US v. Johns, Crim. No. 87-00376.

• Court: United States District Courts. 3th Circuit. United States District Court (Eastern District of Pennsylvania)
• Writing for the Court: Edward F. Borden, Jr., Philadelphia, Pa., for defendant
• Citation: 742 F. Supp. 196
• Parties: UNITED STATES of America v. H. William JOHNS.
• Decision Date: 18 June 1990
• Docket Number: Crim. No. 87-00376.

742 F. Supp. 196

UNITED STATES of America
v.
H. William JOHNS.

Crim. No. 87-00376.

United States District Court, E.D. Pennsylvania.

June 18, 1990.

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William Carr, Asst. U.S. Atty., Philadelphia, Pa., for plaintiff

Edward F. Borden, Jr., Philadelphia, Pa., for defendant.

MEMORANDUM AND ORDER

DITTER, District Judge.

I. Introduction

The defendant, H. William Johns, was employed by Acme Markets, Inc., between May of 1979 and November of 1984, as director of packaging, equipment, and supplies procurement. Before May of 1979, he worked for Acme first as a quality control supervisor, and later as a packaging buyer. As director of packaging, equipment, and supplies procurement, Johns was responsible for Acme's purchases of non-resale items, such as bags, cans, packaging supplies, and janitorial supplies and services.

In August of 1979, Johns arranged for the incorporation in New Jersey of a company called "Pak-all." In April of 1983, he arranged for the incorporation of "Alma Trading Corporation" and "Garo Service Corporation," also New Jersey companies. Johns' name did not appear on any of the incorporation papers for these companies, nor was he formally listed as an officer, director, or shareholder of any of them. These companies basically performed no services, but primarily acted as shells for Johns to deposit, withdraw, and transfer funds. Acme was not aware of the existence of these companies or of Johns' affiliation with them.

Beginning in October of 1979 and continuing through March of 1985, without Acme's knowledge or consent, Johns agreed with six of the brokers and vendors who supplied non-resale goods and janitorial services to Acme that these brokers and vendors would deposit sums of money representing a percentage of the business their companies did with Acme into Pak-all and Alma checking accounts in exchange for continued business with Acme. These brokers and vendors paid a total of almost $2 million in kickbacks into Pak-all and Alma accounts at Johns' direction and for Johns' personal financial benefit between October of 1979 and March of 1985. All of the parties involved took pains to ensure

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that Acme was unaware of these kickback payments. At all times, the payments were contrary to Acme's official conflict of interest policy

As a result of the defendant's arranging for the payment of kickbacks to entities he controlled, the government charged him with thirty-eight counts of mail fraud, 18 U.S.C. § 1341 and § 2, nine counts of Travel Act violations, 18 U.S.C. § 1952 and § 2, and nine counts of violating the National Stolen Property Act, 18 U.S.C. § 2314 and § 2. Defendant waived his right to a jury trial. He and the government then submitted to me a comprehensive stipulation of facts and memoranda supporting their diverging positions as to whether the government had sustained its burden of proof. I later heard oral argument on the parties' briefs. For the reasons set forth below, I conclude that defendant H. William Johns is guilty of the mail fraud and Travel Act charges, but is not guilty of violating the National Stolen Property Act.

In accordance with Fed.R.Crim.P. 23(c), this opinion constitutes my special findings of fact and conclusions of law. For the purposes of this opinion, I have adopted the parties' stipulation of facts in its entirety.¹

II. The Mail Fraud Counts

Defendant's brief in support of his request for a verdict of not guilty challenges the legal sufficiency of the bill of indictment in light of the Supreme Court's sweeping decision in McNally v. United States, 483 U.S. 350, 107 S.Ct. 2875, 97 L.Ed.2d 292 (1987), and also attempts to defeat the merits of the government's proof, as described in the stipulation of facts, in the event the indictment withstands judicial scrutiny. Because I find that the conduct alleged in the indictment charges an offense under McNally, and that the government has satisfied its burden of proof with respect to this offense, I conclude that Johns has violated section 18 U.S.C. § 1341 as interpreted by McNally. The reasons for this decision are discussed infra at subsections A and B.² Even if I were to have found that the government's indictment alleged only an "intangible rights" theory of prosecution, temporarily invalidated by McNally, I would nonetheless conclude that Johns' conviction is proper in light of the post-McNally addition of section 1346 to the mail fraud chapter of the criminal code, which effectively overruled McNally. As discussed infra at subsection C, there is no ex post facto problem with retroactive application of section 1346 to Johns' conduct.

