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Making a Federal Case Out of Corruption

 

QUESTION
I have been closely following the prosecution of a local colleague who is facing corruption charges. It would be an interesting story if it weren’t so sad. This guy is quite bright and prided himself on knowing exactly where the boundaries are in terms of the Political Reform Act and other such laws. But now he finds himself in federal court, charged with crimes that include something called “honest services fraud,” extortion and income tax evasion. He’s had to hire an expensive lawyer experienced in federal court practice to defend himself against these charges.

 

I can’t remember ever having been told about these laws as a public official. Can you explain?
 
ANSWER
The importance of the public’s trust in government processes means that there are laws designed to prevent breaches of that trust at both the state and federal levels. The same conduct can be charged under both sets of laws. State laws tend to be more specific in describing what kind of behavior crosses the line. Federal law is broader in some respects and thus arguably offers more opportunities for missteps, as your colleague has discovered.
“Honest Services” Fraud
Let’s take “honest services fraud,” for example. Generally, the notion underlying the crime of fraud is to deprive someone of something by lying. In 1872, Congress added mail fraud to the federal criminal laws by prohibiting people from “devis[ing] any scheme or artifice to defraud” and then putting something in the mail for the purposes of executing such a scheme.1 A similar prohibition as it relates to using interstate communications networks was subsequently added.2
The history of “honest services” mail fraud is quite interesting. Back in the1930s, a court ruled a New Orleans public official violated the federal fraud laws when he used the mails in the course of being bribed. In the course of that ruling, the court observed that the public has a right to honest government.3 This observation was relied upon in the 1973 trial of an Illinois state official that attracted widespread attention.4 Prosecutors then began using this theory in a variety of public corruption cases.
The U.S. Supreme Court temporarily nixed such prosecutions in 1987, finding that the concept of “honest services” fraud represented too broad of a reading of the federal fraud statutory language.5 The case involved a Kentucky public official and a private individual who were participating in a patronage scheme.
Congress responded in 1988 by adding language to the federal criminal laws that says a scheme to deprive the public of honest services can be punished as mail or wire fraud.6 This means that “honest services fraud” is a deprivation of honest services that involve using either the mails or electronic communications. Note that the use of the mail or electronic communication doesn’t have to be the central aspect of the fraud or activity claimed to be fraudulent.7
The potential penalties for federal mail fraud are steep. The maximum penalty for being guilty of wire and/or mail fraud includes a jail term of up to 20 years and a $250,000 fine.8
That of course leads to the question: “Under what circumstances does a public official’s actions deprive his or her constituents of ‘honest services’?” The basic concept is that a public official owes a duty of loyalty and honesty to the public, similar to a trustee or fiduciary.9 That duty is violated when a public official makes a decision that is not motivated by his or her constituents’ interests but instead by his or her personal interests.10
The clearest cut example is when an official receives a personal financial gain as the result of his or her public service. Examples include bribes and kickbacks (for example, receiving money back from proceeds paid to a company that does business with a public entity).
Federal authorities have also prosecuted public officials for the following kinds of actions under a theory of deprivation of honest services (those with an asterisk are California cases):
• Mayor’s failure to disclose kickback income, paid by a firm that was awarded city business, on his Statement of Economic Interests;11
• Commissioner’s use of his position to benefit airport concessionaires when those concessionaires paid the commissioner fees and dividends;12
• Firm’s agreement to pay money to middlemen in exchange for assurances that the firm would receive the city’s waste franchise, with city council members ultimately receiving portions of the payments for their votes;13 *
