U.S. v. Nicolo, 05-CR-6161L.

Decision Date27 November 2007
Docket NumberNo. 05-CR-6161L.,05-CR-6161L.
Citation523 F.Supp.2d 303
PartiesUNITED STATES of America, Plaintiff, v. John NICOLO, Constance Roeder, Charles Schwab, David Finnman, Defendants.
CourtU.S. District Court — Western District of New York

Matthew R. Lembke, Cerulli Massare & Lembke, Rochester, N.Y. Paul Derohannesian, II, Derohannesian & Derohannesian, Albany, NY, for Defendants.

Richard A. Resnick, U.S. Attorney's Office, Rochester, NY, for Plaintiff.


DAVID G. LARIMER, District Judge.

This is a criminal action against four defendants, John Nicolo, Constance Roeder, Charles Schwab, and David Finnman, charging them with various offenses involving an alleged scheme to defraud the Town of Greece, New York ("Greece"), Eastman Kodak Company ("Kodak"), and other companies in the Western District of New York. Although the alleged scheme involved numerous acts taking place over a period of years, and cannot neatly be summarized in a sentence or two, in general it involved the payment of kickbacks by Nicolo to Schwab, Finnman and other coconspirators in return for the coconspirators' hiring Nicolo, or companies owned by Nicolo to perform appraisals of real property owned by Kodak and other entities, mostly within Greece.

A jury trial in this case is currently scheduled to begin on March 10, 2008. On September 13, 2007, the Court heard oral argument on pretrial motions filed by Nicolo and Roeder. Finnman's motion was argued on September 20, 2007, Schwab's motion was argued on October 19. This Decision and Order constitutes my rulings on all defendants' motions.

I. Defendants' Motions to Dismiss the Honest Services Fraud Counts1
A. Constitutional Challenges

Defendants Nicolo, Schwab and Finnman have moved to dismiss Counts 1-4, 7, 10-17, and 20-22, which charge that defendants acted together to defraud the taxpayers of Greece, Kodak, and other entities of their right to honest services, and to dismiss Counts 33-53, which charge Nicolo with money laundering offenses in connection with the fraud counts recited above. All of these counts will be collectively referred to as the "honest services fraud" counts.

The statute under which defendants are charged in these counts, 18 U.S.C. § 1346, provides that "[f]or the purposes of th[e] chapter [of the United States Code that prohibits, inter alia, mail fraud, 18 U.S.C. § 1341, and wire fraud, 18 U.S.C. § 1343], the term `scheme or artifice to defraud' includes a scheme or artifice to deprive another of the intangible right of honest services."2 Nicolo contends that § 1346 is unconstitutional, for a number of reasons.

To a great extent, defendants' challenges to the statute are foreclosed by the Second Circuit's decision in United States v. Rybicki, 354 F.3d 124 (2d Cir.2003), cert. denied, 543 U.S. 809, 125 S.Ct. 32, 160 L.Ed.2d 10 (2004). In Rybicki, the Court of Appeals, sitting en banc, held inter alia, that § 1346 was not unconstitutional on its face, nor was it unconstitutionally vague as applied to the facts of Rybicki, in which the defendant attorneys were alleged to have used the mails and wires to induce certain insurance adjusters, in return for payments and against the interests of the insurance companies that employed them, secretly to expedite insurance claims in favor of the attorneys' clients, and that in furtherance of this scheme, the insurance adjusters engaged in material omissions in the information that they gave to the insurance companies.

In the case at bar, defendants recognize that the Second Circuit has already ruled, adversely to them, on some of the arguments that they raise in support of their motions to dismiss the honest services fraud counts. See Nicolo's Mem. of Law (Dkt.# 74-3) at 29; Schwab's Mem. of Law (Dkt.# 122) at 5. Defendants also concede that'"no court of appeals has definitively declared the `honest services' statute unconstitutional." Id. They state, however, that they are nevertheless "mount[ing] constitutional challenges" to the statute "[b]ecause the United States Supreme Court has yet to address the constitutionality of § 1346." Nicolo's Mem. of Law at 30; Schwab's Mem. of Law at 5-6.

To the extent that the Second Circuit in Rybicki has already rejected defendants' arguments concerning the constitutionality of § 1346, then, defendants raise those arguments simply to preserve their rights should the Supreme Court overrule Rybicki. Unless and until that happens, however, Rybicki remains the law in this circuit, and I deny defendants' motions to dismiss the honest services fraud counts on the grounds that § 1346 is facially "void for vagueness," see Rybicki, 354 F.3d at 129-32, 144.

