U.S. v. Skeddle

• Decision Date: 11 September 1996
• Docket Number: No. 3:95CR736.,3:95CR736.
• Citation: 940 F.Supp. 1146
• Parties: UNITED STATES of America, Plaintiff, v. Ronald W. SKEDDLE, et al., Defendants.
• Court: U.S. District Court — Northern District of Ohio

940 F.Supp. 1146

UNITED STATES of America, Plaintiff, v. Ronald W. SKEDDLE, et al., Defendants.

No. 3:95CR736.

United States District Court, N.D. Ohio, Western Division.

September 11, 1996.

Thomas Karol, Robert W. Kern, Assistant United States Attorneys, for plaintiff.

Brendan V. Sullivan, Jr., Barry S. Simon, Stuart G. Nash, Williams & Connolly, Washington, DC, for Darryl J. Costin.

Robert Gold, Gold & Wachtel, for Ronald W. Skeddle.

Richard A. Hibey, Gordon A. Coffee, Winston & Strawn, Washington, DC, for Edward B. Bryant.

Gerald A. Messerman, Kevin M. Norchi, Messerman & Messerman, Cleveland, OH, for David Herzer.

John E. Martindale, Martindale & Brzytwa, Cleveland, OH, Niki Z. Schwartz, Gold, Rotatori & Schwartz, Cleveland, OH, for John Corsaro.

Sander Schwartz, Cook, Riley, Smith, Nace, Schwartz, Cleveland, OH, for Floyd Trouten.

J. Michael Murray, Berkman, Gordan, Murray & DeVan, Cleveland, OH, for David Hobe.

John Czarnecki, Cooper, Straub, Walinski & Cramer, Toledo, OH, for Clarence Martin.

John J. Callahan, Secor, Ide & Callahan, Toledo, OH, for John Purser.

ORDER

CARR, District Judge.

This is a criminal case in which the defendants are charged with mail and wire fraud, money laundering, and tax evasion. The charges are based on several incidents of undisclosed self-dealing by three of the defendants (Skeddle, Costin, and Bryant) (the defendants), who at the time of the transactions were senior officers of Libbey-Owens-Ford Company (LOF). The government alleges that those activities violated the defendants' fiduciary duties to LOF and caused LOF to lose several million dollars.

Throughout the course of this case, the defendants have contended that they cannot be held criminally culpable for any undisclosed self-dealing if the transactions were "fair" to LOF. On June 12, 1996, I ordered the defendants to brief the question of which side has the burden of proof on the question of the fairness of the transactions to LOF.

In their briefs in response to that order, the defendants argue that the government has the burden of proving that the transactions were unfair. (Docs. 282, 329). The government, on the other hand, argues that the fairness of the transactions is neither an element of nor a defense to the mail or wire fraud charges. (Doc. 317).

For the reasons that follow, I conclude that the unfairness of the transactions is not an element of the charges against the defendants. The government, consequently, need not produce proof in its case-in-chief that the transactions were unfair to LOF.

If the defendants desire to produce evidence showing that the transactions were fair, I presently anticipate that they will be permitted to do so. If the fairness of the transactions provides an affirmative defense, they shall have the burden of proving that defense.

1. The Elements of Mail Fraud

The indictment alleges, inter alia, that the defendants "did knowingly and willfully devise and intend to devise a scheme and artifice to defraud" LOF, "and to obtain money and property by means of false and fraudulent pretenses, representations, and promises;" their "scheme and artifice to defraud LOF deprived LOF of its intangible rights to the honest services of its employees, defendants Skeddle, Costin, Bryant, and Purser;" and they "breached their fiduciary duties to LOF as imposed by Ohio law." (Doc. 232, at 50-51).

Historically, "circuit courts consistently held that `scheme to defraud' encompassed two general categories. The first category includes those schemes that seek to deprive others of money or tangible property rights. The second category includes schemes to defraud others of their `intangible rights,'" Gagliardi, Back to the Future: Federal Mail and Wire Fraud Under 18 U.S.C. § 1346, 68 Wash.L.Rev. 901, 904 (1993), which included the "right to honest services."

In the instant prosecution, the indictment charges that the defendants committed both types of mail fraud (i.e., engaging in schemes to: a) defraud LOF of its money or property, and b) deprive LOF of the honest services of its employees).¹ Despite the differences between these two theories in many other cases, I am persuaded, for purposes of this order, that the elements the government must prove under both theories are essentially the same: a breach of fiduciary duty with intent to cause economic harm to LOF where such harm was reasonably foreseeable.