• Mayor’s violation of her city’s ordinances governing apartment conversions to condominiums;14 *
• City treasurer’s decisions to award contracts to firms who had provided him gifts and/or contributed to specified political or charitable events;15
• Mayor’s steering lucrative, no-bid city contracts to a consulting firm owned by his family;16 * and
• County and special district officials’ efforts to encourage a company to withdraw its application to build an energy facility in a port so a competing company that they had an interest in could get the contract. 17*
Private individuals can also be prosecuted for providing inducements to public officials with an intent to influence them (in other words, to deprive the public of the officials’ honest services).18 Also, in one area of the country, the appellate courts have expanded the definition of wrongdoing to include “coaxing” — defined as a more generalized pattern of gratuities to coax ongoing favorable official action.19
Note too that personal financial gain is not necessary for an honest services prosecution. Leaders of an Olympic bid committee discovered this when they were tried for bribing and providing gifts to members of the International Olympic Committee (IOC). The court held that the site committee need not have obtained personal gain from their actions, but only needed to intend to deprive the public of the IOC members’ honest services.20
Quid Pro Quo
It is important to note that prosecutors have gone after appointed officials as well. For example, in California, federal prosecutors have charged pension officials with allowing the financially strapped city to underfund its pension system in return for enhanced pension benefits. The theory is that such a quid pro quo (one thing in return for another) deprived the public and pensioners of their right to honest pension administrators.21
Sometimes violation of a state law is the basis of an “honest services” fraud claim (including the state ethics laws with which you are already familiar). However, the courts have also held that such claims can be based on common or judge-made law concepts relating to a public official’s fiduciary duties to his or her constituents.22
There is a dispute between prosecutors and defense attorneys as to whether such a quid pro quo is a necessary element of honest services fraud. This was an issue in another California prosecution involving allegations that city officials agreed to pursue a repeal of a ban on touching between strippers and patrons in return for campaign contributions.23 The trial court said that such a showing of an exchange is necessary; prosecutors disagree and are seeking to appeal that determination. In this case, the prosecutors wanted to be able to find the defendants guilty of fraud even though the defendants had not actually delivered what was promised and there was something less than an explicit agreement.
Extortion
Another offense that is frequently charged in corruption cases is extortion. Extortion occurs when someone obtains money through threat of harm or by abusing the power of public office.24 To be chargeable as a federal offense, the act must affect interstate commerce. This is another offense with a steep penalty. The maximum penalty for extortion under federal law is 20 years in prison and a $250,000 fine.25
A federal court found that a New Mexico state official acted improperly (extortionately) when he suggested that a bank competing for state business contribute to the governor’s campaign. In upholding the conviction, the appellate court noted that the coercive solicitation of political contributions (give me a campaign contribution and I will do what you want) constitutes extortion.26 So could a public official’s demand for gifts or money in exchange for a favorable action.
Kicking It Up a Notch: RICO
The Racketeering-Influenced and Corrupt Organizations Act (RICO) was passed to give prosecutors a tool for dealing with organized crime. However, one section makes it a crime to participate in the conduct of the affairs of an enterprise through a pattern of racketeering activity.27 “Racketeering activity” means any of a number of enumerated crimes including, most notably, honest services fraud.28 A “pattern of racketeering activity requires at least two acts of racketeering activity.”29 It is also a crime to conspire to commit a racketeering activity.30
RICO law is enormously complex. An example may be helpful.
