Corrupting the harm requirement in white collar crime

Stanford Law Review

Volumn 60, Issue 5, 2008, Pages 1371-1446

  Mills, David ^a   Weisberg, Robert ^a  

^a STANFORD LAW SCHOOL   (United States)

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EID: 45349085081     PISSN: 00389765     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (277)

1. In the case of two statutory crimes, bribery of federal officials under 18 U.S.C. § 201 (2000), and obstruction of justice, e.g. 18 U.S.C. § 1503 (2000), Congress has expressly made "corruptly" the mental state requirement - with vexingly uncertain results. The former is discussed at infra notes 43-44. 49-50, 62 and accompanying text. On the latter, see generally Eric Tamashasky, The Lewis Carroll Offense: The Ever-Changing Meaning of "Corruptly" Within the Federal Criminal Law, 31 J. LEGIS. 129 (2004).
2. Since our focus is on how the law understands the corrupting effects of white collar misconduct, our approach complements the very different focus of a major new book on white collar crime by Professor Stuart Green. STUART P. GREEN, LYING, CHEATING, AND STEALING: A MORAL THEORY OF WHITE-COLLAR CRIME (2006). Although our interests, of course, overlap with his, Green is much more concerned with the ethical criteria by which we judge deceptive motives and, specifically, culpable mental states that define criminal behavior under the varieties of fraud and other white collar laws.
3. Mail fraud is proscribed in 18 U.S.C. § 1341 (2000) and wire fraud in 18 U.S.C. § 1343 (2000). Both were augmented by the 1988 addition of 18 U.S.C. § 1346 (2000), which says that the term "scheme or artifice to defraud" under those original sections now includes a "scheme or artifice to deprive another of the intangible right of honest services."
4. 15 U.S.C. § 77x (2000); 17 C.F.R. § 240.10b-5 (2000). Somewhat arbitrarily, we exclude from our discussion the related law of extortion, especially in its federal form under 18 U.S.C. § 1951 (2000), where the difficulty of defining the actus reus or mens rea of corruption produces parallel problems of white collar jurisprudence. However, we briefly allude to some features of extortion below where they are relevant to refining our definitions of bribery. See infra note 59.
5. Some of the scholars working in the area of definitions of public corruption have tried to translate general norms of fidelity to governmental or public interest into an affirmative taxonomy of fiduciary duties. Most notable is Kathleen Clark, Do We Have Enough Ethics in Government Yet?: An Answer from Fiduciary Theory, 1996 U. ILL. L. REV. 57. Clark hopes to give us an alternative to the twin choices of, on the one hand, vague normative criteria of fidelity, and, on the other, the maze of ethical conflict-of-interest rules facing all public institutional actors.
6. Seeking an internal definition of fiduciary duty, Clark, relying on the work of Robert Flannigan, The Fiduciary Obligation, 9 OXFORD J. LEGAL STUD. 285 (1989), suggests breaking down the duty into component elements: [T]he conflict component of fiduciary obligation prohibits a fiduciary from placing herself in a position where her own interest conflicts with her duty toward the beneficiary. The influence component subjects transactions between certain fiduciaries and their beneficiaries to heightened scrutiny to ensure that the fiduciary has not unduly influenced the beneficiary's decision to enter the transaction. The partiality component requires fiduciaries who have responsibility for allocating benefits among beneficiaries to treat beneficiaries of the same class equally and beneficiaries of different classes fairly. Finally, the avoidance component prohibits certain fiduciaries from delegating their duties to others or putting themselves in a position where, because of conflict or other concerns, they could not act on behalf of the beneficiary. Clark, supra at 71.
7. Another approach comes from the economic perspective, mostly by law and economics scholars interested in corporate law. The theme of this writing is that there is grave danger of economic inefficiency if we accord independent or mystical status to fiduciary duties by suggesting that such a duty is anything more than a contract. Thus, Larry Ribstein, in The Structure of the Fiduciary Relationship (Ill. Law and Economics Working Paper Series No. LEO-003, 2003),
8. and Frank H. Easterbook and Daniel R. Fischel, in Contract and Fiduciary Duty, 36 J.L. & ECON. 425 (1993), argue that a fiduciary duty is no more than a kind of delegation where the principal needs to give considerable authority to an agent who he cannot monitor, and must bind the agent to act wholly in the principal's interest (but of course paying the agent enough to make it worth his while).
9. In an elaboration of this theme, Robert Cooter and Bradley J. Freeman describe a fiduciary duty as no more than a kind of duty of care with a reverse burden of proof. The Fiduciary Duty: Its Economic Character and Legal Consequences, 66 N.Y.U. L. REV. 1045 (1991).