Thus, the scheme to defraud LOF of its money or property, as I understand the substance of the allegations, involved the defendants' failure to disclose their interest in the transactions, rather than any affirmative material misrepresentations of fact by them. Because the "scheme to defraud of property or money" counts are based on what was not said (i.e., omissions), the defendants are culpable under this branch of the mail fraud statute only if the government proves the defendants had a duty to disclose their interest in the transactions. See California Architectural Bldg. Products, Inc. v. Franciscan Ceramics, 818 F.2d 1466, 1472 (9th Cir. 1987) ("[a]bsent an independent duty, such as a fiduciary duty ..., failure to disclose cannot be the basis of a fraudulent scheme"). In this case, therefore, the government must show that the defendants breached one or more of their fiduciary duties with the intent to obtain property or money from LOF. Id. Accord, United States v. Dowling, 739 F.2d 1445, 1450 (9th Cir.1984), rev'd on other grounds, 473 U.S. 207, 105 S.Ct. 3127, 87 L.Ed.2d 152 (1985); United States v. Von Barta, 635 F.2d 999, 1005 n. 24 (2d Cir.1980); United States v. Rabbitt, 583 F.2d 1014, 1026 (8th Cir.1978); Celpaco, Inc. v. MD Papierfabriken, 686 F.Supp. 983, 993 (D.Conn.1988); United States v. Haynes, 620 F.Supp. 474, 480 (M.D.Tenn.1985); United States v. Gallant, 570 F.Supp. 303, 307, 309 (S.D.N.Y. 1983).

When the government alleges mail fraud on the basis of a deprivation of intangible rights (rather than a "scheme to defraud of property or money"), it must likewise show the defendants were fiduciaries: "[t]he basis for protection of ... intangible rights [in the mail fraud statute arises] from the existence of a fiduciary duty." Gagliardi, supra, 68 Wash.L.Rev. at 915. Though several formulations have been enunciated to describe the elements of proof, id. at 918, I will, for purposes of this opinion, use the most stringent formulation: namely, that the government must show, in addition to the existence of a fiduciary duty and its breach, reasonably foreseeable economic harm to the victim. Id.

Moreover, as I understand the element of intent, the government is required to prove that the defendants "intentionally utilize[d] their trusted position to obtain a benefit for themselves at the expense of the person [i.e., LOF] whose trust is betrayed." Id. at 918 n. 112 (citing United States v. Lemire, 720 F.2d 1327, 1335 (D.C.Cir.1983)). Such intent can also be shown "by a misrepresentation or non-disclosure that is intended or is contemplated to deprive the person to whom the duty is owed of some legally significant benefit." Lemire, supra, 720 F.2d at 1335. Accord, American Eagle Credit Corp. v. Gaskins, 920 F.2d 352 (6th Cir.1990) (quoting Bender v. Southland Corp., 749 F.2d 1205, 1215-16 (6th Cir.1984)) ("a scheme to defraud must involve `[i]ntentional fraud, consisting in deception intentionally practiced to induce another to part with property or to surrender some legal right, and which accomplishes the end designed'").

Thus, for purposes of considering the issue of "fairness," I conclude that the government, to prevail on a charge of fraud based on deprivation of intangible rights (and, in this case, on a charge of participation in a scheme to deprive of property or money), must show that: a) the defendants breached their duties as fiduciaries; b) they intended thereby to harm LOF by obtaining LOF's property or money for themselves; and c) such harm to LOF was the reasonably foreseeable result of their breach of their fiduciary duties.

The defendants argue vigorously that, as part of its case-in-chief, the government must also show that the transactions were unfair to LOF. In making this argument, the defendants conflate the element of harm to the victim with their view of the significance of the "fairness" provision of O.R.C. § 1701.60(A)(1)(c). As discussed below, the defendants misperceive and misinterpret that state law provision.

2. Fiduciary Duty

Before discussing O.R.C. § 1701.60(A)(1)(c), another argument raised by the defendants should be addressed: namely, their contention that the government "cannot predicate the mail and wire fraud counts" on an intangible rights basis "because defendants had no duty of disclosure to LOF under Ohio law." (Doc. 282 at 12). They err: Ohio law, as discussed below, required the defendants to disclose any interest in their dealings with LOF. When they chose not to do so, they took on themselves the burden of proving the fairness of those dealings.

The fiduciary obligations of a corporate officer or director were eloquently depicted by Justice Douglas in Pepper v. Litton, 308 U.S. 295, 311, 60 S.Ct. 238, 247, 84 L.Ed. 281 (1939):

He who is in ... a fiduciary position cannot serve himself first and his cestuis second. He cannot manipulate the affairs of his corporation to their detriment in disregard of the standards of common decency and honesty. He cannot by the intervention of a corporate entity violate the ancient precept against serving two masters.... He cannot use his power for his personal advantage and to the detriment of the stockholders and creditors no matter how meticulous he is to satisfy technical requirements. For that power is at all times subject to the equitable limitation that it may not be exercised for the aggrandizement, preference, or advantage of the fiduciary to the exclusion or detriment of the cestuis.

In Ohio every corporate officer owes loyalty to his employer. This duty is embodied in...