In early 2006, an Illinois governor was convicted of 18 counts of racketeering, conspiracy, mail fraud, lying to the FBI, obstructing the Internal Revenue Service (IRS) and filing false tax returns.31 One of the charges was that a group of friends and staffers constituted a racketeering enterprise that engaged in a pattern of criminal activity. Among the things the enterprise was involved in were: 1) using public resources to support campaign activities; 2) performing official acts in return for campaign benefits; and 3) concealing such activity from public exposure, administrative action and possible criminal prosecution.32 Other charges included that the governor arranged lucrative public contracts in return for vacations, gifts and other benefits to himself and his family.
Similarly, an Illinois mayor was convicted under both the honest services mail fraud statutes and RICO when the kickbacks from the city contractor extended over a number of years.33 (The contractor and the mayor constituted the “racketeering enterprise,” which can be a group of people who are “associated in fact” even though they are not a formal legal entity.34)
RICO crimes and conspiracy to commit them carry a maximum penalty of 20 years in prison and a fine of up to $250,000.35 One must also forfeit the items one purchased with any ill-gotten gains (that is, with any resources directly or indirectly relating to the racketeering enterprise).36
Income Tax Violations
Income tax evasion is another important tool in federal prosecutors’ arsenal. The IRS even has a page on its website dedicated to “Examples of Public Corruption Tax Crimes Investigations.”37 Income tax problems arise when officials receive money and other kinds of valuable items and don’t report them on their income tax forms. Prosecutors don’t need to show that the money or gifts were received in exchange for improper purposes, only that they were not reported on the official’s income tax form.
Officials have also been charged with income tax evasion when they embezzle or otherwise misuse public resources for personal or other purposes. This includes using an agency credit card for personal purposes.38
Income tax evasion carries with it a possible five-year prison term and a fine of up to $100,000.39 In addition, prosecutors can require the defendant to pay for the costs of prosecution (in addition to the costs associated with defending against the prosecution).40 The sometimes-related crime of filing a false tax return is punishable by a maximum three-year prison term and a fine of up to $100,000 (along with the costs of prosecution).41
Walking Close to the Line Is Risky In Many Respects
The sweep of these federal laws is one of the reasons that the Institute for Local Government strongly encourages local officials to stay as far away as possible from the lines dividing lawful from unlawful conduct. The laws are so numerous — and in the case of federal laws, so broad — that it simply isn’t possible to know that conduct close to the line withrespect to one law isn’t over the line withrespect to another. The safest course is tonot take any chances.
Furthermore, even if you ultimately survive a prosecution without being convicted, the financial, physical and emotional consequences of being under the stress of an investigation and/or a trial are huge. One official blamed the stress for a stroke he suffered.42 Another local official emotionally described the physical and emotional toll that the prosecution had on both himand his family, adding that the experiencehad also left him “financially ruined.”43
Another official broke into sobs before being sentenced by a federal judge in an honest services prosecution, saying:
   What is so hard for me is that I will live with this scarlet letter for the rest of my life, and that it’s so painful and so hard. ... When the raid of my office took place and the indictments and the conviction, I [felt] as if part of me had died, and I know that part of my obituary has already been written.
The local newspaper said the sentencing left the former local elected official and his family devastated, pondering the prospect of the official spending nearly two years behind bars and the “irreversible spiral from elected official to convicted felon.” In delivering the sentence, the judge said that he was “not immune to the sadness and tragedy” the case involved, but that he had to send a message to other elected officials.44
And that’s a hard reality about these prosecutions: Prosecutors and courts do feel the need to make examples of local officials who have breached the public’s trust. The results are often harsh. This also may be why the courts interpret the federal laws in cases involving charges of public official corruption so broadly. 
 
