U.S. v. Gray, s. 84-5033

• Decision Date: 12 May 1986
• Docket Number: 84-5400 and 84-5401,Nos. 84-5033,s. 84-5033
• Citation: 790 F.2d 1290
• Parties: UNITED STATES of America, Plaintiff-Appellant (84-5033), Plaintiff-Appellee (84- 5400/5401), v. James E. GRAY and Charles J. McNally, Defendants-Appellees (84-5033), Defendants-Appellants (84- 5400/5401).
• Court: U.S. Court of Appeals — Sixth Circuit

Page 1290

790 F.2d 1290

UNITED STATES of America, Plaintiff-Appellant (84-5033), Plaintiff-Appellee (84- 5400/5401), v. James E. GRAY and Charles J. McNally, Defendants-Appellees

(84-5033), Defendants-Appellants (84- 5400/5401).

Nos. 84-5033, 84-5400 and 84-5401.

United States Court of Appeals, Sixth Circuit.

Argued July 30, 1985.

Decided May 12, 1986.

Louis DeFalaise, Jane Graham (argued), U.S. Attys., Lexington, Ky., Christopher G. Caldwell, Marshall Jarrett (argued), Lee J. Radek, Jo Ann Farrington, U.S. Dept. of Justice, Public Integrity Section, Washington, D.C., for the U.S.A.

William E. Johnson, Frankfort, Ky., James Shuffett (argued), Shuffett and Shuffett, Michael D. Baker, Lexington, Ky., for Gray.

Frank E. Haddad, Jr. (argued), Louisville, Ky., James Baker, Frankfort, Ky., for McNally.

Before JONES and KRUPANSKY, Circuit Judges, and NEESE, Senior (retired District) Judge. ^*

PER CURIAM.

Defendants James E. Gray (Gray) and Charles J. McNally (McNally) appealed their jury convictions on one count of conspiring to devise a scheme to defraud in violation of 18 U.S.C. Sec. 371 and one count of aiding and abetting in the use of the mails to defraud in violation of 18 U.S.C. Secs. 2 and 1341. The United States, in a separate appeal, challenged the trial court's dismissal of six counts of substantive mail fraud charged in the indictment.

Since 1971, Kentucky had purchased workmen's compensation insurance through the Wombwell Insurance Agency of Lexington, Kentucky (Wombwell). The policy was awarded to Wombwell after its vice president, Robert Tabeling (Tabeling), agreed with certain political leaders then in power to pay a percentage of the commission resulting from the policy to other insurance agents as designated by those politicians.

The operative facts are easily summarized. In 1974, Julian M. Carroll became governor of Kentucky. Shortly thereafter, Howard P. "Sonny" Hunt (Hunt) ¹ was selected Kentucky Democratic Party Chairman. To ensure awarding the Kentucky workmen's compensation insurance policy to Wombwell, Tabeling conferred with Hunt on several occasions during the spring of 1975 to discuss the subject. At one of those meetings, Hunt advised Tabeling and Joseph H. Wombwell that Wombwell could retain the workmen's compensation insurance policy for the forthcoming year, commencing July 1, 1975, and thereafter if it would agree to "share" or kickback a percentage of the insurance commissions. Tabeling and Wombwell agreed to service the policy for $50,000 per year. In turn, Wombwell agreed to pay all commissions it received in excess of $50,000 per year to any authorized insurance agencies specified by Hunt. This arrangement was maintained, with minor adjustments, throughout the Carroll Administration.

From 1975 to 1979, the annual award of the workmen's compensation insurance policy followed a set procedure. Insurance Commissioner Harold McGuffey (McGuffey) received directions from Hunt, who consistently directed McGuffey to award the workmen's compensation insurance policy to Wombwell, and McGuffey would execute Hunt's decision. Wombwell then contracted with an insurance underwriting company, the Hartford Insurance Group, to write the policy.

During the Carroll Administration, Hunt directed Wombwell to pay twenty-one separate designated insurance agencies the sum of $851,000 from the commissions resulting from the workmen's compensation insurance policy premium payments it received for the period here in issue. Of the $851,000 of excess commissions paid by Wombwell to the other agencies, nine checks totaling $200,000 were issued to Seton Investments, Inc.

The success of defendants' scheme depended upon the use of the mails to convey commission checks from the Hartford's home office in Connecticut to Wombwell's office in Kentucky.

The government originally stipulated that McNally "was an officer, director, and sole recorded stockholder of Seton" from September, 1975 to December, 1981. However, during the trial, the government's evidence developed that Hunt and Gray were, in fact, the primary parties that controlled Seton and that McNally did not become associated with Seton until late 1977 or 1978. McNally received $77,500 in return for acting as Seton's frontman. The payments were made to him through the Snodgrass Insurance Agency, which received commission checks from Wombwell at Hunt's direction after McNally had prevailed upon his friendship with Ronald Snodgrass to permit his agency to act as a conduit for the $77,500 McNally received. McNally had assured Snodgrass that the procedure was not in violation of law.

