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UNITED STATES OF AMERICA v. MICHAEL P.S. SCANLON

November 30, 2010

UNITED STATES OF AMERICA, PLAINTIFF,
v.
MICHAEL P.S. SCANLON, DEFENDANT.



The opinion of the court was delivered by: Ellen Segal Huvelle United States District Judge

MEMORANDUM OPINION AND ORDER

In November 2005, defendant Michael Scanlon ("Scanlon" or "defendant") pled guilty to a one-count information charging conspiracy with three objects: bribery in violation of 18 U.S.C. § 201; property mail and wire fraud in violation of 18 U.S.C. §§ 1341 and 1343; and honest-services mail and wire fraud in violation of 18 U.S.C. §§ 1341, 1343, and 1346.

Before the Court is defendant's motion to modify or amend his plea agreement based on United States v. Skilling, 130 S. Ct. 2896 (2010). Specifically, Scanlon argues that the honest-services charges to which he plead guilty can no longer be constitutionally maintained against his conduct. If correct, this conclusion would have material consequences for Scanlon's sentencing offense level and restitution. Based on the arguments of counsel at a hearing on November 23, and for the reasons set forth below, the Court denies his motion.

FACTS

Scanlon pled guilty to conspiring with Jack Abramoff to defraud certain of Abramoff's Native American Indian Tribe clients ("Tribes") of their right to Abramoff's honest services. (Plea Agreement ¶ 3.) The scheme involved Abramoff taking advantage of his relationship of trust and confidence with his clients in order to convince them to hire Scanlon. (Factual Basis ¶ 6.) Scanlon would then secretly kick back to Abramoff approximately fifty percent of his company's net profits gained from these clients. (Id.) With respect to one of the clients, Abramoff misrepresented to the tribe that he would perform lobbying work "pro bono," when in fact he received the fifty-percent kickback from Scanlon under their arrangement. (Id.)

Under the government's theory of fiduciary duty, tribal clients who had hired Abramoff more than once were, by virtue of such repeat hiring, relying upon an ongoing relationship of trust and loyalty with Abramoff, giving rise to his fiduciary duty to provide them with his honest services.*fn1 Throughout this scheme, "Scanlon believed that [Abramoff] had a duty to act in the best interest of his clients in these matters and that [Abramoff]'s clients did in fact trust and rely upon [Abramoff]." (Id.) He also "knew that [Abramoff] promoted himself as having knowledge superior to his clients regarding lobbyist and grass roots activity and [Abramoff] encouraged his clients to trust his judgment in these matters." (Id.)

ANALYSIS

In United States v. Skilling, the Supreme Court addressed a challenge to the constitutionality of the honest-services fraud statute, 18 U.S.C. § 1346, on the grounds that the statute was impermissibly vague. Declining Skilling's invitation to void the statute in its entirety, the majority instead held that the statute could only be constitutionally applied to those cases that formed the "core" of honest-services fraud prior to the Supreme Court's ruling in McNally v. United States, 483 U.S. 350 (1987), namely bribery or kickback schemes. In doing so, the Court rejected both the government's argument that § 1346 could also permissibly proscribe "undisclosed self-dealing" cases as well as the opinion of Justice Scalia that the statute be struck down in its entirety.

The question before the Court is what effect, if any, Skilling has on Scanlon's plea. The government contends that defendant's plea is unaffected by Skilling because it sets forth a classic kickback scheme. Scanlon, however, argues that Skilling reached a narrower holding, approving only "the prosecution of certain types of kickback cases," of which he claims his case is not one. (Defendant's Motion ["Def.'s Mot."] at 2-3.) As explained below, Scanlon's interpretation of Skilling is erroneous.

Scanlon's primary argument depends on his interpretation of scattered passages from the majority's opinion in Skilling. Seizing on this language, Scanlon argues that Skilling divided kickback cases into two heretofore unknown categories: "kickback cases within the 'core' of 'pre-McNally case law'" (id. at 10 (emphasis omitted)), which according to Scanlon are still encompassed by § 1346, and kickback cases that fall outside this "core," which according to Scanlon were invalidated under Skilling.

Scanlon appears to define the scope of so-called "non-core" kickback schemes under two alternative theories. First, Scanlon seizes on of what he terms the "literal core of pre-McNally case law," which involved fraud relating only to public official-public, employee-employer, and union official-union member relationships. (Id. at 3.) "Beyond these three examples," Scanlon argues, "the Skilling Court provided no further elucidation of this 'core' concept." (Id.)

the parties agree) that bribery and kickback schemes under § 1346 must involve a breach of fiduciary duty, as this duty establishes the right to one's honest services out of which the victim of § 1346 is defrauded.

See, e.g., Skilling, 130 S. Ct. at 2930 ("The 'vast majority' of the honest-services cases involved offenders who, in violation of a fiduciary duty, participated in bribery or kickback schemes." (emphasis added)). In addressing Justice Scalia's concern that the Courts of Appeals pre-McNally did not uniformly agree as to the source and scope of fiduciary duties, the Skilling majority argued that this fact would have little impact on bribery and kickback cases. Id. at 2390 n.41. The Skilling majority cited several pre-McNally bribery and kickback cases involving public official-public, employee-employer, and union official-union member relationships as examples in support of its argument that the existence of a fiduciary relationship was "usually beyond dispute" in such cases. Id. This is altogether different, however, from stating that the application of § 1346 is limited to only those cases where the scope and source of the fiduciary duty was beyond dispute.

Moreover, even if, as Scanlon claims, the majority of pre-McNally bribery or kickbacks cases involved one of these three relationships, this does not mean that these examples represent an exhaustive list of the fiduciary relationships that can support an honest-services fraud prosecution, to the exclusion of other fiduciary relationships such as attorney-client, doctor-patient, or stockbroker-customer. Indeed, the Second Circuit acknowledged this point explicitly in United States v. Rybicki, 354 F.3d 124 (2d Cir. 2003), a decision cited approvingly by the Skilling Court. See 130 S. Ct. at 2929. After taking stock of the pre-McNally case law, the Rybicki court noted that "[a]lthough the bulk of the [private-sector] pre-McNally honest-services cases involved employees, we see no reason the principle they establish would not apply to other persons who assume a legal duty of loyalty comparable to that owed by an ...


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