10. That is, if the fiduciary does anything that seems to harm the beneficiary, he bears the burden of showing it was not lack of care, whereas in duty of care cases the reverse is true. And for a similar and passionate argument that courts have dangerously intervened in the corporate world of explicit private contracts by creating fiduciary duties to non-shareholder claimants such as creditors, see Frederick Tung, The New Death of Contract: Creeping Corporate Fiduciary Duties for Creditors, 57 EMORY L.J. (forthcoming 2007). This theoretical commentary suggests that reliance on a benchmark of fiduciary duty can pose quite a challenge to courts or legislators trying to establish clear definitions of fraud. That is, honest services and related fraud concepts may create the kind of inefficient standards of loyalty that the economists fear; or, if limited to the narrower definition, fraud law may come perilously close to making it a crime to intentionally breach a contract. Even in an area as supposedly technical and rule-like as the federal sentencing guidelines, we have seen troubled efforts to define standards of fiduciary duty. U.S. SENTENCING GUIDELINES MANUAL § 3B1.3 (2008) provides for a two-level enhancement if the defendant "abused a position of public or private trust . . . in a manner that significantly facilitated the commission or concealment of the offense." As interpreted by the courts, a violation of a duty to be truthful is not sufficient for imposing this sentencing upgrade. See, e.g., United States v. Hirsch, 239 F.3d 221, 227 (2d Cir. 2001). Rather, the defendant has to abuse an independently defined relationship of trust "in a manner that significantly facilitated the commission or concealment of the offense." United States v. Jolly, 102 F.3d 46, 47 (2d Cir. 1996). The key is that he possessed '"substantial discretionary judgment that is ordinarily given considerable deference,'" United States v. Laljie, 184 F.3d 180, 194 (2d Cir. 1999) (quoting U.S. SENTENCING GUIDELINES MANUAL § 3B1.3 Application Note 1 (2008)), and hence '"the freedom to commit a difficult-to-detect wrong,'" id. (quoting United States v. Viola, 35 F.3d 37, 45 (2d Cir. 1994)). In United States v. Santoro, 302 F.3d 76 (2d Cir. 2002), an agent for investors gave favored brokers extraordinary commissions to recommend the stock to their clients, and himself received inflated commissions never disclosed to his investor-clients. The court held that a trust can be established by virtue of a specific transaction with one who is expecting honest dealing, even without any more formal, general structural relationship that would be necessary to meet the legal criteria of a fiduciary. Indeed, even where, as here, the "trusting party" may not have even relied in any important way on the trusted party's advice, the sentencing upgrade can apply so long as the defendant acted in such a way as to risk the fully trusting acceptance. In short, there is a kind of federal crime of "attempted reckless trust-inducement."
11. Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745.
12. On how the war on crime of the late twentieth century helped create iconic images of victimhood see, for example, MARKUS DIRK DUBBER, VICTIMS IN THE WAR ON CRIME 3-4, 7-8, 177 (2002).
13. In terms of the politics of modern crime waves, this victim is the lower-middle class white voter, best represented as a Southerner, but also morphed into a blue-collar Northern Reagan Democrat, living in a border-suburban world. See Robert Weisberg, The New York Statute as Cultural Document: Seeking the Morally Optimal Death Penalty, 44 BUFF. L. REV. 283, 284-85 (1996).
14. Another somewhat anomalous kind of "crime wave" is exemplified by cybercrime, where we are told that there is a specific and theoretically measurable increase in conduct that might not quite be covered by conventional crime (theft/vandalism law). Rather, the novelty lies in the awkwardness and uncertainty of comprehending new technology under old legal categories. See Orin S. Kerr, Cybercrime's Scope: Interpreting "Access" and "Authorization" in Computer Misuse Statutes, 78 N.Y.U. L. REV. 1596, 1599 (2003).
15. On how populist anger at white collar criminals creates a convenient, if erroneous, image of its target villain, see DUBBER, supra note 7, at 218-19.
16. Probably far more than with violent or street crime, the rate of prosecutorial filings may be a very bad measure of actual incidence of crime. See Daphne Eviatar, What's Behind the Drop in Corporate Fraud Indictments?, AM. LAW., Nov. 1, 2007, available at http://www.law.com/jsp/ihc/PubArticleIHC.jsp?id=1193821429242.
17. One approach to measuring the rate of white collar crime is to track filings of class action shareholder lawsuits - a possible proxy for or indicator of criminal fraud. By that measure, the crackdown on Enron and the advent of Sarbanes-Oxley and other measures are at least associated with a reduction in perceived corporate malfeasance. Of course, in so complex a legal and economic area, the variables and controls are elusive. Theories vary between attributing the decline in civil litigation to an actual reduction in fraud and a strong stock market that has decreased the incentive to litigate and may, depending on how one measures these things, have decreased the harm, if not the incidence, of fraud. See CORNERSTONE RESEARCH, SECURITIES CLASS ACTIONS CASE FILINGS: 2007: A YEAR IN REVIEW 3 (2008), available at http://securities. cornerstone.com/pdfs/YIR2007.pdf.
