Supreme Court Upholds Honest Services Fraud, but Vacates Skillings Conviction

In a much anticipated decision, the United States Supreme Court upheld the constitutionality of the "honest services" theory of mail fraud and wire fraud prosecutions. However, in doing so, the Court vacated the conviction of former Enron executive Jeffrey Skillings. The Skillings case was remanded to a lower court for further proceedings.

The Justice Department had charged Skillings with conspiracy to commit wire and mail fraud for defrauding Enron investors of his honest services. The Government charged Skillings with conspiring to defraud Enron’s shareholders by breaching his duty of honest services in misrepresenting the company’s fiscal health, thereby artificially inflating its stock price. It was the Government’s theory at trial that Skillings profited from the fraudulent scheme by receiving of salary and bonuses. Additionally, the Government alleged that he realized $89 million from the sale of Enron stock.

Skillings's defense team had attacked the mail fraud and wire fraud honest services theory as unconstitutionally vague. Justice Ginsburg in her decision held that the historic core of the honest services theory of the fraud statutes was the subversion of honest services by bribery and kickback schemes. Thus, the Court held that the application of the honest services theory in these instances met constitutional scrutiny. In such cases it is immaterial whether any person or entity suffered an economic or other tangible loss. The harm comes from the victim not receiving the honest services of the violator.

In the case before the Supreme Court the Government had charged the following as the objects of its conspiracy count: 1) honest services wire fraud, 2) money or property wire fraud, and 3) securities fraud. A conviction of Skillings for conspiracy based on honest services wire fraud would be unconstitutional because the Government did not allege a bribe or kickback as a basis for the honest services fraud. Instead, it alleged a conflict of interest as the basis. However, the Justice Ginsburg rejected a conflict of interest basis for honest services fraud. Because the jury returned a general verdict of guilty to the conspiracy count, the Court was unable to determine whether it had used the constitutionally impermissible theory. Therefore, the Court vacated the conviction and remanded the case to the Fifth Circuit Court of Appeals for further proceedings.

The case is particularly significant because it will allow the federal government to continue the use of wire and mail fraud statutes to combat official corruption. The fraud statutes and the honest services theory of prosecution had become government favorites in the prosecution of local and state officials. Federal bribery statutes only apply to federal officials. So, to target corrupt state and local government officers, the Justice Department uses the honest services theory based on bribery or kickbacks. To a lesser extent, the Government also uses the theory against corrupt business people, although the money or property fraud theory is much more prevalent in the private sector context.

For more about the Supreme Court's decision, please see The New York Times, "Justices Limit Use of 'Honest Services' Law against Fraud," June 24, 2010, http://www.nytimes.com/2010/06/25/business/25bizcourt.html?hp.

White Collar and Securities: U.S. Reportedly Opens Investigation of Goldman Sachs

Various news organizations are reporting today that the U.S. Attorney for the Southern District of New York has begun an investigation of Wall Street banking giant Goldman Sachs. The reports state that the investigation resulted from a Securities and Exchange Commission referral of possible criminal activity by the bank. The SEC brought a civil enforcement action against Goldman earlier in the month alleging securities fraud.

The prosecutors will most likely begin their investigation on the basis of facts generated by the SEC investigation. The government will begin by looking to see whether Goldman and its executives defrauded customers who invested in Goldman's CDO offering, ABACUS 2007-AC1. (See prior post for a discussion of the SEC complaint.) There are a number of fraud statutes available to federal prosecutors should they seek indictments. Those most commonly used by federal prosecutors in securities fraud cases are wire fraud, mail fraud, securities fraud, conspiracy, and money laundering.

The criminal investigation will focus more on the potential culpability of individuals rather than the Goldman corporate entity. Typically, federal prosecutors will seek to hold individuals responsible for any criminal wrongdoing rather than settle for corporate liability. In many cases a corporation will enter into a corporate integrity agreement with the government. Such an agreement will require compliance and internal education programs and a period of time in which the company must report regularly to the government. In return for the agreement the government forgoes prosecution of the business entity.

