The mail-fraud statute1 ‘‘does not make a federal crime of every deceit.’’2 Rather, that statute is ‘‘limited in scope to the protection of property rights,’’3 and ‘‘makes criminal only schemes to deprive people of property rights.’’4 Therefore, a deception that neither contemplates nor leads to the deprivation of another’s property does not violate Section 1341.
McNally requires that the government allege and prove as an element of the offense of mail fraud that the defendant deprive the victim of a property right. This principle holds true when the government is the victim of the alleged scheme to defraud because ‘‘any benefit which the Government derives from the [mail-fraud] statute must be limited to the Government’s interests as property holder.’’5
‘‘The object of the fraud [must] be ‘property’ in the victim’s hands.’’6
Because a regulatory interest such as the integrity of a licensing process is not a property interest,7 a scheme that is intended merely to deprive another of such an interest, or to frustrate such an interest, is not a scheme to defraud proscribed by Section 1341.8 This article addresses the ill-defined boundary between property interests and regulatory interests by examining caselaw treatment of the so-called ‘‘right to control spending,’’ that is, the right to decide how and to whom one’s property is transferred or money is paid. The courts of appeals have split on whether the ‘‘right to control spending’’ is a property interest for purposes of Section 1341. Three circuits have recently concluded that the ‘‘right to control spending’’ is not ‘‘money or property,’’ while three others have held that it is a property interest and, therefore, a scheme intended to deprive another of such an interest supports a Section 1341 conviction. The courts of appeals clearly are not in agreement concerning where the boundary between property and regulatory interests lies, calling for a resolution of this question by the Supreme Court.
Fraud: Getting Something for Nothing
Although written in the disjunctive, Section 1341 proscribes schemes intended and designed to separate the victim from his property, that is, a scheme to defraud requires an intent to deprive the victim of ‘‘money or property.’’9 Without this intent to deprive another of property, there is no scheme to defraud. It follows that if the actor acts with an intent to deprive another of something other than property with the intention to deceive but not to deprive that party of property, there is no mail fraud. And while a scheme does not have to be successful to be unlawful, and actual pecuniary loss is not an element of a Section 1341 violation,10 the scheme must at least present the potential for loss of the victim’s money or property to violate Section 1341.
Intended, Actual Deprivation of Property. The deprivation of the so-called ‘‘right to control spending,’’ without more, does not result in the intended deprivation of money or property required for a Section 1341 conviction because that ‘‘right,’’ in the absence of intended or possible economic harm, is not a property right at all.11 Therefore, the mere frustration of that ‘‘right’’ does not result in a loss of property, nor should it support a conviction under Section 1341.12 The reach of Section 1341 should not be extended to cases where the defendant neither deprives nor intends to deprive the victim of its property, that is, to profit at the victim’s expense by obtaining something for nothing.13 That is why to sustain a Section 1341 charge, the government must show ‘‘that some actual harm or injury was contemplated by the schemer’’ in order to supply the necessary element of fraudulent intent.14
An ‘‘actual harm or injury’’ is one that affects the tangible, pecuniary interests of the victim, not some metaphysical harm. While the government need not allege or prove that the intended victims were actually defrauded,
this does not mean that the government can escape the burden of showing that some actual harm or injury was contemplated by the schemer. ...[T]he purpose of the scheme ‘‘must be to injure, which doubtless may be inferred when the scheme has such effect as a necessary result of carrying it out.’’15
Evolution of Mail Fraud. The mail-fraud statute, first enacted in 1872 as part of a comprehensive recodification of the postal laws, has a sparse legislative history.16 Like other federal legislation passed during Reconstruction following the Civil War, the statute expanded federal authority to an area previously reserved to the states.17 Perhaps because the mail-fraud statute offers no precise definition of ‘‘fraud,’’ courts have struggled to define the outer boundaries of the statute. More than a century ago, the U.S. Supreme Court held that the statute prohibited ‘‘everything designed to defraud by representations as to the past or present, or suggestions and promises as to the future.’’18 Since then, prosecutors have used the statute to attack a broad range of schemes, the statute’s reach being limited only by a prosecutor’s fertile imagination. Nevertheless, the Supreme Court long ago stated that ‘‘the words ‘to defraud’ commonly refer to ‘wronging one in his property rights by dishonest methods or schemes’ and ‘usually signify the deprivation of something of value by trick, deceit, chicane or overreaching.’ ”19 At a minimum, the courts have agreed that, in enacting the statute, Congress intended to protect people from schemes to deprive them of their money or property.20