18. In her two books, CORRUPTION: A STUDY IN POLITICAL ECONOMY (1978),
19. and CORRUPTION AND GOVERNMENT: CAUSES, CONSEQUENCES, AND REFORM (1999), Susan Rose-Ackerman demonstrates that this outright theft is the dominant form of corruption in developing countries.
20. For a discussion of this odd "disclosure" solution, see Daylian M. Cain, George Loewenstein & Don A. Moore, The Dirt on Coming Clean: Perverse Effects of Disclosing Conflicts of Interest, 34 J. LEGAL STUD. 1 (2005).
21. The distinction has two other possible meanings that may help to illuminate why this morphing has taken place. Within the category of fraud involving officials, the trope often refers to the effort to distinguish legitimate (public-interested) motivations for action from illegitimate (self-interested) motivations. But still more subtly, within government official fraud or bribery, and depending on one's preferred theory of the fiduciary duty of officials, the "public" side may refer to those things an official (most obviously executive or judicial) must or, in some strong normative sense, should do under some legislative or constitutional mandate, as opposed to those areas (especially for legislator, sometimes for an executive branch official) where the official is allowed to exercise pure policy preference. Thus, officials may do perfectly legal things that can be "private" in that they are motivated by the desire to please the material interests of some constituents, or perhaps an idiosyncratic philosophical goal of the official, and they need not be justified by any objective standard, so long as they do not violate any express legal boundary - or, in the terms of this paper, any definable fiduciary duty.
22. One of the most interesting recent treatments of the elusive public/private distinction comes from Roderick Hills. He observes that we tolerate - and suggests that we should tolerate - a much softer line between public and private interests in state and local government, as opposed to the federal system. Hills argues that the federal government follows a fairly bureaucratized model, with full-time professional officials obligated - at least formally - to keep very alert to the consequences of dealing with private actors. By contrast, state and local officials are often part-timers who work through flexible local structures whereby private interests blend in with governmental authority fairly loosely. As Hills insists, neither type of system is more inherently democratic than the other. The federal system reduces direct citizen access, but is more efficient in concentrating citizen attention on the most dramatic and salient public issues. The typical local system, on the other hand, provides far more citizen access, though it usually diffuses citizen interest by virtue of the parochialism or relative triviality of many of the issues. In any event, Hills argues for much greater tolerance for the incursion of arguably conflicting private interests in the actions of local officials in order to encourage lay and populist participation. Roderick M. Hills, Jr., Corruption and Federalism: (When) Do Federal Criminal Prosecutions Improve Non-Federal Democracy?, 6 THEORETICAL INQUIRIES L. 113 (2005).
23. Wayne DiFranceisco & Zvi Gitelman, Soviet Political Culture and Modes of Covert Influence, in POLITICAL CORRUPTION: A HANDBOOK 467, 484 (Arnold J. Heidenheimer, Michael Johnston & Victor T. LeVine eds., 1989).
24. Fred S. McChesney, Ever the Twain Shall Meet, 99 MICH. L. REV. 1348 (2001).
25. Koenraad W. Swart, The Sale of Public Offices, in POLITICAL CORRUPTION: A HANDBOOK, supra note 17, at 87, 92-98. In fact, bribery is sometimes a form of "speed money" that merely hastens otherwise legitimate outcomes, a kind of price discrimination among bribers with different time preferences. Pranab Bardhan, Corruption and Development: A Review of Issues, 35 J. ECON. LITERATURE 1320, 1323 (1997). Bardhan notes Francis Lui's model, whereby the key factor is the briber's opportunity cost of time. Id. If kickbacks come from funds designed for projects contributing little to the sum of capital investment, the diversion of those funds through bribery may be toward more productive uses, as, for example, where funds are diverted from famine relief or inefficient cottage industries into the hands of civil servants backing firms that manufacture tires or machine tools.
26. Francis T. Lui, An Equilibrium Queuing Model of Bribery, 93 J. POL. ECON. 760 (1985).
27. Jeanne Becquart-Leclercq, Paradoxes of Political Corruption: A French View, in POLITICAL CORRUPTION: A HANDBOOK, supra note 17, at 191.
28. James C. Scott, Handling Historical Comparisons Cross-Nationally, in POLITICAL CORRUPTION: A HANDBOOK, supra note 17, at 129.
29. See Linda Levy Peck, Corruption and Political Development in Early Modern England, in POLITICAL CORRUPTION: A HANDBOOK, supra note 17, at 219, 221-22.
