Use of Mail Fraud Statute Muddied by 2 Court Rulings

“The law does not define fraud; it needs no definition. It is as old as falsehood and as versatile as human ingenuity,” a federal appeals court once suggested in the hope of laying to rest centuries of argument over what it means to dupe a man out of his horse.

Laws proscribing all manner of pyramid schemes, lottery devices, tax “savings” plans and miracle cures have passed on and off the books. But in a world where the boundaries of fraudulent activities are constrained only by the limits of criminal imagination, it has been illegal for more than 100 years to use the U.S. mails to perpetrate them.

Since 1872, when postal officials determined that the mails should not be used by “thieves, forgers and rapscallions generally” to carry on their work, the federal mail fraud statute has become one of the most important and commonly used tools available to prosecutors for attacking a wide range of devilry not necessarily spelled out in state law.

Armed with the mail fraud law, which carries stiff penalties for any “scheme or artifice to defraud” utilizing the U.S. mails, prosecutors have imprisoned legions of boiler room operators and credit card scammers, and in the last 10 years they have moved into the broader arena of defense industry kickbacks, insider trading and political corruption.

Payment Checks

By the simple task of tracing payment checks sent through the mails, an erroneous campaign contribution statement mailed to a county registrar or a fraudulent document posted to unsuspecting investors, a seemingly limitless range of frauds have been prosecuted as federal crimes.

“To federal prosecutors of white-collar crime, the mail fraud statute is our Stradivarius, our Colt .45, our Louisville Slugger, our Cuisinart--and our true love,” former federal prosecutor Jed S. Rakoff wrote in a 1980 law journal article.

But two recent U.S. Supreme Court decisions redefining the scope of the mail fraud law have prompted legal experts to reexamine the old statute, raising questions about whether prosecutors can continue pursuing modern-day fraud cases that the court said may never have been envisioned by the founders of the Postal Service.

Ruling in June in the case of a Kentucky businessman, Charles J. McNally, and a top government official accused of funneling state insurance commissions to a business they controlled, the Supreme Court concluded that the mail fraud statute is directed at the loss of money and property but is not intended to cover “intangible rights,” such as the right of citizens to honest government.

Stock Market

Then last week, ruling in the case of former Wall Street Journal reporter R. Foster Winans, accused of profiting in the stock market on the basis of Winans’ knowledge of future Journal columns, the high court backtracked somewhat.

The court concluded that while mail fraud must indeed involve a loss of money or property, that property can include such “intangibles” as information--the Journal’s “property right” to its own articles and publication schedules.

Taken together, the two decisions have elicited a deluge of applications to set aside convictions in political corruption and defense fraud cases and prompted federal prosecutors to reevaluate the kinds of cases that they can call mail fraud.

At least one of the scores of convictions in Chicago’s wide-ranging investigation into court corruption, Operation Greylord, has been set aside. Two weeks ago, former Maryland Gov. Marvin Mandel’s 10-year-old conviction for conspiring to influence race track legislation in return for $380,000 in bribes was voided by a federal judge.

Breach of Duty

In Los Angeles, a former supervisor at Rockwell International, Ralph Affinito, convicted of directing subcontracts to a company he secretly controlled, on Monday will appeal his mail fraud conviction based on a breach of his duty of honesty and loyalty to his employer--one of the “intangibles” he claims that the Supreme Court was addressing in the McNally case.

Although the U.S. attorney’s office in Los Angeles denies it, defense lawyers and politicians widely credit the McNally case with bringing an abrupt end to the most intensive political corruption probe in recent California history: the investigation into the activities of former fireworks manufacturer W. Patrick Moriarty that led to the convictions of 10 state and local politicians and bankers on a variety of corruption charges, most prosecuted as mail fraud.

Moriarty has already had two of the seven mail fraud counts against him dismissed. Former Carson City Councilman Walter Egan is challenging his conviction on 10 counts of mail fraud for funneling campaign contributions from Moriarty to get a political ally elected in 1981.

Reversal Expected

Former Democratic Assemblyman Bruce Young, the highest-level figure convicted in the probe, said he expects to have all five mail fraud counts against him reversed on appeal.

“I think that McNally just took the wind out of their sails,” Young’s lawyer, Donald Heller, said of the conclusion of the investigation last month.

Federal prosecutors say they will still be able to bring political corruption cases, but their job will be more difficult.

Rather than simply showing that a politician violated the public’s right to honest government by failing to disclose payoffs, for example, prosecutors will have to show a direct quid pro quo to prove an officeholder accepted money in exchange for favors.

The subsequent decision in the Wall Street Journal case eases the burden somewhat, allowing the government potentially to argue that something such as a business license is the kind of intangible property still encompassed within the mail fraud law, suggested Assistant U.S. Atty. Richard Drooyan, who prosecuted the Moriarty cases.