A. The indictment properly alleges an offense under McNally.

1. Under McNally, mail fraud requires a showing of property loss.

In McNally v. United States, 483 U.S. 350, 107 S.Ct. 2875, 97 L.Ed.2d 292 (1987), the Supreme Court addressed for the first time whether the statutory and legislative history of the mail fraud statute, 18 U.S.C. § 1341, would support a tradition of court of appeals decisions interpreting that statute as proscribing schemes to defraud another of the intangible right

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to honest and impartial services.³ The McNally defendants, individuals who exerted control over the selection of workmen's compensation insurance for the Common-wealth of Kentucky, were charged with committing mail fraud by engaging in a scheme to give the commonwealth's insurance business to a large insurance agency that agreed to split its commissions with smaller agencies owned or controlled by the defendants. The government's principal theory at trial was that the defendants had participated in a self-dealing patronage scheme to defraud the citizens of Kentucky of certain intangible rights, in particular, the right to have the commonwealth's affairs conducted honestly. McNally, 483 U.S. at 352, 107 S.Ct. at 2877. Disagreeing with a long line of decisions from the courts of appeals, the Supreme Court construed the mail fraud statute to reach only frauds in which the alleged victim had been deprived by the defendants of money or property. Id. at 359, 107 S.Ct. at 2881. Because the jury instructions in McNally permitted the jury to base guilt solely on loss of the intangible right to honest government and did not require it to find that the citizens of Kentucky had lost money or property, the Court reversed the convictions

Later, in Carpenter v. United States, 484 U.S. 19, 108 S.Ct. 316, 98 L.Ed.2d 275 (1987), the Court clarified its decision in McNally. Holding that "McNally did not limit the scope of § 1341 to tangible as distinguished from intangible property rights," id. at 25, 108 S.Ct. at 320, the Court sustained the conviction of a former journalist for the Wall Street Journal who sold the Journal's confidential pre-publication financial information to securities brokers who then traded stocks on the basis of this information. The Court deemed the confidential material to be "property" within the meaning of the mail fraud statute and determined that the Journal had been "defrauded of much more than its contractual right to defendant's honest and faithful service, an interest too ethereal in itself to fall within the protection of the mail fraud statute, which `had its origin in the desire to protect individual property rights.'" Id. (quoting McNally, 483 U.S. at 359, 107 S.Ct. at 2881).⁴

Invoking McNally and Carpenter, a significant number of pre-McNally criminal

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convictions have been challenged on the basis that verdicts were rendered pursuant to an impermissible intangible rights theory of prosecution. In general, the courts of appeals have responded to these challenges by overturning those convictions in which the indictment alleged only a deprivation of intangible rights or in which the jury instructions did not require that money or property interests be implicated, e.g., United States v. Zauber, 857 F.2d 137 (3d Cir.1988), cert. denied sub nom., Scotto v. United States, ___ U.S. ___, 109 S.Ct. 1340, 103 L.Ed.2d 810 (1989); United States v. Holzer, 840 F.2d 1343 (7th Cir. 1988); United States v. Covino, 837 F.2d 65 (2d Cir.1988); United States v. Murphy, 836 F.2d 248 (6th Cir.), cert. denied, 488 U.S. 924, 109 S.Ct. 307, 102 L.Ed.2d 325 (1988), and by affirming those convictions in which it was clear that the jury could not have reached a guilty verdict without concluding that the victim of the fraudulent scheme suffered a monetary or property loss at the hands of the defendant, even where the government relied in part on the deprivation of intangible rights, e.g., United States v. Asher, 854 F.2d 1483 (3d Cir. 1988), cert. denied, 488 U.S. 1029, 109 S.Ct. 836, 102 L.Ed.2d 969 (1989); United States v. Perholtz, 836 F.2d 554 (D.C.Cir.1988); United States v. Piccolo, 835 F.2d 517 (3d Cir.1987), cert. denied, 486 U.S. 1032, 108 S.Ct. 2014, 100 L.Ed.2d 602 (1988); United States v. Fagan, 821 F.2d 1002 (5th Cir. 1987), cert. denied, 484 U.S. 1005, 108 S.Ct. 697, 98 L.Ed.2d 649 (1988)

Significantly, the courts have generally concluded that kickback schemes — traditionally, one of the most common forms of criminal activity for which pre-McNally convictions were obtained on an intangible rights theory of mail fraud — will no longer implicate section 1341 unless the indictment charges and the government's proof establishes that the alleged victim of the scheme, as opposed to the payor of the kickbacks, lost a cognizable, and not merely a "constructive," interest in money or property as a result of the artifice. See McNally, 483 U.S. at 360, 107 S.Ct. at 2881 ("`There are no constructive offenses; and before one can be punished, it must be shown that his case is plainly within the statute.'") (quoting Fasulo v. United States, 272 U.S. 620, 629, 47 S.Ct. 200, 202, 71 L.Ed....