I also find that § 1346 is not unconstitutionally infirm as applied to defendants in the case at bar. The Court of Appeals in Rybicki stated that "when ... the interpretation of a statute does not implicate First Amendment rights, it is assessed for vagueness only `as applied,' i.e., `in light of the specific facts of the case at hand and not with regard to the statute's facial validity.'" 354 F.3d at 129 (quoting United States v. Nadi, 996 F.2d 548, 550 (2d Cir.), cert. denied, 510 U.S. 933, 114 S.Ct. 347, 126 L.Ed.2d 311 (1993)). The court held that § 1346 was not invalid as applied in Rybicki, because the statute, "together with either section 1341 or section 1343, `gives the person of ordinary intelligence a reasonable opportunity to know' that conduct of the type in which the defendants engaged with the specific intent to defraud ... deprived the [victim] insurance companies of the `honest services' of their employees and is therefore prohibited by law." Id. at 132 (quoting Village of Hoffman Estates v. Flipside, Hoffman Estates, Inc., 455 U.S. 489, 498, 102 S.Ct. 1186, 71 L.Ed.2d 362 (1982)).

In the case at bar, defendants' vagueness challenges to § 1346 are couched largely in terms of the statute's facial invalidity. Nicolo does raise one argument, however, concerning the alleged vagueness of the statute as applied to him. Specifically, Nicolo asserts that while the indictment alleges that Nicolo participated in a scheme to defraud Kodak and the Greece taxpayers of their right to honest services, it fails to identify any fiduciary duty owed by Nicolo to those putative victims. The government responds that it is unnecessary to allege that Nicolo himself had a fiduciary duty to the victims, because Nicolo is alleged to have conspired with, and to have aided and abetted, individuals who did have fiduciary duties — which they breached — to their employers and to the public.

I agree with the government's position. A number of courts have held that fraud charges involving a breach of fiduciary duty may properly be brought against a nonfiduciary based on a conspiracy or aiding-and-abetting theory. See, e.g., United States v. Martin, 228 F.3d 1, 18 (1st Cir. 2000) (evidence of nonfiduciary defendant's willing participation in codefendant's breach of fiduciary duty supported finding that nonfiduciary's participation in scheme to defraud fiduciary's employer of fiduciary's honest services was sufficient to maintain liability for aiding and abetting pursuant to 18 U.S.C. § 2); United States v. Kenrick, 221 F.3d 19, 32 n. 17 (1st Cir.) ("Even if [the nonfiduciary defendant] did not execute the scheme, there was sufficient evidence that he `associated himself with the venture, participated in it as something he wished to bring about, and sought by his actions to make it succeed' to find him guilty of aiding and abetting [the fiduciary's] fraud") (quoting United States v. Colon-Munoz, 192 F.3d 210, 223 (1st Cir.1999), cert. denied, 529 U.S. 1055, 120 S.Ct. 1559, 146 L.Ed.2d 463 (2000)), cert. denied, 531 U.S. 961, 121 S.Ct. 387, 148 L.Ed.2d 299 (2000); United States v. Paradies, 98 F.3d 1266, 1282 (11th Cir. 1996) (affirming conviction of non-fiduciary defendants, who paid off city council member in exchange for political influence, of aiding and abetting violation of § 1346), cert. denied, 521 U.S. 1106, 117 S.Ct. 2483, 138 L.Ed.2d 992 (1997); United States v. Alkins, 925 F.2d 541 (2d Cir.1991) (affirming convictions of Department of Motor Vehicles ("DMV") employees and a car dealership owner for mail fraud conspiracy, even though car dealership owner, while closely involved with the DMV employee defendants who were in a fiduciary relationship with the state, did not himself owe the state any similar duty); United States v. Mahaffy, No. 05-CR-613, 2006 WL 2224518, at *17 (E.D.N.Y. Aug.2, 2006) ("even though the Watley defendants may not have had a duty to the Brokerage Firms or the firms' clients, and thus might not have committed the substantive [securities fraud] offense directly, it is axiomatic that a defendant who does not directly commit a substantive offense may nevertheless be liable if the commission of the offense by a co-conspirator in furtherance of the conspiracy was reasonably foreseeable to the defendant as a consequence of their criminal agreement") (citing Cephas v. Nash, 328 F.3d 98, 101 n. 3 (2d Cir. 2003)).

Nicolo also notes that in, United States v. Brown, 459 F.3d 509 (5th Cir.2006), cert. denied, ___ U.S. ___, 127 S.Ct. 2249, 167 L.Ed.2d 1089 (2007), the Fifth Circuit stated that "[i]n order that not every breach of fiduciary duty owed by an employee to an employer constitute an illegal fraud, [there must be] some detriment to the employer" to support a conviction under § 1346. Id. at 519. Nicolo argues that the indictment here fails to allege any actual harm to Kodak, or that the services provided to Kodak pursuant to the kickback scheme did not achieve Kodak's corporate objective of lowering its property tax assessments. Nicolo's Mem. of Law at 40 n. 44.

Nicolo's reliance on Brown is misplaced. In Rybicki, the Second Circuit discussed the two common types of honest services cases: those involving bribes or kickbacks, and those involving self-dealing. In bribery or...

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