This column is a service of the Institute for Local Government Ethics Project (ILG), which offers resources for local officials on public service ethics. For more
information, visit www.ca-ilg.org/trust.
 
 
Code of Silence Unreliable in Federal Prosecutions
It can be tempting to think that “no one will know” about breaches of the public trust and that everyone involved has an incentive to keep from disclosing such breaches. Many public officials have learned otherwise the hard way.
In one instance, local officials were approached and encouraged to engage in conduct that landed them in federal court by someone who was already cooperating with federal law enforcement authorities. The reason? The federal authorities promised the cooperating individual favorable consideration with respect to other federal charges already pending against the individual. As a result, the cooperating individual agreed to wear a wire in his subsequent conversations about campaign contributions with candidates.
In other instances, prosecutors will promise favorable treatment to someone if he or she agrees to cooperate in providing information that will make it easier to secure convictions of his or her colleagues. The incentives, in terms of reduced prison time, fines and defense costs, can be sufficient to cause even longtime friends to turn against one another.45
 
1 Now 18 U.S.C. § 1341.
2 18 U.S.C. § 1343
3 18 U.S.C. § 1346.
4 Andrew Zajac, “’Honest Services’ Law Vexes Defense Lawyers in Fraud Cases,” Chicago Tribune, June 7, 2006 (available at www.chicagotribune.com).
5 McNally v. U.S., 483 U.S. 350, 355 (1987).
6 See 18 U.S.C § 1346 (“For purposes of this chapter, the term ‘scheme or artifice to defraud’ includes a scheme or artifice to deprive another of the intangible right of honest services.”).
7 Department of Justice, U.S. Attorney Criminal Resource Manual, 950 Use of Mailings and Wires in Furtherance of the Execution of the Scheme (“It is not necessary that the scheme contemplate the use of the mails as an essential element." Pereira v. United States, 347 U.S. 1, 8 (1954); Durland v. United States, 161 U.S. 306, 313 (1896) (proof of specific intent to use the mails on the part of defendants need not be proven). "It is sufficient for the mailing to be 'incident to an essential part of the scheme,' ... or 'a step in [the] plot.'" Schmuck, 489 U.S. at 710-11 (citations omitted); cf. United States v. Diggs, 613 F.2d 988, 998 (D.C. Cir.) ("[A]lthough the scheme need not 'contemplate the use of the mails as an essential element,' the mailings must be sufficiently closely related to [the] scheme to bring his conduct within the statute.") (footnote omitted), cert. denied, 446 U.S. 982 (1980). ... As in the case of mail fraud, a wire transmission may be considered to be for the purpose of furthering a scheme to defraud if the transmission is incident to the accomplishment of an essential part of the scheme. United States v. Mann, 884 F.2d 532, 536 (10th Cir. 1984). Moreover, it is not necessary to show that the defendant directly participated in the transmission, where it is established that the defendant caused the transmission, and that such use was the foreseeable result of his acts. United States v. Gill, 909 F.2d 274, 277-78 (7th Cir. 1990); United States v. Jones, 554 F.2d 251, 253 (5th Cir.), cert. denied, 434 U.S. 866 (1977) (cases cited); United States v. Wise, 553 F.2d 1173 (8th Cir. 1977).”). Online at: http://www.usdoj.gov/usao/eousa/foia_reading_room/usam/title9/crm00950.htm

8 18 U.S.C. §1341 (“... shall be fined under this title or imprisoned not more than 20 years, or both). 18 U.S.C. § 1343 (“shall be fined under this title or imprisoned not more than 20 years, or both.”).

9 U.S. v. Sawyer, 239 F.3d 31, 39 (1st Cir. 2001) (finding sufficient evidence of guilt apart from proof of violation of state law).