30. See James C. Scott, Corruption, Machine Politics and Political Change, in POLITICAL CORRUPTION: A HANDBOOK, supra note 17, at 275, 276-77. On the socially integrative effects of corruption, see Michael Johnston, The Political Consequences of Corruption: A Reassessment, in POLITICAL CORRUPTION: A HANDBOOK, supra note 17, at 985.
31. V.O. Key, Jr., Techniques of Political Graft, in POLITICAL CORRUPTION: A HANDBOOK, supra note 17, at 39, 47.
32. Edward C. Banfield, Corruption as a Feature of Governmental Organization, 18 J.L. & ECON. 587 (1975).
33. Mark Granovetter, The Social Construction of Corruption, in ON CAPITALISM 152, 152 (Victor Nee & Richard Swedberg eds., 2007). In many societies, to accept a bribe is to acknowledge social inferiority, like accepting a tip or gratuity, and the offering of excessive overtly material consideration can be a status insult. If a favor is done in the hope of supporting some claim of status similarity, then the preferred reciprocation is gratitude, social approval, gifts and/or the promise of future assistance in return. Recharacterizing an exchange as a gift implies the likelihood of a social relationship in which gifts and favors will continue to be exchanged. Id. at 154-55.
34. As Granovetter explains, this general pattern of money going downward socially does not preclude bribes flowing between equals or from those socially inferior to those socially superior. But such a flow goes "against the grain of normal social interaction and is more complicated, requiring extensive management and buffering at much higher cost and complexity, and requiring far more skill, [at manipulating social symbolism] than simple monetary payments." Id. at 158.
35. Extortion is best divided into two component forms, though at the federal level both are punished through the Hobbs Act, 18 U.S.C § 1951 (2000).
36. This social interpretation is often a self-rationalizing act of status reinforcement, where it would insult a person's sense of hierarchical status to pay a bribe, but where it is no insult to have been extorted. Granovetter, supra note 26, at 159-60.
37. Terms, Concepts, and Definitions: An Introduction, POLITICAL CORRUPTION: A HANDBOOK, supra note 17, at 3.
38. Daniel H. Lowenstein, Legal Efforts to Define Political Bribery, in POLITICAL CORRUPTION: A HANDBOOK, supra note 17, at 29.
39. Daniel H. Lowenstein, Political Bribery and the Intermediate Theory of Politics, 32 UCLA L. REV. 784 (1985). Lowenstein worries, for example, about such situations as the legitimacy of candidate A agreeing to back B in election race 1 if B agrees not to oppose A in election race 2, and tries (to his own explicit dissatisfaction) to resolve the question through a subtle analysis of the relative social values of party unity and candidate competition. He also worries over such questions as how to sort out public from private in humanly typical mixtures of motivation, and whether secrecy is itself a badge of corruption. Lowenstein also insists that the ambiguous position of party loyalty, lying somewhere between private and public interest, challenges us to develop nuanced distinctions between corrupt/legitimate and public/private interests. Id.
40. See Edmund Burke, Speech to the Electors of Bristol, in 1 BURKE'S WORKS 442-49 (London 1854) (discussed in Lowenstein, supra note 32, at 831-34).
41. Lowenstein, supra note 32 at 834-35.
42. Id. at 836; Daniel H. Lowenstein, When is a Campaign Contribution a Bribe?, (Mar. 1996) (unpublished paper presented at the annual meeting of the Midwest Political Science Association, on file with author). A notable pattern in Lowenstein's work is his resort to sliding scale hypotheticals of the following sort: (1) An issue-oriented group contributes money to a challenger more sympathetic to the group's ideological interest than the incumbent, but has no other contact with the challenger. (2) A corporation gives campaign money to a safe-seat incumbent, hoping that the official will vote in a way favorable to the donor's interests on as-yet unknown issues, and the official accepts the money with the expectation that when it is costless for him to do so he will indeed vote in that way. (3) The same corporation gives money to a safe-seat incumbent, hoping that this will influence the official to support a project crucial to the corporation's business, but the candidate remains undecided on the issue, though she now considers shifting her position towards favoring the project. (4) The corporation gives money to the safe-seat incumbent just as in #2 above, except a corporate official directly converses with the official to elicit the favorable action. (5) Same as #3, above, except that official says he has previously disfavored the project but now promises to change his mind if he receives the money. Lowenstein somewhat distinguishes the first from the other four on the categorical ground that it is part of an "electoral strategy," while the others are part of "legislative strategy." He concedes, however, that the real distinctions are along a continuum of specificity and distortion from some presumed baseline position of neutrality. And so he laments that we cannot escape reliance on the official's motive, again in relation to some unspecified assumptions about the official's actual subjective position before the deal, or some objective norm of a publicly interested position he should have had before the deal. Lowenstein, supra. A useful parallel taxonomy of hypotheticals is provided by John G. Peters and Susan Welch, in Gradients of Corruption in Perceptions of Academic Public Life, in POLITICAL CORRUPTION: A HANDBOOK, supra note 17, at 723, 728-35. Peters and Welch use their hypotheticals in a questionnaire survey of public officials to gauge their attitudes about the "gradients" of corruption, and their results resonate fairly closely with Lowenstein's normative analysis.