The criminal authorities have more difficult task than the SEC in prevailing in a law suit. For a criminal prosecution to be successful the government must convince the jury beyond a reasonable doubt, a much greater burden than the preponderance of the evidence burden that the SEC must meet in its civil enforcement action.

A potentially important factor to bear in mind is that the SEC did not name John A. Paulson or his hedge fund in its complaint against Goldman. In the press conference announcing the SEC action, the Commission's Director of Enforcement seemed to deflect questions about the charging of the hedge fund. Additionally, when Goldman executives testified before the Permanent Senate Subcommittee on Investigations, there was an absence of questioning about the role of the Paulson hedge fund in creating the CDO offering. One possible explanation for the absence of discussion about Paulson is that persons involved in the hedge fund may be cooperating with the government investigations.

If there are persons involved in the the deal cooperating with investigators, that fact could greatly facilitate the government's investigation and proof of wrongdoing. "Flipping" an insider to a criminal conspiracy is one of the best means of investigating and bringing a successful case against a criminal conspiracy.

For more about the reported federal criminal investigation of Goldman, please see The New York Times, "Goldman's Share Plunge on Inquiries and Downgrades," April 30, 2010, http://www.nytimes.com/2010/05/01/business/01goldman.html?ref=business.

Health Care: Pfizer Found Liable in Civil RICO Case

Yesterday was quite newsworthy the U.S. District Court in Boston. (See blog entry below about the identity theft sentencing.) In a case before the court a jury found Pfizer, Inc., liable for the violation of federal racketeering law by improperly marketing its epilepsy drug Neurontin for off-label uses. The jury awarded the plaintiffs, Kaiser Foundation Hospitals and the Kaiser Foundation Health Plan, $47 million. Civil RICO (Racketeer Influenced and Corrupt Organizations) provides for the awarding of triple damages. Thus, the jury's award is increased to a judgment of $141 million.

Off-label uses of a drug are its prescription for medical purposes not approved by the Food and Drug Administration. Pfizer marketed Neurontin not only for the treatment of epilepsy, the FDA approved use, but the company also marketed Neurontin for the treatment of migraine headaches, pain, and bipolar disorders. While physicians are free to prescribe drugs for off-label uses, drug companies may only market their products for the uses approved by the FDA.

To succeed on a claimed RICO violation the plaintiffs must prove the existence of an enterprise, which engaged in racketeering activity two or more times in a ten year period, thus establishing a pattern of racketeering activity. In this case Pfizer itself, or at least its division marketing Neurontin, would be the enterprise. The racketeering activity would be the fraudulent marketing of the drug for off-label uses, in essence a mail fraud or wire fraud. Finally, the pattern of racketeering activity would be the repeated marketing of the drug for off-label uses.

Pfizer has stated its intention to appeal the verdict. Previously, in 2004 Pfizer had pleaded guilty to a criminal charge for its promotion of off-label uses for Neurontin and paid a fine of $430 million to the federal and state governments. Pfizer believes that the court erred in allowing evidence of the criminal conviction to come before the jury and has stated its intention to base the appeal on this alleged error.

For more about the Pfizer case please see Forexyard, "US Jury's Neurontin Ruling to Cost Pfizer $141 Mln," March 26, 2010, http://www.forexyard.com/en/news/jurys-Neurontin-ruling-to-cost-Pfizer-141-mln-2010-03-25T220425Z-US.

White Collar and Securities: Government Focuses on Personal Gain in Backdating Trial

As the United States government prepares for the beginning on Tuesday, March 16, 2010, of the trial of Bruce Karatz, the former CEO of KB Home, on charges stemming from his backdating of stock option bonuses, it is focusing on proving his motive, namely personal gain. The government has alleged that Karatz fraudulently received millions from his receipt of backdated stock options. Interestingly, the federal prosecutors have not alleged the exact amount of his alleged fraudulent gains.

The government's trial of Karatz is its sixth one alleging securities fraud based on individuals receiving backdated stock options. In most of the prior cases, the government did not focus the proof and the juries' attentions on the personal gains received by the defendants as motive for the crimes charged. Of the five prior prosecutions two resulted in convictions. A third conviction was overturned on appeal due to prosecutorial misconduct. A fourth was thrown out at trial due to prosecutorial misconduct, and the fifth resulted in an acquittal.