But Section 1341 eventually evolved into a “first line of defense’’ and ‘‘stopgap device’’ to address a variety of novel and previously unimagined frauds until the government could determine how to address more directly the emerging problems of deceit.21 Throughout the first century of the mail-fraud statute’s existence, Congress and the courts repeatedly authorized its expanded use.22 Blackmail, counterfeiting, election fraud, and bribery all became targets of the statute’s application.23 The ill-defined boundaries of the statute’s outer limits invited federal prosecutors to use it to attack varied manifestations of corruption that deprived victims of ‘‘ ‘intangible rights’ unrelated to money or property.’’24 For decades, the courts of appeals regularly held that Section 1341 covered schemes designed to deprive victims of intangible rights, such as the right to have ‘‘public officials perform their duties honestly.’’25
Supreme Court Rejects Expansion. Notwithstanding this judicial gloss imposed by those courts of appeals that confronted the question of whether a scheme to defraud another of ‘‘honest services’’ is mail fraud,26 in 1987, in McNally v. United States, the Supreme Court rejected that expansion of Section 1341, declaring that the intangible right of ‘‘honest services’’ is not a property interest and the intended deprivation of such an interest does not support a mail-fraud conviction.27 In McNally, the defendants’ convictions were reversed because the jury instructions given in that case permitted the jury to convict the defendants of violating Section 1341 for depriving the state of something other than ‘‘money or property.’’28 The dishonestly arranged purchase of insurance coverage by the Commonwealth of Kentucky, which the defendants orchestrated, did not support a mail-fraud conviction because it did not result in the loss of any property interest by the state, nor was it intended to, and there was no evidence that the state suffered or could suffer any pecuniary harm as a result of the scheme. Therefore, as a matter of law, there could be no violation of Section 1341. The court said:
We note that as the action comes to us, there was no charge and the jury was not required to find that the Commonwealth itself was defrauded of any money or property. It was not charged that in the absence of the alleged scheme the Commonwealth would have paid a lower premium or secured better insurance. ... Indeed, the premium for insurance would have been paid to some agency ....29
Thus, McNally teaches that mail fraud requires, inter alia, that there be an actual or intended harm of a pecuniary nature, constituting the deprivation of a property interest. Where such a deprivation is not intended or the possibility of such a deprivation does not exist, there is no mail fraud because an essential element of the offense as defined by the statute, the intent to deprive the victim of property, is absent. Section 1341 protects people from schemes to deprive them of their money or property, and ‘‘honest services’’ are neither.30 The Supreme Court declined to interpret the mail-fraud statute so as to ‘‘leave its outer boundaries ambiguous,’’31 concluding that if Congress wished to see the boundaries of Section 1341 expanded, it would have to ‘‘speak more clearly.’’32
Congressional Response. Congress responded to the Supreme Court’s invitation and, presumably, attempted to speak more clearly the following year when it enacted Section 1346, effectively overturning McNally’s holding that ‘‘honest services’’ are not a species of property. Section 1346 expanded the reach of the mail-fraud statute by including within its scope those schemes intended to deprive another of the ‘‘intangible right of honest services.’’33 Since its passage, Section 1346 has been wielded to prosecute a broad spectrum of conduct, and the courts of appeals have struggled to develop a consistent method for applying it.3 4 Though the Supreme Court soon may clarify the outer boundaries of Section 1346 and the duties embraced by ‘‘honest services,’’ as well as the constitutionality of that statute,35 for now the lower courts are left to make those determinations on their own.
Regulatory Interests Are Not a Species of Property.
