Stewart: Over actual expenditures --

Mr. T. Gilbert Sharpe: Yes, sir.

Justice Potter Stewart: -- for that year.

Nevertheless, if you have such a provision in the budget, and were not now dealing with a -- a budget and valuation which will realize more than -- would require a rate higher than the maximum.

If you still have this provision in the budget for the surplus, that's reflected in the rate isn't it?

Mr. T. Gilbert Sharpe: It could be.

Yes, Your Honor.

Justice Potter Stewart: Now, in that -- in that circumstance --

Mr. T. Gilbert Sharpe: Yes.

Justice Potter Stewart: -- suppose, they fixed the provisions in the budget with the intention before they fixed it of stealing the surplus when the proceeds were -- tax proceeds were collected, is it your position that still would not be tax fraud?

Mr. T. Gilbert Sharpe: My position is one, if that was --

Justice Potter Stewart: (Voice Overlap) --

Mr. T. Gilbert Sharpe: -- alleged, and secondly, the Government shall (Voice Overlap) --

Justice Potter Stewart: Well, parting from -- apart from what was alleged?

Mr. T. Gilbert Sharpe: Yes, sir.

Justice Potter Stewart: Would that or would it not in your judgment to the mail fraud.

Mr. T. Gilbert Sharpe: It -- it could be -- it could be Your Honor.

But I would like to point out this.

We have Texas statute which requires a budget of every School District to be found annually, with the county clerk.

All of the Government had to do, in this case, was to go to the county clerk and get the school budget for each one of these years 1951, 1952, and 1953 and offered in evidence, and that it failed to do and did not explain its failure to do so.

In other words, there was not only a failure of allegation in this case, as to the budgetary need in the requirement, but there was a failure of proof and a failure to explain the reason to supply that budget.

The budget that Mr. Wilkey talks about is an oral reconstruction to number of witness.

It is not the written budget that a School District in Texas is required to make out each year.

And I would like to say this further.

That we have printed as an appendix to our brief, appendix -- our reply brief filed today.

Appendix B which shows every single one of the essential mailings that form this basis of the 19 substantive counts in this case.

Every single letter involved in the appendix and in the indictment involved a use of the mail at Houston, Texas.

Either the taking or the placing of a letter there was a theory on Government's part to the taking and placing was caused over in Benavides, by the petitioners, 250 miles away.

Each one of the exhibits there will show other the purpose.

Everyone of them was for the legitimate purpose, either of the taxpayer sending a check with a letter of transmittal, or this oil company sending its bill.

Now, I would like to challenge Mr Wilkey's statement that the statutes of limitation had ran against Diego Heras, as to any offense.

And if the Court has before, if the Members the of the Court have before them, the appendix to our brief on page 13 (a), you will see a letter which is the basis for the first count of the indictment, signed by Diego Heras dated September the 26th, 1952.

The petitioner (Inaudible) convicted on that count and the statue of limitation did not run on that count until September of 1957, after this case was tried, the last time.

Justice Hugo L. Black: When was the indictment?

Mr. T. Gilbert Sharpe: That is on page 13 (a).

Justice Hugo L. Black: I say, when was the indictment?

This letter was September 26th, 1952.

Mr. T. Gilbert Sharpe: The indictment was returned in March of 1956, Your Honor.

Mr. Heras could've been indicted on that one count that the other petitioners were convicted on up until September the 26th, 1957.

The same thing is true Count 7, which appears at page 22 (a) of the appendix.

There is a letter, dated December the 3rd, 1952, signed by Mr. Diego Heras, on the petitioner in this case, with two exceptions, were convicted on that letter and Mr. Heras could have been indicted on that letter, until December the 3rd, 1957.

Your Honor, my time is about out here and I would just like to say this, the Government has switched its theory in this case, from reliance from the letters which are described in the last numbered paragraph of each count of the indictment which was simply a legitimate use of the mails of Houston for the purpose of paying and collecting taxes to one, in which they mentioned receipts, notices, letters, properties left of the rolls and not in single count in this indictment, not one involves a piece of property which was not on the rolls.

Justice John M. Harlan: Could I put a question to you?

Mr. T. Gilbert Sharpe: Yes, sir.

Justice John M. Harlan: I haven't read this record so this is highly hypothetical.

Supposing there have been direct proof in the case that one of these defendants, the first meeting with the School District Board and said; gentlemen we got an easy way of making $40,000 a year, we have these tax receipts coming in, regularly by mail each month and the procedure are to be agree to, thus and so, and in the outlining of this scheme which described by Mr. Fortas had followed.

Would that be indictable offense under the mail fraud statute in your view?

Mr. T. Gilbert Sharpe: I'm not certainly -- certain that I followed your example completely, Mr. Justice Harlan.

Would that be before preparation on the School District budget?

Justice John M. Harlan: Yes, before or after the main difference.

Beginning of the school year that the chairman of the Board calls the group together and he said, “We're going to find way of making $40,000 a year a piece.

The assessments go out by mail, checks come in by mail, regular source of income.

We'll cash $40,000 of these fictitious checks as they come in each year -- each -- each year.

Mr. T. Gilbert Sharpe: Well, sir, my answer first, of course, is that's not their scheme.

Justice John M. Harlan: I understand that.

And my purpose -- what I had to say by saying that this is purely hypothetical, but I want to get your theory of what this mail -- mail fraud statute --

Mr. T. Gilbert Sharpe: I think --

Justice John M. Harlan: -- now, isn't -- what it doesn't.

Mr. T. Gilbert Sharpe: Yes, sir.

I think that that could be an indictable offense under mail fraud statute provided --

Justice John M. Harlan: You do?

Mr. T. Gilbert Sharpe: -- the School District budget showed that an amount clearly in excess of the district needs --

Justice John M. Harlan: No, that isn't part of my question.

Mr. T. Gilbert Sharpe: Yes, sir.

Justice John M. Harlan: You -- you --

Mr. T. Gilbert Sharpe: In standing alone, my answer would be, no, sir.

I would like to say this in conclusion, that if the Court and the Members of the Court will look carefully at the exhibits, in Appendix B, of our reply brief and considered carefully the nature and purpose of each one who those essential exhibits that I believe the conclusion would inevitably follow that the purpose of the use of the mails in this case was not to defraud and that all that the Government had shown here is a series of embezzlement disconnect with any proper use of the mail.

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