US v. Brennan, CR-95-0420 (CPS).
| Decision Date | 01 May 1996 |
| Docket Number | No. CR-95-0420 (CPS).,CR-95-0420 (CPS). |
| Citation | 938 F. Supp. 1111 |
| Parties | UNITED STATES of America, v. John BRENNAN and United States Aviation Underwriters, Inc., Defendants. |
| Court | U.S. District Court — Eastern District of New York |
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Edward A. McDonald, New York City, for John Brennan.
David M. Zornow, Skadden, Arps, Slate, Meagher & Flom, New York City, Clifford M. Sloan, Wiley, Rein & Fielding, Washington, DC, for U.S. Aviation Underwriters, Inc.
Sean F. O'Shea, Sean F. O'Shea, New York City, for U.S.
This is a prosecution against United States Aviation Underwriters, Inc. (USAU) and its former president and CEO, John Brennan, on 43 separate counts of mail fraud under 18 U.S.C. § 1341. The defendants have jointly moved for dismissal of the indictment on the grounds that the prosecution involves an extension of the mail fraud statute into an area that has been pre-empted by the McCarran-Ferguson Act, that the prosecution is barred by the statute of limitations, that the indictment fails to allege the elements of mail fraud, and that it is the product of breaches of the attorney/client privilege. For the reasons stated below, the motions for dismissal are denied or deferred for post-trial hearing.
According to the indictment, USAU is a large insurance underwriting company, providing insurance for airlines, aircraft products, and aviation-related risks. In the period covered by the indictment, USAU also managed claims and accounting for a consortium of fourteen large insurers known as the United States Aircraft Insurance Group (USAIG). Brennan was the President, Chairman, and Chief Executive Officer of USAU.
Because of the magnitude of the potential liability flowing from plane crashes, insurers known as "coinsurers" or "concurrent insurers" regularly combine in a "vertical placement" to provide coverage and minimize individual exposure. To further reduce exposure of individual insurers, the coinsurers may also "reinsure" portions of their risk arising from any individual insurance contract. The reinsurers may, in turn, contract to further spread the risk with other reinsurers, known as "retrocessionaires."
These coinsurers then select a "lead" insurer which, in exchange for a fee, manages claims and litigation arising under the policies. No matter how dispersed the risk, the coinsurers, reinsurers, and retrocessionaires rely on the lead insurer to manage claims arising from the insured. The indictment alleges that a lead insurer owes a fiduciary duty both to the insured and to the other insurers.
The indictment arises out of USAU's management of litigation stemming from the December 7, 1987 crash of Pacific Southwest Airlines (PSA) flight 1771 en route from Los Angeles to San Francisco. During the flight, a recently terminated employee murdered the crew and the supervisor who had fired him. The crash killed all 43 passengers as well. Lawsuits were filed against the Los Angeles Airport Authority, PSA, USAir (PSA's owner), and Ogden-Allied, the company responsible for airport security.
USAIG and six other coinsurers insured USAir. USAU acted as lead insurer for all six coinsurers of USAir's risk. As underwriting manager for USAIG, USAU underwrote USAIG's 29% share of USAir's risk for PSA 1771. However, it reinsured the entire risk, and consequently USAIG had no exposure for any damages imposed on USAir. USAIG also insured Ogden-Allied, but USAU only reinsured 25% of USAIG's losses up to $7.5 million on the policy. Losses in excess of that amount were covered by catastrophic excess reinsurance.
According to the indictment, officials of USAir expressed concern about a possible conflict of interest resulting from USAU's control of litigation on behalf of both USAir and Ogden-Allied. The indictment alleges that USAU assured USAir that the liability would be fairly apportioned but that USAU never disclosed to USAir, the coinsurers, reinsurers, or retrocessionaires that it had a direct financial stake in allocating responsibility to USAir in preference to Ogden-Allied.
