Case o' the Week: Baaad case for fraudster who shears sheep rancher, Williams

The Ninth extends the “intangible rights to honest services” theory of fraud to private individuals (instead of just government employees) in United States v. Williams, __ F.3d. __, Slip. Op. 2969 (9th Cir. Mar. 21, 2006), decision available here. The theory is limited to fiduciaries, however – especially fiduciaries who buy condos in Belize with their client’s money (left).

Players: A sophisticated challenge by AFPD Ruben Iniguez before a tough, tough panel.

Facts: Financial planner Williams bilked an old sheep rancher out of several hundred thousand dollars, sending much of the money to Belize. Slip. op. at 2974. He was not a government employee. Instead of sticking to a straightforward theory of wire and mail fraud of actual assets, the government tacked on an alternative theory under 18 USC § 1346. This statute includes a definition that criminalizes “a scheme or artifice to deprive another of the intangible right of honest services.” 18 USC § 1346. The jury returned a general guilty verdict that didn’t specify its theory of fraud.

Issue(s): “Defendant argues that the ‘intangible rights’ theory of fraud does not apply to private individuals.” Id. at 2977. [Ed. note: there were many other interesting issues in this decision not addressed in this memo.]

Held: “We follow our sister circuits and hold that the ‘intangible rights’ theory of fraud, as codified by § 1346, can apply to private individuals as well as to public figures.” Id. at 2981.

Of Note: White collar folks should view this case warily. Author Graber traces the development of the “intangible rights” theory, the theory’s temporary demise in McNally v. United States, 483 U.S. 350 (1987), and its apparent resurrection by Congress in Section 1346. In sum, the Supreme Court rejected the “intangible rights” theory in its 1987 McNally decision. Graber notes that Congress meant to “restore the pre-McNally landscape” with Section 1346. Id. at 2979, citing United States v. Frega, 179 F.3d 793, 803 (9th Cir. 1999).

In any event, the “intangible rights” theory probably made little actual difference to defendant Williams: it sounds like the defendant could have been squarely convicted on a pure “assets fraud” theory. Williams is dangerous, though, because it gives the government another arrow in its fraud quiver. The “intangible rights to honest services” is – by definition – a less “tangible” theory of loss than “actual assets” fraud. Because the theory is not clearly defined and limited, it is a fraud allegation ripe for expansive and abusive pleading by the feds.

How to Use: Graber (reluctantly, one senses) limits the “intangible rights” theory to defendants who have a fiduciary relationship with the victims. Id. at 2982. This limitation arises because the theory has traditionally and overwhelmingly been applied to bribery of public officials. Id. Therefore, part of the new rule is that an element of the intangible rights theory of fraud is a fiduciary relationship between the fraudster and victim: without this relationship, there is no basis for conviction under § 1346. Beware, however, that the panel leaves open for another day whether the “‘intangible right of honest services’ in § 1346 applies to persons who are not fiduciaries.” Id. at 2983.

For Further Reading: Williams’ trial defense counsel labored under what can be charitably described as bad facts. The victim sheep rancher who was defrauded was old and mentally feeble. See USAO Press Release. When arrested, Williams was caught with evidence suggesting that he was planning a permanent vacation in Belize. Id. Despite these facts, the Oregon Federal Public Defender still scraped out a new and novel challenge to its client’s conviction. AFPD Ruben Iniguez and his office deserve credit for finding a solid fight in an apparently bleak case.

Steven Kalar, Senior Litigator N.D. Cal FPD. Website available at www.ndcalfpd.org