43. Two scholars with whom Lowenstein has conducted a spirited debate are David Strauss and Bruce Cain. Strauss has argued that we can eschew any concern with normative political baselines of individual officials or with moral motive once we recognize that the only justifiable purpose of any regulation of campaign finance is ensuring equality of influence. David A. Strauss, What Is the Goal of Campaign Finance Reform?, 1995 U. CHI. LEGAL F. 141. Strauss adds that regulation must also address collective action problems. In short, we have no need to define corruption - we need only equalize. (This is may be too severe a reduction of Strauss's position, but for now I simply want to set up his contrast with Loewenstein).
44. For Bruce Cain, the key distinction is between "moral/idealist" views of political responsibility and "proceduralism." Bruce E. Cain, Moralism and Realism in Campaign Finance Reform, 1995 U. CHI. LEGAL F. 111. Thus, in partial parallel to Strauss, Cain believes that legal engineering of campaign finance and other structural regulation can ensure that the maximum or optimal airing of political positions occurs, in turn ensuring that the maximum or optimal reflection of divergent and minority political positions by our officials. Moreover, Cain argues that any motive-based restriction on an official's behavior is incoherent, because it must allow for the legitimate self-interest of the official in reelection and any incidents thereof, and the impossibility of coherently distinguishing that kind of self-interest from others (e.g., those which are strictly financial) renders pointless any effort to distinguish proper, public-minded from improper, private-minded motivation.
45. Daniel Hays Lowenstein, Campaign Contributions and Corruption: Comments on Strauss and Cain, 1995 U. CHI. LEGAL F. 163. Unsurprisingly, Lowenstein thinks that Cain's distinction is hopeless, because "proceduralism" contains inherent "moral/idealist" assumptions. Id. at 175.
46. Lowenstein does respectfully acknowledge one of the more ambitious, if ultimately very hedged, efforts to develop a normative theory of corruption, which appears in DENNIS F. THOMPSON, ETHICS IN CONGRESS: FROM INDIVIDUAL TO INSTITUTIONAL CORRUPTION (1995). For Thompson, the distinction in his title is crucial: institutional corruption involves use of public office for private purposes, but it encompasses conduct that under certain circumstances is a necessary or desirable part of the job - such as pushing a bill or constituent service. Corruption is institutional, as opposed to individual, when it meets these criteria: the gain the official receives is political; the service she delivers is procedurally improper; and the connection between the gain and service damages the legislative or democratic process. Thompson argues that institutional corruption is more pervasive and corrupting to government than individual corruption. He therefore laments that both the media and the ethics officials who purport to police their colleagues for reducing institutional corruption tend to limit their focus to highly individual cases of corruption involving individual and purely private gain. Thompson eschews any claim of usefully defining corrupt motive, because motive, he argues, is too troublesome factually, subjectively, and definitionally. Especially in mixed cases, he argues, any distinct mens rea is a phantom. Indeed, Thompson appropriately worries about cases that may meet the clear criteria of corruption, but that exhibit private self-interest only in the sense that satisfaction of any preference can be deemed self-interested - even if the preference is deeply charitable.
47. See 26 U.S.C. § 9012 (2000) (maximum sentence for such federal election law violations as excess expenses or unauthorized contributions set at one year, but maximum for unlawful use of payments or false statements can be five years). In any event, these campaign-specific laws do not express any legislative intent to preempt general bribery or extortion laws. Cf. McCormick v. United States, 500 U.S. 257, 272 (1991) (mandating cautious application of federal extortion law to state campaign contributions.
48. 494 U.S. 652 (1990).
49. 424 U.S. 1 (1984) (upholding federal limits on campaign contributions against First Amendment attack but holding that the First Amendment entitles candidates to give unlimited money to their own campaigns).
50. 494 U.S. at 684 (Scalia, J., dissenting).