Defendants in the past urged juries to accept the argument that the backdating of options was a common practice among many companies. More specifically, defendants have argued that all of the actors within their corporations aware of the backdating, including the corporations' accountants and attorneys. Moreover, the argument relies on the fact that the accounting rules are arcane, and defendants relied on their accounting and legal professionals who allowed the backdating to occur. By drawing attention to the motive of personal gain, the federal prosecutors are attempting to focus the jury's attention on the result of the alleged crime, the receipt of the money by the defendant Karatz.

Previous trials had focused on Accounting Principles Board Opinion No. 25, which requires public companies to disclose in their public filings expenses incurred when granting "in the money options." "In the money" options are those below the current market value. Expenses incurred for options granted at the current market price did not have to be disclosed. Thus, there was an incentive to grant options at the lowest possible price and to reflect the date of the granting as the date when the market price was actually at that low level. By focusing on the personal gains of the defendants the prosecutors are trying to make the case less esoteric for the jury.

The indictment charges Karatz with seven counts of mail fraud, five counts of wire fraud, three counts of securities fraud, four counts of making false filings to the Securities and Exchange Commission, and one count of lying to the company's accountants.

The government will try to streamline its proof to show that Karatz knowingly and intentionally backdated his options to put money in his pocket at the expense of the company and its shareholders. The defense will argue that Karatz lacked the criminal intent to defraud the company and its shareholders, believing that the treatment of the options was lawful and appropriate. While the government would like to avoid a discussion of Opinion No. 25, it will probably be a centerpiece of the defense.

For more about the Karatz trial please see Law.com, "Prosecution in KB Home Backdating Case Takes a New Tack: Personal Gain," March 8, 2010, http://www.law.com/jsp/article.jsp?id=1202445793620&rss=newswire.

White Collar and Securities: Investigations of Toyota Begin

Reports are beginning to surface that Toyota has received a grand jury subpoena from a federal grand jury considering possible criminal charges and a document request from the Securities and Exchange Commission. The investigations apparently revolve around safety issues, including sudden acceleration, leading to the company's recall of more than 8 million vehicles. Among the issues addressed in the recall is the sudden acceleration and problems with the braking systems. The company is also the subject of congressional investigations.

The Wall Street Journal is reporting that the grand jury subpoena was issued from the United States Attorney's Office in Manhattan. The securities fraud unit of that office is active in cases involving public companies. The paper is also reporting that the request for documents from the SEC was a voluntary request that came from the Commission's Los Angeles office

Toyota Motor Corporation is the world's largest automaker. It is a publicly traded company, and its stock is traded on the Tokyo, London, and New York stock exchanges.

It is likely that the United States Attorney and the SEC are both considering similar possible charges. The question under investigation is whether Toyota officials were aware of mechanical deficiencies in the company's products and failed to disclose these deficiencies to the investing public and in its periodic filings to the SEC. If 1) such deficiencies existed, 2) corporate personnel were aware of the deficiencies, and 3) the information about the deficiencies rises to the level of material information, the company had a duty to disclose the information. Under securities laws material information is that which a reasonable investor would need to make an informed decision of whether or not to execute a securities transaction. In short, if there were significant problems with sudden acceleration, brakes, and other systems about which Toyota management knew and withheld disclosure, Toyota and its knowledgeable officials could be legally liable both criminally and civilly.

The existence of the potential factual situation above could serve as the basis for criminal charges of wire fraud, mail fraud, and securities fraud among others. Also, the facts could support a civil Section 10(b), Rule 10b-5 Securities Exchange Act and rules charge by the SEC. It will be interesting to see if and how these investigations develop.

For more about the investigations please see The Wall Street Journal, "Subpoenas Hit Toyota on the Eve of Hearing," February 23, 2010, http://online.wsj.com/article/SB20001424052748704454304575081363213478420.html?mod=WSJ-hpp-LEFTWhatsNewsCollection.

