530 F.3d 596 (7th Cir. 2008), 07-4080, United States v. Black

Docket Nº:07-4080, 08-1030, 08-1072, 08-1106.
Citation:530 F.3d 596
Party Name:UNITED STATES of America, Plaintiff-Appellee, v. Conrad M. BLACK, Peter Y. Atkinson, John A. Boultbee, and Mark S. Kipnis, Defendants-Appellants.
Case Date:June 25, 2008
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit

Page 596

530 F.3d 596 (7th Cir. 2008)

UNITED STATES of America, Plaintiff-Appellee,


Conrad M. BLACK, Peter Y. Atkinson, John A. Boultbee, and Mark S. Kipnis, Defendants-Appellants.

Nos. 07-4080, 08-1030, 08-1072, 08-1106.

United States Court of Appeals, Seventh Circuit.

June 25, 2008

Argued June 5, 2008.

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[Copyrighted Material Omitted]

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Edward Siskel (argued), Office of the United States Attorney, Chicago, IL, for Plaintiff-Appellee.

Andrew L. Frey (argued), Mayer Brown LLP, Washington, DC, Marc W. Martin , Chicago, IL, Michael S. Schachter (argued), Willkie Farr & Gallagher, New York, NY, Richard A. Greenberg (argued), Newman & Greenberg, New York, NY, Ronald S. Safer (argued) Schiff Hardin, Chicago, IL, for Defendants-Appellants.

Before POSNER , KANNE , and SYKES , Circuit Judges.

POSNER , Circuit Judge.

At the end of a four-month trial, the jury convicted the defendants of mail and wire fraud in violation of 18 U.S.C. § 1341 and Black in addition of obstruction of justice in violation of 18 U.S.C. § 1512(c) . The judge sentenced him to 78 months in prison, Atkinson and Boultbee to 24 and 27 months, and Kipnis to probation with six months of home detention.

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The defendants were senior executives (Black was the CEO) of an American company called Hollinger International, which through subsidiaries owns a number of newspapers here and abroad. It was controlled by a Canadian company, since defunct, called Ravelston, which in turn was controlled by Black, who owned 65 percent of its shares. (In between Hollinger and Ravelston was a holding company that we can ignore.) Black effectively controlled Hollinger through his majority stake in Ravelston. He owned some stock in Hollinger, but a much higher percentage of the stock of Ravelston, in which Atkinson and Boultbee also owned stock. So it was in his and their financial interest to funnel income received by Hollinger to Ravelston. This was done by Hollinger's paying large management fees to Ravelston.

Hollinger had a subsidiary called APC, which owned a number of newspapers that it was in the process of selling. When it had only one left-a weekly community newspaper in Mammoth Lake, California (population 7,093 in 2000, the year before the fraud)-defendant Kipnis, Hollinger's general counsel, prepared and signed on behalf of APC an agreement to pay the other defendants, plus David Radler, another Hollinger executive and a major shareholder in Ravelston, a total of $5.5 million in exchange for their promising not to compete with APC for three years after they stopped working for Hollinger. The money was paid. Neither Hollinger's audit committee, which was required to approve transactions between Hollinger's executives and the company or its subsidiaries because of conflict-of-interest concerns, nor Hollinger's board of directors, was informed of this transaction. Or so the jury was entitled to find; the evidence was conflicting.

That Black and the others would start a newspaper in Mammoth Lake to compete with APC's tiny newspaper there was ridiculous. But the defendants argue that really the $5.5 million represented management fees owed Ravelston and that they had characterized the fees as compensation for granting covenants not to compete in the hope that Canada might not treat the fees as taxable income. Although Hollinger is a large, sophisticated, public corporation, no document was found to indicate that the $5.5 million in payments was ever approved by the corporation or credited to the management-fees account on its books. The checks were drawn on APC, though the evidence was that the defendants had no right to management fees from that entity, and were backdated to the year in which APC had sold most of its newspapers. The purpose of the backdating was-or so the jury could find-to make the compensation for the covenants not to compete seem less preposterous. And while management fees were supposed to be paid to Ravelston as well as from a management-fee account, the payments were made to the defendants personally and came from the proceeds of a newspaper sale, facts that increase the implausibility of supposing that these direct payments to the defendants were a means of discharging a debt owed them by Hollinger. It is true that Radler, who pleaded guilty and testified for the government, said that he thought the audit committee had approved the so-called management fees. But the members of the committee testified otherwise and the jury was entitled to believe them.

There is more. The defendants failed to disclose the $5.5 million in payments in the 10-K reports that they were required to file annually with the Securities and Exchange Commission. And they caused Hollinger to represent to its shareholders falsely that the payments had been made “to satisfy a closing condition."

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There was still more evidence of the fraud, but there is no need to go into it. The jury convicted the defendants of a second, similar fraud, on equally compelling evidence; there is no need to extend the opinion with a discussion of that either.

The evidence established a conventional fraud, that is, a theft of money or other property from Hollinger by misrepresentations and misleading omissions amounting to fraud, in violation of 18 U.S.C. § 1341 . United States v. Orsburn, 525 F.3d 543, 545-46 (7th Cir.2008) . But the jury was also instructed that it could convict the defendants upon proof that they had schemed to deprive Hollinger and its shareholders “of their intangible right to the honest services of the corporate officers, directors or controlling shareholders of Hollinger," provided the objective of the scheme was “private gain." That instruction is the focus of the appeals.

Section 1346 of the federal criminal code, added in 1988 in order to overrule McNally v. United States, 483 U.S. 350, 107 S.Ct. 2875, 97 L.Ed.2d 292 (1987) , defines “scheme or artifice to defraud" in section 1341 to include a scheme or artifice to “deprive another of the intangible right of honest services." The defendants do not deny that Hollinger was entitled to their honest services. They were senior executives of Hollinger and owed the corporation fiduciary obligations, implying duties of loyalty and candor. It is not as if Black had merely been using his power as controlling shareholder to elect a rubber-stamp board of directors or to approve a merger favorable to him at the expense of the minority shareholders. He was acting in his capacity as the CEO...

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