51. Id. (citations omitted). In the most important sequel to Buckley, the recent case of McConnell v. FEC, 540 U.S. 93 (2003), Justice Scalia again expressed doubt that a legislature could define corruption in any meaningful sense and added that the one arguably clear crime of quid pro quo exchange agreement between candidate and supporter could be regulated by 18 U.S.C. § 201. For Justice Scalia, writing in partial concurrence, all of the other versions of exchange the statute might condemn could be imputed to the "nature of politics - if not indeed human nature." Id. at 259 (Scalia, J., concurring). A more extended essay in skepticism is in Justice Kennedy's McConnell dissent, where he argues that the only form of corruption that the Court has recognized in the campaign finance context is quid pro quo, and he heavily criticizes the majority for trying to read their precedents to encompass a richer notion of corruption that concerns not only "actual or apparent quid pro quo arrangements," but also "any conduct that wins goodwill from or influences a Member of Congress." Id. at 294 (Kennedy, J., dissenting). Finally, Chief Justice Rehnquist, in his dissent, notes that "[b]y untethering its inquiry from corruption or the appearance of corruption, the Court has removed the touchstone of our campaign finance precedent and has failed to replace it with any logical limiting principle." Id. at 356 (Rehnquist, C.J., dissenting). Any broad legislative incursion into election financing, he notes, could in theory be justified as somewhat reducing the appearance of corruption. Id. But Justice Kennedy views such legislation as falsely grounded in the notion that the "private" side of politics is a corruption of politics; whereas, he sees it as an inherent part of politics. Id. at 297 (Kennedy, J., dissenting). And that, he believes, means quid pro quos, which is to say "actual corrupt, vote-buying exchanges, as opposed to interactions that possessed quid pro quo potential even if innocently undertaken." Id. at 293.
52. 18 U.S.C. § 201(b) (2000)
53. Tamashasky, supra note 1, at 141-45.
54. 18 U.S.C. § 201(c)(1).
55. United States v. Sun-Diamond Growers of Cal., 526 U.S. 398 (1999).
56. Id. at 402-03, 413.
57. Id. at 406.
58. As Justice Scalia says, the language of the gratuities subsection suggests that in giving the consideration the donor must have some specified governmental act in mind. Moreover, the trial court's reliance on the term "because of his position" invites such absurdities as punishing harmless ceremonial gifts given, for example, on the occasion of an official's appearance or speech or the giver's visit to an official's office, though Justice Scalia acknowledges that his reading would not entirely avoid all potential absurdities. Id. at 406-07.
59. Id. at 404.
60. Id. at 405.
61. Alternatively, Justice Scalia complains that the Government treated the statute as if it said "for or because of such official's ability to favor the donor in executing the functions of his office." Id. at 406-07. Indeed, to complicate things further, the court of appeals in Sun-Diamond, in language cited by Justice Scalia, said that in a gratuities case the government must at least show "'the requisite intent to reward past favorable acts or to make future ones more likely.'" Id. at 403-04 (quoting United States v. Sun-Diamond Growers, 138 F.3d 961, 969 (D.C. Cir. 1998)).
62. Still more hyper-subtly and in a seemingly contradictory statement, the court of appeals added that the absence of a quid pro quo requirement in the gratuities section does not read the official act requirement out of the statute: "It is only to say that, in contrast to bribery, the gratuity and the official act need not each motivate the other. But the gratuity statute by its terms does still require at least a unidirectional relationship - the gift must be 'for or because of' the act." 138 F.3d at 966.
63. An interesting formulation from the court of appeals in Sun-Diamond, never mentioned by the Supreme Court, is that in a gratuity we know that the fact or prospect of a specified official act motivated the donor to give, but we do know whether it motivated the official act, whereas causation is bi-directional in a bribe. Id.
64. United States v. Alfisi, 308 F.3d 144 (2d Cir. 2002).
65. Id. at 148.
66. See infra note 59.
67. 308 F.3d at 150.