While money, other property (both tangible and intangible),36 and honest services are presently recognized as interests protected by the mail-fraud statute, Cleveland v. United States addressed the question of whether a scheme designed to frustrate a regulatory interest or to deprive another of such an interest is punishable as mail fraud.37 Underlying the prosecution in Cleveland was a Louisiana statute that required a prospective owner of a video-poker machine to apply for a license from the state. The defendants were indicted under Section 1341 for fraudulently concealing their true identities on their initial poker-license application and subsequent renewal forms. As a result of that deceit, the government contended, the state was deprived of its interest in the proper regulation of the licensing process; according to the government, such an interest is property. Cleveland argued that the video-poker licenses did not constitute property in the hands of the state, as defined by Section 1341 and McNally, and, therefore, the alleged scheme was not intended to and could not result in the deprivation of any property, nor could it support his conviction for mail fraud.
The Supreme Court agreed, holding that a license or permit issued by a state is not a property interest.38 The government had not alleged that ‘‘Cleveland defrauded the State of any money to which the State was entitled by law. Indeed, there is no dispute that [the State received] its proper share of revenue.’’39 The state’s video-poker licensing statute established a typical regulatory program, and the state’s intangible rights of allocation, exclusion, and control of its licenses and those who may become licensees amounted to regulatory interests only, not property interests that are the object of Section 1341’s protection.40
What Constitutes Deprivation of Property Interest?
While decisions of the Supreme Court and an act of Congress have defined interests in money, property, and honest services as protected by the mail-fraud and wire-fraud statutes,41 and while Cleveland teaches that regulatory interests are not protected by Section 1341, the federal courts have not found common ground on how to treat the so-called ‘‘right to control spending.’’ A split has emerged among the courts of appeals, with the Second, Third, and Ninth Circuits and at least two decisions of the Seventh Circuit holding that the ‘‘right to control spending’’ is not a property interest, while the Eighth and Eleventh Circuits and a single decision of the Seventh Circuit have taken a contrary approach, concluding that the ‘‘right to control spending’’ is a property interest.
Intent to Deprive Another of Pecuniary Interest. The Second Circuit has recognized that deception alone, without a tangible, pecuniary injury (or the possibility of such injury), cannot support a mail-fraud conviction.42 The defendants in United States v. Starr were indicted for mail- and wire-fraud violations arising out of their operation of a “lettershoppe service’’ for bulk-mail customers. Their company, AMS, billed customers for sorting, labeling, packaging, and handling the customers’ mailings, but customers calculated on their own ‘‘the postage due for their mailings based on the number of pieces to be mailed and the applicable postage rate’’ and paid these amounts to AMS for payment at a later date to the U.S. Postal Service.43 The defendants, however, concealed higher postage-rate mail inside bulk-rate mailing sacks, and as a result, the USPS was paid less than the defendants collected from their customers (and less than the USPS deserved). The defendants pocketed the difference. The court explained:
AMS customers, however, remained blissfully ignorant of the Starrs’ activities. The customers paid the postage that they themselves calculated to be legally due. Mail was sent on time and arrived at the appropriate destination.44
Because AMS customers received the desired services at the agreed price, based on their own calculation of postage due, none was (or could be) deprived of any property interest, and any frustration of the customers’ ‘‘right’’ to control their spending did not supply this essential element. That those customers may have chosen not to do business with the defendants had they known of the defendants’ dishonest ways did not save the government’s mail-fraud prosecution.
That holding was subsequently reaffirmed by the Second Circuit in United States v. Mittelstaedt, which likewise concluded that to convict under Section 1341, the government must prove an actual or intended loss of a property interest, not merely the loss of some metaphysical entitlement to control how one’s money is spent.45 Profiting from one’s deceit, but not at the expense of the ‘‘victim,’’ is not mail fraud.46 While the defendants in Mittelstaedt profited from their conduct, their profit did not come at the expense of the purported victims, and therefore did not (and could not) cause any pecuniary harm to those ‘‘victims.’’47 Not even the payment of a bribe to one victim-town’s director of community development supported a mail-fraud conviction because there was no showing that the bribe affected the price paid by the town to purchase property from the defendants in the underlying transaction. While paying the bribe ‘‘theoretically could support a mail-fraud conviction if the bribe inflated the cost of the property to the town,’’ that theory was not mentioned in the indictment, argued to the jury, nor addressed in the jury instructions.48 As a result, the convictions could not be grounded on any such findings, and so they were reversed.