White Collar: DOJ Charges West Palm Beach Man with Telephone "Cramming"

A federal grand jury in Florida has voted an indictment against Willoughby Farr of West Palm Beach charging him in a telephone cramming scheme. "Cramming" occurs when a telephone customer is billed for services that he did not order or use. According to Department of Justice officials, it is a type of consumer fraud that steals hundreds of thousands of dollars from consumers annually.

The indictment alleges that Farr, using three of his companies, billed customers for collect calls that they had not made. It is alleged that the fraud took place between April 2003 and December 2005. The government claims that the charges appeared on the last page of the customers' telephone bills and that many customers paid the phony charges.

The indictment further alleges that, as part of the scheme, Farr hid his ownership of the three companies. This was because other telephone companies submitting bills to their customers had refused to allow Farr to bill for services on their accounts after state regulators had sued him for improper billing.

The charges against Farr include mail fraud and wire fraud. For more about the indictment, please see PCWorld, February 17, 2010, http://www.pcworld.com/printable/article/id,189590/printable.html

Health Care: Pennsylvania Physician Pleads Guilty to Fraud Charges

A Lancaster County physician, Saroj K. Parida, has pleaded guilty in the U.S. District Court for the Middle District of Pennsylvania, located in Harrisburg, to bilking public and private health insurers out of $8 million. Parida pleaded guilty to health care fraud and mail fraud charges. He is awaiting sentencing.

Parida and the federal prosecutors entered into a plea agreement. The terms of the agreement call for the recommendation of a sentence of eight years incarceration. The plea agreement is not binding on the court. As a general rule, if the probation department agrees with the sentencing rationale of the plea agreement, the court will impose the agreed upon plea.

Parida also agreed to the payment of $7.1 million in restitution to several insurers. The insurers included Medicaid and private insurance companies. Thus far, Parida has turned over $959,000. Additionally, the plea agreement called for Parida to forfeit $5.7 million that the government seized from Parida's bank and investment accounts. The forfeiture will count towards the restitution order.

The government alleged that Parida was submitting bills to the insurance companies for work that he was not performing. The government claims that the locations of Parida's fraud scheme were Cumberland and Lancaster counties in Pennsylvania and in the state of South Carolina.

For more information about the case, please see The Reading Eagle, February 2, 2010, http://readingeagle.com/article.aspx?id=192174.

White Collar: Federal Authorities Foil Boston Area Affinity Scheme

Agents of the Federal Bureau of Investigation arrested Richard Elkinson at a casino in Mississippi yesterday. He is charged with operating a Ponzi scheme that defrauded more than 130 investors out of more than $29 million. Federal prosecutors in Boston filed the charges, which include mail fraud.

The government alleges that Elkinson gave investors promissory notes paying up to 13% return on the investments. The funds were supposedly to be used to supply uniforms to governments and large private organizations. Apparently, no such business existed, and Elkinson kept the scheme going by making interest payments to early investors by using the monies of later investors. This Ponzi scheme was the type known as an "affinity scheme" because it targeted victims who were close to Elkinson. Many of those victimized belonged to the Belmont Country Club in Belmont, Massachusetts.

The scheme came to light when Elkinson failed to make regularly scheduled interest payments last year. Investors made complaints to the Massachusetts Secretary of State who referred the matter to federal law enforcement authorities for investigation. The secretary of state has proceeded with civil enforcement in the matter by filing civil charges against a Boston area financial advisory firm for referring clients to Elkinson. To prevail in the civil suit the secretary will have to prove knowledge on the part of the advisers.

Federal authorities said that they had tracked Elkinson to Las Vegas before capturing him in Mississippi. They allege that Elkinson had conducted $3.7 million in reportable currency transactions of more than $10,000 since 1998. These transactions included placing and collecting wagers.

For more information, please see The Boston Globe, January 7, 2010, http://www.boston.com/business/articles/2010/01/07/ponzi_suspect_had_prior_woes/.