68. Extortion is best divided into two component forms, though at the federal level both are punished through the Hobbs Act. 18 U.S.C § 1951 (2000). See generally, James Lindgren, The Elusive Distinction Between Bribery and Extortion: From the Common Law to the Hobbs Act, 35 UCLA L. REV. 815 (1988). Extortion falling under the common law name of "under color of official right" is really a form of public bribery, but where the crime is conceived asymmetrically. That is, the official is thought of as coercing the payment from the private person, most obviously as a condition of granting the extorted party some government benefit to which he is legally entitled. The other form, solely between private parties, is extortion through "force, violence, or fear," as exemplified by the colorful image of the labor racketeer offering protection money to the employer. E.g., People v. Dioguardi, 8 N.Y.2d 260, 203 N.Y.S.2d 870 (1960) (applying New York extortion law on which Hobbs Act was originally based). Obviously, extortion under color of official right can overlap with public bribery, the difference being that the very term "extortion" naturally suggests not only that the transfer is being proposed by the "bribe,", but also that the "briber" as helplessly coerced. But Lindgren suggests that under a historically accurate reading of extortion law, this color of official right extortion is dissociated from 'force or fear" extortion. If so, the legal outcome is less intuitively satisfying if the private party is not really helpless. Unlike public bribery under 18 U.S.C. § 201, where the crime is only committed by the official, not the party seeking the benefit, § 1951 may seem consistent with the idea that the extorted party is a victim. But the case law does not require specific proof of coercion, instead implicitly finding the coercion in the very official power of the extorter. Thus, under the doctrine of McCormick v. United States, 500 U.S. 257 (1991), it is sufficient for a government extortion charge that an official demand payment as a quid pro quo for the benefit. The Court complicated things further in Evans v. United States, 504 U.S. 255 (1992), where it held that the official could be guilty of extortion even if he was the "victim" who initiated the idea of the payment. Thus, where the official works for the federal government, the prosecutor may have substantial discretion to assess what she thinks is the relative culpability of the "victim" and can then choose whether to prosecute both parties or only the official under § 201, or (necessarily) only the official under § 1951. Moreover, since the Hobbs Act, which was based on the interstate commerce clause, can apply to state and local officials now that McNally has been overruled by § 1346, in such cases the federal prosecutors also have the challenge and opportunity of choosing between the Hobbs Act and the mail and wire fraud statutes. See infra notes 79-82 and accompanying text.
69. E.g., MODEL PENAL CODE § 2.06 (1985) (allowing for the possibility of exonerating a person who aids a purposive criminal where the former knows her action will help cause the crime but lacks the purpose that it do so).
70. E.g., MODEL PENAL CODE § 2.09(1) (1985) (requiring coercion "by the use of, or a threat to use, unlawful force against his person or the person of another, that a person of reasonable firmness in his situation would have been unable to resist").
71. The difference between the two sets of facts may be still grayer than Alfisi portrayed it. Cashin's insistence on a payment as a condition of granting an entitled inspection is obviously illegal and, therefore, if we must use this language, a breach of his fiduciary duty to government and public (although this first set of facts at least reduces by one the number of victims - in this case, the broker). The moral and economic distinctions are probably subtler than the ones the defendant and the dissent portrayed. But surely they had a good argument that to take the word "corruptly" seriously might mean an obligation to tackle those subtleties or to permit or encourage the jury to draw some finer-grained moral distinctions than the approved instruction allowed for.
72. 308 F.3d at 150.
73. See supra note 60.
74. 308 F.3d at 151.
75. Ian Ayres, The Twin Faces of Judicial Corruption: Extortion and Bribery, 74 DENV. U. L. REV. 1231 (1997).
76. 308 F.3d at 154 (Sack, J., dissenting).
77. Id. at 155-56 (Sack, J., dissenting).
78. Id. at 154 (Sack, J., dissenting). A recent commentary on Alfisi criticizes the decision for paying no heed to the word "corruptly," and for therefore condemning an action that does not exhibit the requisite culpability. Jeremy N. Gayed, "Corruptly": Why Corrupt State of Mind Is an Essential Element for Hobbs Act Extortion Under Color of Official Right, 78 NOTRE DAME L. REV. 1731, 1761-65 (2003). Indeed, Gayed blames the Second Circuit for adopting the proposed Model Penal Code redefinition of bribery (which eliminates the alleged surplusage of "corruptly"), complaining that the Model Penal Code deprives bribery of the moral valence it has carried since the common law and also, ironically, that the adoption has exacerbated rather than solved the confusion in typical statutory language. Id. at 1762; see MODEL PENAL CODE § 240.1 (1985). A reading of the issue contrary to Alfisi can be found in Roma Construction Co. v. Arusso, 96 F.3d 566 (1st Cir. 1996) (raising the definition of bribery in a civil RICO context), where new partners in a real estate venture were surprised to discover that the original partners had made a deal with the "de facto government of the Town" to ensure permission for their project and ultimately chose to make the payoff. Id. at 568. The district court explicitly relied on the Model Penal Code, but the court of appeals reversed, emphasizing that bribery should still require the mens rea it described as "the intention to obtain ill-gotten gain," whereas "the Model Penal Code converts the lack of willpower to stand up to abusive authority into a degree of culpability," thereby "ignoring the settled law of centuries and current notions of right and wrong." Id. at 574 (citations omitted). Somewhat melodramatically, Gayed says of the Second Circuit that "its phobia of making culpability an element of the crime rather than an issue of judicial discretion has no place in a free society operating on a presumption of innocence." Gayed, supra at 1765. For Gayed, the "corrupt" mental state is what can distinguish licit from seriously illicit behavior, notwithstanding a safety valve like the Second Circuit's remand in Alfisi to allow an "economic coercion" defense. But can we say that the private party is not corrupt in any sense of the term, or that Alfisi and Roma faced some responsibility to resist the bribe-demand, on the theory that they should not be "enablers" of illegal activity? Do they expose themselves to the charge of some kind of reckless complicity in corruption?
