USA. v. Lowder

• Decision Date: 01 November 1999
• Docket Number: 98-2967,Nos. 98-2621,s. 98-2621
• Citation: USA. v. Lowder, 195 F.3d 961 (7th Cir. 1999)
• Parties: (7th Cir. 1999) United States of America, Plaintiff-Appellee, v. Michael R. Martin and Ronald D. Lowder, Defendants-Appellants
• Court: U.S. Court of Appeals — Seventh Circuit

Page 961

195 F.3d 961 (7th Cir. 1999)

United States of America, Plaintiff-Appellee, v.Michael R. Martin and Ronald D. Lowder, Defendants-Appellants.

Nos. 98-2621, 98-2967

United States Court of Appeals, Seventh Circuit

Argued September 10, 1999

Decided November 1, 1999

Appeals from the United States District Court for the Central District of Illinois.No. 96 CR 30036--Richard Mills, Judge.[Copyrighted Material Omitted]Before Posner, Chief Judge, and Easterbrook and Rovner, Circuit Judges.

Posner, Chief Judge.

Martin and Lowder were convicted by a jury of mail fraud, 18 U.S.C. sec. 1341, and Martin with giving a bribe in connection with a federally funded program, sec. 666(a)(2), and Lowder both with receiving such a bribe, sec. 666(a)(1)(B), and misapplying government property. sec. 666(a)(1)(A).Martin was sentenced to 70 months in prison and Lowder to 66 months, and each was also ordered to pay restitution to the Illinois Department of Public Aid of $12.3 million.Their appeals raise a number of issues, only some of which have enough merit to require extended discussion.For example, the argument that an employee of the Department of Public Aid who purloined incriminating documents and gave them to the Illinois State Police was acting as an agent of the state and so violating the Fourth Amendment(made applicable to the states by the Fourteenth) raises purely factual issues as to which it is enough to say that the district court did not commit clear error in rejecting the argument.It is true that a district court's answer to the ultimate question whether a private person is actually a government agent, a question that requires the application of a legal concept (agency) to facts, may, after Ornelas v. United States, 517 U.S. 690(1996), be subject to plenary review by the court of appeals, as we noted in United States v. Shahid, 117 F.3d 322, 325(7th Cir.1997), and assumed without discussion in United States v. Hall, 142 F.3d 988, 993(7th Cir.1998).But the determination of the underlying facts remains subject to the clear-error rule, Ornelas v. United States, supra, 517 U.S. at 699, and the Fourth Amendment issue in this case pivots on such a fact: whether the state police asked the employee to obtain documentary evidence of Lowder's misconduct.The judge thought not, and we cannot say that he committed a clear error in so finding.United States v. McAllister, 18 F.3d 1412, 1417-18(7th Cir.1994).

The facts relevant to the principal issue presented by the appeals, viewed, as they must be, as favorably to the verdict as the record permits, are as follows.(Our summary emphasizes Lowder's conduct, as there was considerably more evidence of Martin's guilt.)The Department of Public Aid administers the Medicaid program in Illinois, which is half funded by the federal government.Lowder worked for a bureau within the department that attempts to reduce Medicaid costs by collecting any private health insurance proceeds to which the Medicaid recipient may be entitled, in order to offset the expense to the Medicaid program.In 1985, the Department hired a contractor to assist with these collections.Martin worked for the contractor and struck up a friendship with Lowder.Five years later Martin bought out the contractor and in effect assumed its contract with the Department.At first when Martin and Lowder socialized they split the expenses, but as time went on Martin picked up a larger and larger share, even after the Department established a policy that employees should not accept gifts from the Department's contractors.In 1993 and 1994 particularly, Martin (or in some instances Ladd, an alleged coconspirator who was, however, acquitted) fairly showered Lowder with gifts in various forms, including upgrading Lowder's round-trip coach ticket to first class at a cost of more than $2,000 on a trip to Germany, giving him $1,000 to gamble with and $200 to spend at a striptease joint, and giving him almost $900 for the expenses of another trip.Lowder failed to disclose any of these gifts to the Department of Public Aid, as its regulations required him to do since the giver was a contractor with the Department.Martin deducted the gifts as business expenses on his company's income tax returns.On January 1, 1995, Martin hired Lowder away from the Department (he had been dangling the possibility of a job offer before Lowder for at least a year) but continued giving him gifts, including $6,000 for tickets and other expenses related to a trip by Lowder and his girlfriend to the Superbowl.This gift, though received after Lowder went to work for Martin, had been promised before.