White Collar: Property Owners Sue Credit Suisse for Fraud

Owners of property at four luxury ski and/or golf resorts have sued Credit Suisse for $24 billion. The class action civil suit alleges that Credit Suisse engaged in conspiracy, wire and mail fraud, racketeering, and money laundering. The complaint alleges that Credit Suisse engaged in a predatory loan scheme designed to load the developments with so much debt that it could foreclose on the assets.

The lawsuit involves property at the following four resorts: Ginn Sur Mer in the Bahamas, Lake Las Vegas in Nevada, Tamarack Resort in Idaho, and Yellowstone Club in Montana. The complaint alleges that Credit Suisse concocted a scheme to artificially inflate the resorts' values to make large loans and charge exorbitant loan fees. Moreover, the plaintiffs allege that the bank knew that the resorts would not be able to perform under the loans. Thus, the complaint alleges that the entire plan amounted to nothing more than an elaborate scheme to bleed money from buyers through loans and then foreclose on those buyers when they became unable to keep up with the loan payments.

The civil case may have developed from the bankruptcy proceeding of the Yellowstone resort. In that case U.S. Bankruptcy Judge Ralph Kirscher said that Credit Suisse had devised a "predatory" loan scheme.

Credit Suisse in the last several years has become very active in financing upscale resorts, which have fallen into bankruptcy. The only property named in the class action suit not in bankruptcy is Ginn Sur Mer.

The plaintiffs filed the action in the United States District Court for the District of Idaho.

For more information about the suit, please see The Wall Street Journal, January 4, 2010, http://online.wsj.com/article/SB10001424052748703580904574638052691063912.html.

White Collar: Another Huge Ponzi Scheme, Another Conviction

In the aftermath of Bernard Madoff's $50 or $60 billion Ponzi scheme, mere thefts of one or a few billion dollars lose the ability to shock. Nevertheless, there seems to be no end to gigantic Ponzi scheme thefts. The most recent news comes from Minneapolis, Minnesota, where federal prosecutors yesterday won conviction on all 20 counts of an indictment charging Tom Petters, a Minnesota business man, with operating a $3.65 billion Ponzi scheme for at least a decade. After deliberating for five days, the jury returned guilty verdicts for wire fraud, mail fraud, money laundering, and conspiracy.

The indictment charged Petters with promising investors significant returns for lending his company, Petters Co., funds to buy surplus merchandise to resell to large retailers such as Costco and Wal-mart. In reality, there were no such transactions, Petters simply pocketed the invested funds and used them to finance his lavish lifestyle. Prosecutors showed that the investments of Petters's victims went to his purchase of expensive homes throughout the country, luxury automobiles, and expensive boats. Moreover, Petters used the stolen funds as seed money to purchase several legitimate businesses such as Polaroid Corp.

Several co-conspirators pleaded guilty to lesser crimes and cooperated in the investigation and prosecution of Petters. The scheme began to collapse in September 2008 when one of the co-conspirators approached the United States Attorney's Office in Minneapolis and disclosed the existence of the fraud. This co-conspirator began cooperating in the investigation, including the wearing of a recording device to meetings with Petters. The tapes gained through this cooperator's efforts to record conversations were the key evidence in the prosecution of Petters. In one tape, Petters was heard saying that the business was "one big . . . fraud."

Sentencing will take place in approximately two months. Petters was in jail since his 2008 arrest and will remain in custody awaiting further proceedings. The receiver in the case has stated that thus far less than $200 million has been recovered. Appeals are standard, although rarely successful, in most criminal convictions after trial. Petters's attorney said that his client will appeal the conviction.

For more about the Petters conviction please see The Wall Street Journal, December 3, 2009, http://online.wsj.com/article/SB10001424052748704107104574572402358172042.html.

White Collar: South Florida Attorney Charged in Massive Ponzi Scheme

The United States Attorney for the Southern District of Florida has charged Scott Rothstein, a Fort Lauderdale attorney, with operating a $1.2 billion fraud. The criminal information alleges that Rothstein and others committed racketeering violations, money laundering, and wire and mail fraud violations.