Many of the lawsuits arising from the crash were settled prior to the trial. Trial as to the remaining parties began on May 31, 1989. The indictment alleges that, after the close of evidence but before a jury verdict was returned, USAU and Brennan, in order to perpetrate the fraud, settled the case and assumed control of the allocation of liability between USAir and Ogden-Allied. Subsequently, USAU and Brennan allocated 100% of the liability to USAir. It is further alleged that the defendants failed to disclose to the coinsurers material facts bearing on the liability of Ogden-Allied for the crash and made affirmative misrepresentations concerning USAir's and Ogden-Allied's relative exposure to damages. When USAir questioned this allocation, the defendants allegedly made further misrepresentations and material omissions intended to mislead USAir as to the extent of Ogden-Allied's trial exposure, the likelihood that the jury verdict would have been returned against USAir alone, and the likelihood of getting Ogden-Allied to pay any portion of the claims.
The indictment alleges that between 1987 and June 1992, the defendants, "together with others known and unknown to the grand jury," knowingly and willfully devised a scheme to defraud USAir and certain of the concurrent insurers, reinsurers and retrocessionaires by means of false and fraudulent pretenses, representations, promises, and the concealment of material facts in order to obtain money and property. In furtherance of this scheme, the defendants allegedly sent and received mail which traveled through the Eastern District of New York. The superseding indictment lists forty-three separate mailings, identified by approximate date of mailings, sender, recipient, and type. Each of these mailings constitutes a separate count of the indictment.
During the investigation of this matter, the government was also looking into USAU's management of litigation arising out of another airline crash. The probe led the FBI to interview Robert Alpert, a former employee of USAU. Alpert began working for USAU in 1973 as a claims attorney. When he left in 1989, and during the period covered by the indictment, he was Director of Claims. The parties agree that Alpert managed the USAir litigation as well as the other litigation under investigation, but they dispute the extent of his responsibility, involvement, and his actual role.
On November 16, 1992, a grand jury for the Eastern District of Virginia issued a subpoena for Alpert's testimony regarding USAU's handling of claims arising out of the other crash. An FBI 302 reveals that when AUSA Dennis Kennedy of that District phoned Brennan to inform him that the subpoena had been issued, Brennan "insisted that an attorney/client privilege existed between Alpert and USAU." USAU's counsel sent a letter to Kennedy the next day asking that the subpoena be withdrawn and the investigation deferred until the issue of attorney/client privilege could be resolved.
In a November 18, 19921 interview with Special Agent Peter Murray of the FBI's field office in Washington D.C., Alpert informed Murray that USAU had asserted the attorney/client privilege.2 Alpert further stated that he did not feel it was a valid claim of privilege but that the issue needed to be resolved before he could testify. Alpert then proceeded to give Murray an account of his handling of the PSA matter among other things.
For reasons not revealed by any party, Alpert never testified in Virginia. Murray instead phoned Special Agent David Edwards in the Melville, New York office and referred the investigation to him. Edwards contacted Alpert and scheduled an interview with him on February 5, 1993. At this meeting, Alpert notified Edwards of USAU's claims of attorney/client privilege and reiterated his belief that he had not acted as an attorney. The government characterizes this interview and others as guarded, abstract, and hypothetical to avoid the breach of any privilege.
Edwards and Sean O'Shea, an Assistant United States Attorney for the Eastern District of New York, thereafter interviewed Alpert on several occasions with respect to USAir and the other airline disaster under investigation without informing USAU. As a result of these meetings, the government states it became convinced that (i) Alpert did not act as an attorney with respect to USAU and (ii) even if he had, the communications fell within the crime-fraud exception.
On February 9, 1993, the government interviewed one of Alpert's subordinates, David Zoffer, regarding substantially the same matters. Zoffer is also an attorney. However, since the parties' focus is on Alpert, Alpert's contacts with the FBI will control this analysis except where noted.
At some point in February, the government is said to have approached USAU and asked the company to waive any privilege with respect to Alpert's testimony. USAU refused. On February 12, 1993, the government served Alpert with a subpoena to testify before a grand jury.3 By letter dated February 17, 1993, Alpert advised USAU and Brennan that he had been subpoenaed and that he anticipated questions about USAir and the other matter. USAU instructed Alpert to claim the attorney/client privilege. In the meantime, the government continued to meet with Alpert.4
On the same day that the government subpoenaed Alpert, it served a subpoena duces tecum on General Re, USAU's parent company. The subpoena was reissued on March 27, 1993, to narrow its scope. USAU produced documents on March 27 and April 21 in response to these subpoenas but withheld others claiming attorney/client and attorney work-product privilege on its own behalf and on behalf of Ogden-Allied.5
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