The motive for Martin's generosity toward Lowder, as well as for Martin's lavish donations to Governor Edgar's campaign fund and lavish gifts to influence-peddlers, legislators, and executive officials, was to get favorable terms for his company in its dealings with the Department of Public Aid(and also to land other profitable contracts with the state).Lowder was involved in these negotiations and he gave work to the company that the Department could have done itself at lower cost, and he persisted in this even after it was questioned by other employees of the Department.Lowder also went easy on Martin's company when it defaulted on its obligation to load certain data into the Department's computer system, and showed other favoritism to the company.

In 1993 the company successfully sought to amend its contract with the Department.In particular, it got the Department to agree to pay it $350 every time it identified an insurer of a Medicaid claimant, even if no money was ever obtained from the insurer; and, what is more, to pay it that amount for 13,000 such identifications that it had made before the contract was amended and had been compensated for under the terms of the original contract.As Lowder well knew, $350 was at least ten times what the identification was worth, and much more than the existing contract terms entitled Martin's company to.Lowder was directed to prepare a cost estimate for the amended contract.The estimate was that the amendment would cost the Department hundreds of thousands of dollars for no additional benefit, yet Lowder termed it a more equitable payment system than the existing one even though the existing one was much more favorable to the Department and there were no "equities" in favor of the new system.He recommended that the Department adopt it; it was adopted; and in administering it Lowder at first allowed Martin's company to claim $350 for the identification of an insurer even when the "identification" consisted of an entirely trivial change in the Department's records such as changing the first name of an insured from "Jim" to "James."Or when it was entering information that was completely worthless to the Department, such as the identification of an insurer more than two years after the medical bill had been paid that the insurance might have covered, when the insurer would not pay claims made more than two years after they accrued; or identifying an insurer that had canceled the insurance before the claim accrued.Even under the amended contract, none of these identifications should have been credited, as Lowder knew.

Furthermore, by concealing the existence of the amended contract from his staff for six months after it was adopted, Lowder prevented the staff from devising procedures that would have made it more difficult for Martin's company to get credit for worthless identifications.Lowder also failed to relay complaints from his staff about the company's performance to his superiors.Audits conducted after the government began investigating the defendants revealed thousands of invalid identifications; the amended contract had cost the Department an additional $12.9 million over the original contract price, causing a net loss to the Department of $12.3 million after offsetting $600,000 that it owed Martin's company for legitimate services.The contract was terminated and a different contractor hired who charged a much lower rate for actual collections from insurers and charged zero for identifying insurers.

Lowder's guilt of receiving bribes is not open to serious doubt.A reasonable jury could find that he accepted the gifts and the job from Martin "intending to be influenced or rewarded in connection with any business . . . [of the Department of Public Aid] involving anything of value of $5,000 or more."18 U.S.C. sec. 666(a)(1)(B).The more difficult question is whether Lauder's failure to advise against the amended contract was a form of mail fraud.Concern has long been expressed that the failure of the mail fraud statute to define "fraud" invites prosecutorial overreaching.E.g., United States v. Dial, 757 F.2d 163, 170(7th Cir.1985);United States v. Margiotta, 688 F.2d 108, 143(2d Cir.1982)(separate opinion);John C. Coffee, Jr., "The Metastatis of Mail Fraud: The Continuing Story of the 'Evolution' of a White- Collar Crime,"21 Am. Crim. L. Rev. 1(1983).The concern has been exacerbated by Congress's restoration to the mail fraud statute of the "intangible rights" doctrine, 18 U.S.C. sec. 1346;seeUnited States v. Bloom, 149 F.3d 649, 655(7th Cir.1998), a judicial interpretation of the original statute which the Supreme Court disapproved in McNally v. United States, 483 U.S. 350(1987).The doctrine makes it a federal crime to defraud one's employer of his right to one's loyal and honest services.United States v. Bloom, supra, 149 F.3d at 655;United States v. Brumley, 116 F.3d 728, 733-34(5th Cir.1997)(en banc);United States v. Sawyer, 85 F.3d 713, 723- 24(1st Cir.1996).The government's argument is that if Lowder had been loyal to his employer, the Department of Public Aid--if his loyalty had not been bought by Martin, his benefactor, who was trying to mulct the Department--he would have spoken out against the approval of the amended contract,...