The government alleges that Rothstein used his now defunct law firm, Rothstein, Rosenfeldt and Adler as the basis of his fraud. The allegations are that Rothstein and co-conspirators sold purported settlements in sexual harrassment and whistle-blower suits to investors. According to the complaint, Rothstein sold these purported settlements at discounted rates. Allegedly, he told the investors that the plaintiffs would receive the investment money and relinquish the right to the settlement proceeds to the investors who would receive a longer term pay out. Rothstein allegedly told the investors that the plaintiffs wished to sell the settlements to avoid publicity and embarrassment. Moreover, he told the purported victims that there were no public court records because his law firm had settled the cases before filing the actions by threatening suits, explaining the that defendants could thereby avoid negative publicity.

One of the charges against Rothstein alleges a RICO conspiracy. RICO is an acronym for Racketeer Influenced and Corrupt Organizations. It is a statute that was orginally enacted to combat organized crime. However, it is frequently charged in cases of business crimes and fraud. The centerpiece of a RICO charge is the existence of an enterprise that is instrumental in the conduct of a pattern of racketeering. In the Rothstein case the government has charged the law firm as the RICO enterprise with wire fraud, mail fraud, and money laundering comprising the pattern of racketeering facilitated by the law firm.

At arraignment the government asked the court to remand Rothstein to custody pending further action, which will be either a plea to the information or a grand jury proceeding. (In the federal system, the government can only proceed based on a grand jury indictment unless the defendant voluntarily waives indictment.) It is likely that Rothstein will cooperate against his co-conspirators in attempt to reduce his ultimate sentence.

Finally, the government has also filed a count of forfeiture in the information. The count seeks, upon conviction, the forfeiture of currency and property in the amount of $1.2 billion.

For further information, please see The Miami Herald, http://www.miamiherald.com/467/story/1360988.html, The South Florida Sun-Sentinel, http://www.sun-sentinel.com/news/broward/fort-lauderdale/fl-rothstein-next-20091201,0,3597653.story, and The New York Times, http://www.nytimes.com/2009/12/02/us/02lawyer.html?scp=1&sq=rothstein&st=cse.

White Collar Crime and Securities: Federal Authorities Seek Top Russian Mobster on Fraud Charges

Federal investigators are seeking reputed Russian crime boss Semion Mogilevich on a 45 count indictment charging Mogilevich and others with racketeering (RICO), securities fraud, wire fraud, mail fraud, and money laundering.

The charges allege that Mogilevich owned a company called YBM, which purportedly manufactured magnets. YBM was a public company traded on the Ontario, Canada, exchange. Its headquarters was in suburban Philadelphia. Allegedly, the company did not produce magnets or anything else. Instead, it is alleged that the defendants moved large amounts of money through European banks including banks in Budapest, Hungary. According the the U.S., the movements of money were reported as the manufacture and sale of magnets. This made the company appear active and profitable, thus driving up its stock price. Those owning the stock, in short the defendants, were able to realize millions from the fraudulently valued stock. It is alleged that Mogilevich defraud American and Canadian investors out of $150 million.

Mogilevich is currently in Russia where authorities arrested him last year on fraud and tax charges. He is out of custody on bail in the Russian cases. American authorities have not been able to bring Mogilevich under U.S. jurisdiction because this country has neither an extradition treaty nor extradition relations with Russia. Authorities are hoping that Mogilevich travels to a jurisdiction that has either a treaty or extradition relations with the U.S.

This case is an example of organized crime elements becoming more sophisticated in their activities and becoming an international law enforcement group. Combating such crime will increasingly require international law enforcement cooperation.

For more information please see CNN.com, http://www.cnn.com/2009/CRIME/10/21/mogilevich.fbi.most.wanted/

White Collar: Supreme Court to Hear "Honest Services" Fraud Appeal

Convicted former Enron CEO Jeffrey Skillings has successfully petitioned the United States Supreme Court to hear the appeal of his conviction. A primary focus of his appeal will be an attack on those counts of conviction that arose from "honest services" fraud. His lawyers will undoubtedly argue that the language of the "honest services" statute is so vague that it does not adequately advise people of what amounts to criminal conduct.

