Supreme Court Curbs Prosecution of Officials : Mail Fraud Convictions Barred Unless Public Lost Money; Moriarty Case May Be Affected

In a decision that attorneys said could jeopardize the prosecution of corrupt politicians nationwide, the Supreme Court ruled Wednesday that officials may not be convicted in mail fraud schemes unless prosecutors prove that the public lost money--not simply that the politician enriched himself or associates.

The decision dealt a particular blow to the public corruption cases of the U.S. attorney’s office in Los Angeles.

U.S. Atty. Robert C. Bonner said that “it appears at first blush to wipe out about 20 years of legal precedent. It’s going to make prosecution of public corruption much more difficult throughout the country.”

On a 7-2 vote, the justices threw out the convictions of a Kentucky politician and a businessman who conspired to have $200,000 in commissions from state insurance business kicked back to a company they controlled.

Although conceding this was a self-serving “patronage scheme,” the high court pointed out that the state and its citizens were not “defrauded of any money or property.” Some company had to get the insurance business and some agent the commission, the court concluded.

U.S. Attorneys Stunned

“Those commissions were not the commonwealth’s money,” said Justice Byron R. White, adding that the law does not create “an intangible right of the citizenry to good government.”

Justice Department attorneys said they were stunned by the court’s opinion and said it appeared to make it far harder to bring federal prosecutions involving all manner of kickback schemes by public officials, union leaders or employers. The federal mail fraud statute has been a particularly useful tool for U.S. attorneys because practically every conspiracy involves at least some use of the postal service.

“We are disappointed with this decision,” said Stephen S. Trott, associate attorney general and former U.S. attorney in Los Angeles. “It is contrary to every court of appeals ruling on this issue, and it will have an adverse impact on a number of pending cases.”

Defense lawyers said the high court may have become concerned about overzealous U.S. attorneys who stretched the 1872 mail fraud law beyond its intended purpose.

“This has become a convenient vehicle for prosecutors to chase down state and local corruption, but that was not its purpose. It was intended to go after private fraud through the mails, not public corruption,” said Carter Phillips, a Washington lawyer who won the high court decision for the two Kentuckians.

“From what we understand, there are close to 100 cases out there” in which U.S. attorneys are using the mail fraud statute to prosecute public officials, Phillips said.

Young’s Case Cited

In Los Angeles, neither Bonner nor Chief Asst. U.S. Atty. Richard E. Drooyan would comment on specific cases potentially affected by the decision. But government sources did predict that it would dramatically improve former Norwalk Democratic Assemblyman Bruce E. Young’s chances of successfully appealing his conviction on five mail fraud counts.

In the last three years, Young and 10 other men have been convicted of or pleaded guilty to a variety of charges in the largest California political corruption case in 30 years. The investigations involved laundered campaign funds and the use of gifts and payments by fireworks manufacturer W. Patrick Moriarty to influence legislation in Sacramento.

Young’s lawyer, George Walker of San Francisco, gleefully hailed the decision as “right in line with my conclusions. Love it!”

Moriarty also may benefit from the ruling. He currently is serving a five-year federal prison sentence. He had pleaded guilty to seven corruption charges, including five that his attorney, Jan Lawrence Handzlik, said might be affected by the decision.

May Face New Charges

Government sources said Moriarty may now possibly move to have his sentence vacated. But they added that, if he did so, he faced the possibility of new federal racketeering charges being filed against him.

Others convicted as part of the probe generally were charged with other crimes in addition to mail fraud counts. Drooyan said, “I don’t think the decision negates the importance of the investigation or its results. I can’t speculate on how it will affect the future practice of politics in California.”

The Supreme Court ruled Wednesday in favor of James E. Gray, a former secretary of public protection and regulation in Kentucky, and Charles J. McNally, a Prestonsburg, Ky., businessman.

Each had been sentenced to 10 years in prison and fined $11,000 for conspiracy and mail fraud. They remained free pending their appeals.

A key figure in the federal investigation was former Kentucky Democratic state Chairman Howard P. (Sonny) Hunt, who served two years in prison after pleading guilty in connection with the same kickback scheme.

Kickback on Commission

Prosecutors said that, after Democrat Julian M. Carroll became governor in 1974, Hunt arranged for Wombwell Insurance Agency of Lexington to retain its workmen’s compensation insurance policy with the state if it would kick back part of the insurance commissions to various insurance agencies around the state, including $200,000 that went to a company controlled by Hunt and Gray.

The government charged that McNally was a front man for the company and received $77,500.

Lawyers noted that two former state governors--the late Otto Kerner of Illinois and Marvin Mandel of Maryland--had been convicted under mail fraud statutes, even though it was not clear that the public suffered an actual money loss from their actions.

The law says it is a federal crime to use the mails in “any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations or promises . . . .”

White noted that, in lower court rulings, this had been read to mean “a public official owes a fiduciary duty to the public, and misuse of his office for private gain is a fraud.”

Monetary Loss Required

In disagreeing with this view, White said that the law appears to require an actual loss of money or property, not an intangible loss of public trust.

“Rather than construe the statute in a manner that leaves its outer boundaries ambiguous and involves the federal government in setting standards of disclosure and good government for local and state officials, we read (the law) as limited in scope to the protection of property rights,” White said.

“If Congress desires to go further,” he added, “it must speak more clearly than it has.”

Justice John Paul Stevens took the unusual step of reading a dissent from the bench. He called the ruling a “serious mistake” that threatens the prosecutions of hundreds of officials and employers who set up secret deals to enrich themselves.

Stevens asked “why a court that has not been particularly receptive to the rights of criminal defendants in recent years has acted so dramatically to protect an elite class of powerful individuals.” His dissent in the case (McNally vs. U.S., 86-234) was joined only by Justice Sandra Day O’Connor.

Staff writers Ronald J. Ostrow in Washington and William Overend and Tracy Wood in Los Angeles contributed to this story.