“It’s going to be more difficult to prove these cases. It’s never easy to prove a bribery case, and I think now you’ve got to prove it,” said Baltimore U.S. Atty. Breckinridge Willcox, whose office prosecuted the Mandel case.

Patronage Schemes

Some corruption cases, such as those involving election fraud where no money or property of any kind is involved, or pure political patronage schemes, where party leaders do favors for their supporters, may well be outside the reach of the law now, according to a variety of prosecutors and legal scholars.

Some have argued that political corruption on the state and local level ought not to be the job of federal prosecutors, predicting that state and local law enforcement agencies will pick up the job with state anti-bribery, extortion and campaign-reporting statutes.

But prosecutors themselves are skeptical.

“When you look at the real world of how things work out there, who was going to investigate Gov. Mandel?” Willcox said. “His own attorney general? Not likely. To think that some state authority has the interest, much less the ability, to pursue these kinds of investigations is just nonsense.

“So you can say the federal government shouldn’t be in the business of enforcing good government for local government, but for God’s sake, who’s going to investigate these kinds of crimes”?

Think Twice

To some legal experts, the McNally decision was a needed floodgate on a tide of mail fraud prosecutions that had strayed increasingly afield from the ordinary bounds of mail fraud, reaching potentially into areas that some might think twice before labeling as criminal.

In Los Angeles, for example, a man claiming to be a Hollywood film producer was successfully prosecuted for luring young actresses into his bedroom with fraudulent promises of film roles.

“That was prosecuted as a mail fraud, even though they hadn’t lost any money. All they lost was their virtue, or such virtue as they may have had,” said Rakoff, now a criminal defense lawyer who represented one of Winans’ co-defendants in the Wall Street Journal case.

“That was the problem with intangible rights. No one knew what it meant. It could be made to apply to anything,” Rakoff said.

“By eliminating such overreaching,” he added in a recent law journal article, “the court . . . has reconfirmed the wisdom that every fall from grace does not a devil make and that a just society does not equate every ethical breach condemned by public opinion with the narrower circle of criminal misconduct condemned by the law.”

Private Sector

In the private sector, many legal scholars have been even more troubled with the implications of applying the concept of intangible rights and intangible property.

A professor of law at Columbia University, John C. Coffee Jr., said the Wall Street Journal case, by holding an employee liable for fraudulent use of information obtained through his employment, injects a new element of criminal liability into the workplace.

“There is not an employee in the country who does not have confidential business information that under this test belongs to their employer, and regularly, in fact so commonly as to defy description, employees go out and found new businesses or engage in some business in which they use confidential information that they acquired in some way from their employer--maybe just a sense of the marketplace or a customer list,” Coffee said.

“In that kind of situation, there has been frequent civil litigation, and now we’re adding an overlay of criminal enforcement that is likely to have a tremendous chilling effect,” he said.

Corruption Cases

In political corruption cases, some defense lawyers say the mail fraud law has permitted prosecutors to target conduct that might historically have been considered sleazy but not necessarily criminal.

Young was convicted of two counts of breaching his duty to provide loyal and faithful services by failing to disclose his business relationship with individuals who had dealings before the state Legislature and of three counts of laundering campaign contributions from Moriarty to other politicians.

“My feeling is that Bruce Young was kind of singled out and prosecuted. He made some stupid mistakes, but I don’t think he did anything with criminal intent, and I don’t think it was fair or proper to use the mail fraud statute to pursue him,” said Heller, his attorney.

“I think what is needed are political corruption statutes that make very, very clear what is a crime and what isn’t a crime, as well as political reform, because the whole system is just in my opinion steeped in corruption,” Heller said.

Related Statutes

Drooyan denies that the McNally case was responsible for closing the Moriarty investigation, and a variety of Los Angeles federal prosecutors predicted that they will in most cases be able to continue bringing employment fraud and corruption cases, either under related statutes such as the Hobbs Act, which covers extortion, or recently strengthened federal kickback laws.

Many cases can still be charged as mail fraud if prosecutors can point to a definite loss of money or property. In defense contract kickback cases, for example, prosecutors may no longer be able to allege that an employee violated a duty of loyalty to his employer, but they may be able to prove that the cost of completing the contract went up because of the amount of the kickback--a loss of property, suggested Fred Heather, a former federal prosecutor who handled the Operation DEFCON series of defense fraud cases in Los Angeles.

“I think we’re in a period of reexamination of the kinds of cases that we’re going to be doing under the mail and wire fraud statutes,” said William F. Fahey, chief of the government fraud and public corruption branch of the U.S. attorney’s office.

“I don’t think we’ve lost our ability to prosecute egregious crimes, it’s just a question of how the courts will allow us to proceed,” he said.