Federal prosecutors do not have a federal criminal statute addressing bribery involving state and local officials. To reach such crimes, traditionally, federal prosecutors invoked mail and wire fraud statutes to obtain criminal jurisdiction. These statutes make illegal participation in schemes to defraud that use either the U.S. Postal Service or interstate couriers for mail fraud or interstate wire transmissions for wire fraud. To combat local corruption federal prosecutors charged these crimes under the theory that the corrupt conduct was a scheme to defraud the citizens of the honest services of their public officials. This theory of prosecution was particularly popular in the 1970's and 1980's.

In the case of McNally v. United States, 483 U.S. 350 (1987), the U.S. Supreme Court held that the wire and mail fraud statutes did not apply to the theory of honest services fraud. The Congress addressed the McNally decision expeditiously, enacting the "McNally fix," 18 U.S.C. Section 1346, in 1988. Section 1346 simply states that a "scheme or artifice to defraud another of the intangible right of honest services" satisfies the requirements of the "scheme or artifice to defraud" language in the mail fraud chapter (mail fraud, wire fraud, bank fraud, health care fraud, and securities fraud). The law does not provide a definition of the "intangible right to honest services." The failure of a definition in the law is the basis of the concern with the statute.

Over the ensuing years, federal courts have interpreted "honest services" provisions in the public employee context to provide a rather clear understanding of what the law holds to be unlawful conduct. Generally, bribery or an undisclosed conflict of interest will cross the line into illegal conduct on the the public employee side.

Unfortunately, as the "honest services" provision has bee applied to those involved in private transactions, the standards of conduct are far less clear. Different courts have provided varying guidance on the level of breach of duty necessary to warrant a criminal charge of a scheme to defraud someone of honest services. The Supreme Court may rule that the statute is too vague as applied or may provide guidance on the use of the theory. The Court's decision could have a profound influence on federal law enforcement in the white collar arena and bears watching.

For more information about the Skillings appeal, please see the following article in the New York Times, "Justices Will Hear Appeal of Former Enron Chief," http://www.nytimes.com/2009/10/14/business/14enron.html?hp

White Collar: Florida Political Fundraiser Indicted

A Broward County ophthalmologist was indicted by a federal grand jury in the Southern District of Florida for diverting funds intended for lobbying and campaign contributions to his personal use. The indictment accuses Alan Mendelsohn, M.D., with diverting to his personal use hundreds of thousands of dollars from political action committees he had set up. The specific charges are 27 counts of wire fraud or mail fraud and five counts of making false statements to federal officials.

It is unlawful to divert political contributions to personal use. Actions to do so are chargeable as either mail or wire frauds.

The indictment alleges that during the course of the decade, Dr. Mendelsohn had created three political action committees. The ostensible purpose of these PACs was to raise money to contribute to politicians and to influence state legislation concerning the viatical industry, which was a market involving the sale of life insurance policies of those with terminal illnesses, mostly AIDS.

According to the indictment Mendelsohn received more than $1.5 million in contributions to his PACs from Mutual Benefits, a Fort Lauderdale insurance company. All total, the indictment alleges that Mendelsohn collected more than $2 million for his PACs. Of that amount, the indictment alleges that Mendelsohn diverted more than $600,000 to himself and his associates.

Among the amounts that the indictment alleges Mendelsohn diverted are the following: 1) $60,000 monthly payments to his mistress from April 2003 to February 2005, 2) $240,000 for the purchase and repair of residence for Mendelsohn and his mistress and an automobile for the mistress, 3) $87,000 to an unnamed public official from November 2003 to November 2006, and 4) hundreds of thousands of dollars to pay for his children's tuition at a private Florida prep school, college, and medical school.

Finally, the indictment alleges that Mendelsohn claimed falsely to have used his influence with investigators to close both state and federal investigations.

It is unclear why the grand jury did not also charge money laundering in the indictment. If the movements of money alleged by the indictment are accurate, the facts appear to make out a case for monetary transactions designed to conceal illegal conduct. The government may be considering a superseding indictment charging additional people and crimes.

For further information please see the following article in The Miami Herald, http://www.miamiherald.com/1374/story/1259300.html?storylink=mirelated.