The payments received by Seton from Wombwell were used to purchase a condominium in Lexington, Kentucky, another condominium in Juno Beach, Florida and a 1976 Ford Country Squire station wagon for use at the Florida Condominium. The condominiums and the station wagon were exclusively at the disposal of Gray and Hunt. In addition to the foregoing, Seton gratuitously provided Hunt's son Alan with seven checks totaling $38,500.

In January of 1976, Governor Carroll appointed Gray as Secretary of Public Protection and Regulation. While Secretary of Public Protection and Regulation, Gray had supervisory authority over McGuffey. Gray also served as Secretary of the governor's cabinet from January of 1977 until August of 1978. For approximately thirteen months Gray occupied both of these positions. Although McNally, a Prestonburg, Kentucky businessman, served in no public office, he was a staunch political ally of Governor Carroll.

Defendants Gray and McNally were indicted by a federal grand jury on June 30, 1983. Count one of the indictment charged that defendants Gray and McNally "did knowingly, willfully and unlawfully conspire, ... with each other and with ... Hunt ... to commit certain offenses against the United States" with the following objectives:

a. To devise and intend to devise a scheme and artifice to:

(1) defraud the citizens of the Commonwealth of Kentucky and its governmental departments, agencies, officials and employees of their right to have the Commonwealth's business and its affairs conducted honestly, impartially, free from corruption, bias, dishonesty, deceit, official misconduct, and fraud; and (2) defraud the citizens of the Commonwealth of Kentucky, and its governmental departments, agencies, officials and employees, of their right to have available and to be made aware of all relevant and pertinent facts and circumstances when selecting an insurance agent to write the Commonwealth of Kentucky's Workmen's Compensation Insurance Policy; when committing and expanding the funds of the Commonwealth of Kentucky to pay for said insurance; and (3) 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.

And, for the purpose of executing the aforesaid conspiracy, the Defendants, James E. Gray and Charles J. McNally, and Howard P. "Sonny" Hunt, Jr. and others, did place and cause to be placed in a post office or authorized depository for mail matter, matters and things to be sent and delivered by the Postal Service, and did take and receive and cause to be taken and received therefrom such matters and things and did knowingly cause to be delivered by mail according to the direction thereon and at the place at which it was directed to be delivered by the person to whom it was addressed, matters and things.

b. To defraud the United States by impeding, impairing, obstructing and defeating the lawful governmental functions of the Internal Revenue Service of the Treasury Department of the United States of America, (Hereinafter the Internal Revenue Service) in the ascertainment, computation, assessment, and collection of federal taxes.

Counts two through eight detailed seven separate charges of aiding and abetting the substantive offense of mail fraud in violation of 18 U.S.C. Sec. 2 and Sec. 1341. Count four alleged mail fraud in connection with the mailing of a commission check addressed to Wombwell. Counts two, three, five, six, seven and eight alleged mail fraud in connection with the mailing of Seton's corporate tax returns.

On December 16, 1983, the district court dismissed counts two, three, five, six, seven and eight because the indictments failed to allege that Seton's tax returns identified in those substantive charges were themselves false or fraudulent. A jury trial on counts one and four commenced on January 23, 1984. On March 6, 1984, defendants Gray and McNally were convicted on both counts.

As outlined in Count one of the indictment, Gray and McNally were charged with conspiring to commit acts of mail fraud the object of which was to deny the citizens of Kentucky certain "intangible rights," such as the right to have the Commonwealth's business conducted honestly, impartially and free from corruption and official misconduct, together with the right to a full and complete disclosure of the practices and procedures employed in awarding the state's workmen's compensation insurance policy. Courts have long interpreted the mail fraud statute, 18 U.S.C. Sec. 1341, as proscribing schemes to defraud the citizens of their intangible rights to honest and impartial government. See, e.g., United States v. Von Barta, 635 F.2d 999, 1005-06 (2d Cir.1980), cert. denied, 450 U.S. 998, 101 S.Ct. 1703, 68 L.Ed.2d 199 (1981); United States v. Mandel, 591 F.2d 1347 (4th Cir.1979), aff'd in relevant part, 602 F.2d 653 (4th Cir.1979) (en banc), cert. denied, 445 U.S. 961, 100 S.Ct. 1647, 64 L.Ed.2d 236 (1980); United States v. Keane, 522 F.2d 534 (7th Cir.1975), cert. denied, 424 U.S. 976, 96 S.Ct. 1481, 47 L.Ed.2d 746 (1976); United States v. States, 488 F.2d 761, 766 (8th Cir.1973), cert. denied, 417 U.S. 909, 94 S.Ct. 2605, 41 L.Ed.2d 212 (1974); Shushan v. United States, 117 F.2d 110, 115 (5th Cir.), cert. denied, 313 U.S. 574, 61 S.Ct. 1086, 85...