Deceiving Isn’t Defrauding. The Second Circuit reached a similar conclusion in United States v. Regent Office Supply Co., holding that although the defendants had made false representations to customers in order to induce them to buy the defendants’ merchandise, deceiving the customers did not amount to defrauding them.49 The customers received the goods ordered at the promised prices and suffered no actual loss of money or property, nor was any such loss intended. While the court disapproved of the defendants’ deceitful behavior, it held that their scheme to obtain money by false pretenses was not punishable under Section 1341.50 Without proof that the defendants expected to get ‘‘something for nothing,’’ there could be no mail fraud.51
Similarly, the Third Circuit has held that the power to control decisions regarding a pension fund’s investments is not money or property. In United States v. Zauber, the defendants, trustees of a pension fund and the fund’s general counsel, schemed to direct the fund to invest in enterprises in which the defendants were financially interested.52 Reversing the defendants’ mail fraud convictions, the Third Circuit held that deprivation of the right of control over how the pension fund’s money was invested did not constitute the actual loss of the fund’s money or property required for conviction under Section 1341.53 Scheming to deprive the fund only of its intangible right of control did not constitute mail fraud; even though the defendants financially benefitted from the scheme, that benefit did not come at the expense of the fund.54
The Ninth Circuit has joined with the Second and Third Circuits’ interpretation of the ‘‘scheme’’ element of Section 1341, requiring intent to deprive the victim of property. The alleged victims in United States v. Bruchhausen sold military equipment and technology they manufactured to the defendant on the basis of his representation that, following the sale, it would remain in the United States; in fact, the defendant was reselling it to Soviet bloc countries.55 As in Starr, Regent, and Mittelstaedt, mere deception without a concomitant intended loss of property did not result in a violation of Section 1341 in Bruchhausen. The manufacturers received the ‘‘full sale price for their products; they clearly suffered no monetary loss.’’56 While the defendant’s deceit had frustrated the manufacturers’ desire to sell their products only to countries authorized by law to purchase those products, the manufacturers were not deprived of any property interest.
Regulatory Interests. ‘‘[T]he government’s regulatory interests are not protected by the mail-fraud statute,’’57 and a scheme that merely frustrates the objectives and policies to be promoted by a regulatory framework does not defraud a public body of property.58 This principle was applied by the Seventh Circuit in United States v. Vollmer, which held that the government’s interest in regulating the resale of military firearms could not support a mail-fraud conviction. Regulations of the Bureau of Alcohol, Tobacco, and Firearms banned private parties from importing semi-automatic weapons, while allowing government agencies to import such weapons for official use and to resell the weapons to third parties.59 A National Guardsman obtained regulated weapons by making false statements to the private seller of the weapons and to ATF that the weapons were being purchased for use in the course of his official duties and not for resale.60 In fact, as soon as the National Guardsman obtained the weapons, he resold them to a gun dealer at a substantial profit for himself, and both were charged with and convicted of mail fraud.61 The Seventh Circuit rejected the argument that the government’s right to control the disposition of the regulated weapons is a property right that can provide the predicate for a mail-fraud violation and reversed the convictions, concluding, ‘‘It is well established that the government’s regulatory interests are not protected by the mail fraud statute.’’62 That the private seller was deceived into selling the weapons to the defendant guardsman did not, standing alone, result in the deprivation of any property interest of the seller, nor was any such deprivation intended by the scheme.
The Seventh Circuit reached a similar conclusion in United States v. Ashman.63 There, the court recognized that where the ‘‘victim’’ is not exposed to any risk of economic injury, and none is intended, there is no mail fraud, even though the defendant may profit as a result of his deceptive conduct, because there is no intent to deprive the victim of his property and therefore no scheme to defraud.64 The prosecution in Ashman rested on a “matched-order scheme’’ involved in the handling of market orders at the Chicago Board of Trade.
Traders paired some of these orders off the market at times chosen to divert profits to themselves. This deprived the customers of the benefits provided by an open-outcry auction; more important, it moved money directly from customers’ accounts to traders’ accounts. The transfers were the objective of the scheme. ...[T]rades executed after the market was limit-up or limit-down could not support mail fraud convictions. Once the market had moved the limit for the day, customers received the same price no matter when or with whom they traded. ... A customer who loses the honesty of the traders, but no money, has not been defrauded of property . . . .65
In contrast to its later holding in Leahy, discussed infra, the Seventh Circuit held in Ashman that where the ‘‘victim’’ has been deceived, but ‘‘has not been defrauded of property,’’ there is no mail fraud.