10  U.S. v. Lopez-Lukis, 102 F.3d 1164, 1169 (11th Cir. 1997) (noting that effort to improperly control composition of decision-making body constituted an effort to deprive public of honest services); McNally v. U.S., 483 U.S. at 362-63 (Justice Stevens, dissenting).
11 U.S. v. Genova, 333 F.3d 750, 759 (7th Cir. 2003) (finding failure to disclose income from kickbacks was essential to continuation of the scheme; also finding a RICO violation).
12 U.S. v. Paradies, 98 F.3d 1266, 1283 (11th Cir. 1996) (“It should be plain to ordinary people that offering and accepting large sums of money in return for a city councilman's vote is the type of conduct prohibited by” mail fraud statutes.”).
13 Press Release, U.S. Attorney’s Office, Central District of California, “Current and Former Elected Officials in City of Carson Charged in Bribery Schemes Involving Trash Contract Cases Show Extortion Attempts Against Four Haulers,” Nov. 21, 2002.
14 Nick Schou, “A Federal Case: Investigation Sparked By Weekly Culminates With 18 Counts Against Ex-Surf City Mayor Houchen,” Dec. 9, 2004.
15 U.S. v. Kemp, 379 F. Supp. 2d 690, 697-98 (E.D. Penn. 2005).
16 Press Release, U.S. Attorneys Office, Central District of California, “Former Mayor of Lynwood and Three Associates Indicted on Federal Corruption Charges: Indictment Alleges Paul Richards Systematically Deceived Citizens of Lynwood and Wasted Taxpayer Dollars to Enrich Himself, His Family and Friends,” Oct. 14, 2004.
17 News 10 “Jury Finds McFall Guilty in Corruption,” March 8, 2005, available at http://www.news10.net/storyfull1.asp?id=9622.
18 See, e.g., U.S. v. Blumeyer, 114 F.3d 758, 765 (8th Cir. 1997) (allowing conviction to stand even with public official’s acquittal of corruption charges).
19 U.S. v. Woodward, 149 F.3d 46, 55 (1st Cir. 1998) (company’s ongoing pattern of gifts and entertainment to chair of key legislative committee constituted intent to deprive citizens of chair’s honest services), citing U.S. v. Sawyer, 85 F.3d 716, 730 (1st Cir. 1996).
20 U.S. v. Welch, 327 F.3d 1081 (10th Cir. 2003).
21 Kelly Thornton, “Vagueness of Statute on Corruption Stirs Dispute: Honest Services' Fraud Law Gets Frequent Use,” San Diego Union Tribune, Jan. 12, 2006 (available online on www.signonsandiego.com).
22 See U.S. v. Sawyer, 239 F.3d 31, 47 (1st Cir. 2001).
23 [shouldn’t this be an “ibid; Thornton”?] Kelly Thornton, “Vagueness of Statute on Corruption Stirs Dispute: ‘Honest Services’ Fraud Law Gets Frequent Use,” San Diego Union-Tribune, January 12, 2006 (available online at www.signsonsandiego.com).
24 18 U.S.C. §1951.
25 18 U.S.C. §1951(a).
26 U.S. v. Troutman, 814 F.2d 1428, 1456 (10th Cir. 1987).
27 18 U.S.C. §1962(c).
28 18 U.S.C. §1961(1).
29 18 U.S.C. §1961(5).
30 18 U.S.C. §1962(d).
31Matt O’Connor and Rudolph Bush, Ryan Convicted in Corruption Trial: Co-Defendant Warner Also Guilty, Chicago Tribune, April 17, 2006.
32 Press Release, U.S. Attorney’s Office, Northern District of Illinois, “Citizens for George Ryan, Top Aides Fawell and Juliano Indicted on Alleged Corruption Charges Involving SOS Office and Campaigns: RICO Indictment Includes Fraud, Bribery and Obstruction Acts; Perjury and Tax Violations,” April 2, 2002.
33 U.S. v. Genova, 333 F.3d at 759 (kickbacks from city prosecutor’s firm).
34 18 U.S.C. §1961(4).
35 18 U.S.C. § 1963(a).
36 18 U.S.C. § 1963.
37 www.irs.gov/compliance/enforcement/article/0,,id=148272,00.html.
38 Press Release, U.S. Attorney’s Office, Eastern District of California, “Former Northridge Water Board Assistant General Manager Pleads Guilty to Tax Evasion and Mail Fraud,” Oct. 25, 2004 (available online).
39 26 U.S.C. § 7201.
40 26 U.S.C. § 7201.
41 26 U.S.C. § 7206(1).
42 Scott Smith, “McFall Fires Attorney, Makes Own Final Case: Deliberations Expected to Begin Today in Corruption Trial of Former S.J. Lawman, Lobbyist,” Stockton Record, March 2, 2005.
43 Kelly Thornton, “Split Decision: Judge Tosses Out 7 of 9 Counts Against Zucchet; Inzunza Gets 21 Months for Corruption Convictions,” San Diego Union Tribune, Nov. 11, 2005 (available online on www.signonsandiego.com).
44 Id.
 
Sam Stanton, “Dunn Gets 6 Months, $40,000 Fine: Former San Joaquin Sheriff Is Spared a Harsher Sentence After He Aids Prosecutors in Lengthy Corruption Case,”Sacramento Bee, June 1, 2005.