Right to Control Spending Is ‘Intangible Property.’ Conversely, the Seventh, Eighth and Eleventh Circuits have held that the right to control spending is a property interest, even when there is no possibility of pecuniary harm to the ‘‘victim.’’ In United States v. Granberry, the Eighth Circuit reviewed a defendant’s mail-fraud conviction resulting from his failure to disclose on his application for a Missouri school bus operator permit his prior conviction for first-degree murder.66 After obtaining the permit, the defendant applied to a school district and was hired as a bus driver, again without disclosing his conviction. While the school district received the bus-driving services for which it paid, the court held that the district was ‘‘deprived of money in the very elementary sense that its money has gone to a person who would not have received it if all of the facts had been known.’’67 The Eighth Circuit found that the right of the school district to control its spending is ‘‘intangible property’’ under Section 1341, and that the defendant’s scheme had deprived the school district of that property.68
In United States v. Maxwell,69 the Eleventh Circuit concluded that the defendant committed mail fraud by participating in a scheme to obtain construction contracts for Miami International Airport that were set aside for ‘‘socially and economically disadvantaged companies.’’ All the work specified by the governing contracts was performed at the contract prices, but not by properly certified subcontractors. The scheme was found to violate Section 1341 because the defendant’s company obtained payments, through a “certified’’ subcontractor controlled by the defendant’s company, for which it was not eligible. ‘‘The County and the United States were free to prescribe the rules of this contracting process, and the defendant was not free to dishonestly circumvent the worthy purpose of the set-aside programs.’’70 In other words, the airport received the services and materials for which it contracted, at the agreed prices, just not from the types of companies it intended to pay. As a result, the airport and participating governments were deprived of the ‘‘right’’ to determine who received their funds.71
In United States v. Leahy, the Seventh Circuit reviewed, inter alia, the defendants’ mail-fraud convictions for obtaining, through deception, a certification as a Minority Business Enterprise that was used by a subcontractor in connection with waste recycling contracts with Chicago.72
In 1990, the City Council of Chicago passed an ordinance to grant an advantage to select businesses owned by minorities (‘‘MBEs’’) and women (‘‘WBEs’’) in the award of city contract money. ... Companies that wished to obtain a contract with the city, but which were neither MBEs nor WBEs had to commit to expend 25% of the value of the contract with MBEs and 5% with WBEs. The ordinance included subcontracting as one of the various ways to fulfill this requirement . . . .73
Willful Act Plus Intent to Deceive. The Leahy court described the city’s MBE/WBE program as ‘‘an affirmative action program whose fruits were reserved for fledgling minority and women businesses.’’74
Though as a result of the defendants’ scheme the city was deprived of its ability to regulate to whom the MBE subcontract was awarded and its dollars ultimately were directed, the defendants argued that they had not committed mail fraud because the city received from the prime contractor all services for which it had contracted at the agreed unit prices for those services, and the defendants’ company had provided the very services for which it had been paid by the prime contractor; as a result, the defendants’ scheme had not deprived the city of money or property, nor had the defendants intended to do so. The Seventh Circuit affirmed the defendants’ convictions, interpreting Cleveland as holding that (except for the ‘‘intangible right of honest services’’) the mail-fraud statute required only that the ‘‘object of the fraud is money or property, rather than an intangible right.’’75 That is, the intent to deprive another of property is not a required element of the offense as long as the ‘‘offender’’ intends to obtain the ‘‘victim’s’’ money or property. As the court put it, the object of the fraud ‘‘was money, plain and simple, taken under false pretenses from the city in its role as a purchaser of services.’’76 While Chicago received part of the services it contracted for through the subcontracts — cleaning and janitorial services, it
completely lost the other type of services for which it was paying the contractors and the [defendant’s] companies — services performed by an MBE or an WBE precisely because the company is a qualified MBE or WBE .... Chicago suffered a loss of money in that it paid for a service provided by an MBE or WBE that it did not receive.77
Therefore, the court said, the indictment adequately alleged mail fraud and it affirmed the defendants’ convictions, because ‘‘[a]ll that is required is a willful act with the intent to deceive or cheat by each of the defendants.’’78 The defendants’ deception arose not from the nature or quality of the services provided, but from the identity of the service provider. The race or gender of the people who owned and controlled defendants’ companies was not as promised and represented, and proof of these misrepresentations was sufficient to support the defendants’ convictions.
Absence of Intent to Deprive of Money or Property. No proof was presented in Leahy that (1) the city failed to obtain the full benefit and value of its contracts with its prime contractor, (2) the prices paid by the city to its prime contractor for those services were affected in any way by the allegedly fraudulent MBE or its principals, or (3) the services provided to the city by the prime contractor were less than required by its contracts with the city. On the contrary, the proof adduced confirmed that the city obtained from its prime contractor precisely those services for which it bargained at the precise unit rates it agreed to pay.79 Like the flawed jury instructions given by the McNally trial court, the jury instructions in Leahy permitted a finding of guilt even in the absence of an intended deprivation of money or property by permitting conviction based solely on the deprivation of an interest in something other than property: Chicago’s interest in running a WBE/MBE certification process free from deception.
Because there was no intended or actual deprivation of money or property in McNally, the state did not pay more for its insurance or receive less coverage as a result of the defendants’ conduct80 and there was no pecuniary injury and no Section 1341 violation. Likewise, the use of MBE or WBE status to obtain payments, even assuming that such conduct diverted payments from properly certified MBE/WBE firms, did not deprive Chicago of any property interest as long as it received from its prime contractor the services for which it bargained at the agreed unit prices. Without the potential for causing pecuniary harm to the victim, and without any intent to cause such harm, the diversion of such payments is not a tangible harm and should not constitute a deprivation of Section 1341 property.81
The school district’s interest in Granberry in hiring bus drivers without prior convictions and the objectives to be fostered by the MBE/WBE program in Leahy and the government programs in Maxwell are policy interests more clearly analogous to the regulatory interests addressed in Cleveland than the property interests required by McNally. The standard adopted by the Seventh, Eighth, and Eleventh Circuits requires only that the ultimate object of the scheme be to obtain money or property, while McNally and Section 1341 require that the offender act with the intent to permanently deprive his victim of some property interest to get something for nothing. If a putative victim receives the service for which he paid at the price he agreed to pay and, as in Leahy, that price is unaffected by the alleged offender’s conduct, the putative victim has not been deprived of money or property; rather, he has received precisely that for which he bargained. Leahy’s holding that ‘‘[a]ll that is required is a willful act with the intent to deceive or cheat’’82 cannot be squared with McNally. Nor can the holdings of Granberry and Maxwell. By requiring the government to prove that a defendant’s scheme is intended to deprive his alleged victims of money or property, the Second, Third, and Ninth Circuits have properly recognized McNally’s and Cleveland’s limitations on the scope of Section 1341.
As the McNally court said, ‘‘If the Federal Government is to engage in combat against fraudulent schemes not covered by the [mail fraud] statute, it must do so at the initiative of Congress ....’’83 Indeed, the rule of lenity, which proscribes constructive offenses and teaches that a case must be plainly within a statute in order for a defendant to be punished, requires as much.84 That is because ‘‘a criminal statute must give fair warning of the conduct that it makes a crime.’’85
Section 1341 has been used to ‘‘extend federal jurisdiction to crimes traditionally prosecuted only at the state and local level.’’86 The prosecution brought in Leahy is unlikely to be an isolated one. At least 20 states have MBE/WBE set-aside programs, 14 of which make it unlawful to provide false information in the certification process and provide penalties for that conduct.87 If the ‘‘right to control spending,’’ without more, is a property interest for purposes of Section 1341, then virtually any alleged misrepresentation, no matter how trivial, made to secure certification pursuant to any one of these affirmative action programs could support federal felony charges.
More than 20 years have passed since the Supreme Court’s decision in McNally and Congress’s response. The court has now determined to review and, hopefully, more clearly define the scope of ‘‘honest services’’ and the limits of Section 1346.88 When it next has the opportunity to do so, the court should revisit its holding in McNally and likewise more clearly define the outer boundaries of Section 1341 and what constitutes a property interest whose intended deprivation results in a violation of Section 1341.