79. An excellent overview article is Jed S. Rakoff, The Federal Mail Fraud Statute (Part I), 18 DUQ. L. REV. 771 (1980).
80. United States v. Regent Office Supply, 421 F.2d 1174 (2d Cir. 1970).
81. Lustiger v. United States, 386 F.2d 132 (9th Cir. 1967).
82. E.g., Schmuck v. United States, 489 U.S. 705 (1989) (mailing must be foreseeable as act in furtherance of scheme).
83. E.g., United States v. Bryant, 766 F.2d 370 (8th Cir. 1985) (fact of use of interstate wires sufficient for federal jurisdiction, even if defendant lacked mens rea with respect to this fact).
84. The foundational case is Durland v. United States, 161 U.S. 306 (1896), which held that unlike common law of false pretenses, mail fraud law applies to lies about future promises, not just past facts.
85. See United States v. Serrano, 870 F.2d 1, 6 (1st Cir. 1989).
86. United Sates v. Rowe, 56 F.2d 747, 749 (2d Cir. 1932) (Hand, J.)
87. Neder v. United States, 527 U.S. 1 (1999).
88. McNally v. United States, 483 U.S. 350 (1987).
89. Carpenter v. United States, 484 U.S. 19 (1987).
90. Id. at 25.
91. See R. Foster Winans, Op-Ed, Notes from a Little Fish, N.Y. TIMES, May 3, 2003, at A19 (a post-Enron, op-ed lament).
92. United States v. Walters, 997 F.2d 1219 (7th Cir. 1993).
93. The only one who did suffer such measurable loss was Walters himself, who was ultimately betrayed by his ungrateful clients.
94. Walters, 997 F.2d at 1225-27.
95. E.g., United States v. Silvano, 812 F.2d 754 (1st Cir. 1987) (referring to a company's right to honest services of employees); United States v. Bronston, 658 F.2d 920 (2d Cir. 1981) (lawyer convicted of mail fraud for knowingly taking on conflict of interest, even though he did not appropriate confidential information from first client, nor did prosecutor allege that lawyer intended or caused actual economic harm to first client); see also John E. Gagliardi, Back to the Future: Federal Mail and Wire Fraud Under 18 U.S.C. § 1346, 68 WASH. L. REV. 901, 907 (1993) (pre-§ 1346 intangible rights doctrine extended to right to "'time, effort . . . and expectations'" (citations omitted)).
96. See Carrie A. Tendler, Note, An Indictment of Bright Line Tests for Honest Services Mail Fraud, 72 FORDHAM L. REV. 2729 (2004).
97. A good review of key cases is Tendler, supra note 87, at 2742-44.
98. The fourth element is, of course, "that the mails or wires were used in furtherance of the scheme." United States v. Rybicki, 287 F.3d 257, 259-60 (2d Cir. 2002).
99. United States v. Cochran, 109 F.3d 660, 667 (10th Cir. 1997) (requiring a showing of materiality); United States v. Jain, 93 F.3d at 436, 441-42 (8th Cir. 1996) (same).
100. See United States v. Jordan, 112 F.3d 14, 18 (1st Cir. 1997); United States v. Czubinski, 106 F.3d 1069, 1074-77 (1st Cir. 1997) (reversing conviction based on defendant's unauthorized accessing of confidential tax records where there was no showing that defendant intended to disclose or otherwise use the confidential information for personal gain).
101. See United States v. Vinyard, 266 F.3d 320, 327-29 (4th Cir. 2001).
102. John C. Coffee, Jr., Modern Mail Fraud: The Restoration of the Public/Private Distinction, 35 AM. CRIM L. REV. 427 (1998).
103. Id. at 430.
104. Id. at 430-31.
105. Id. at 431.
106. Id. at 460.
107. Id. at 460-61.
108. Id. at 450.
109. Id. at 462-63.
110. Id. at 460.
111. United States v. Brumley, 116 F.3d 728, 734 (5th Cir. 1997).
112. See U.S. CONST. art. IV, § 4 ("The United States shall guarantee to every state in this Union a Republican Form of Government . . . ."). Coffee proffers this argument, Coffee, supra note 93, at 432, but he acknowledges some ambivalence in deploying it, id. at 456-57 (noting that clause "has been more regarded . . . as a shield for the states than as a sword for Congress").
113. Coffee, supra note 93, at 444-45.
114. Sawyer v. United States, 85 F.3d 713 (1st Cir. 1996). Roderick Hills views this case as the prime example of a federal court misapplying to local government the rigid public/private line more relevant to the federal government. Hills, supra note 16, at 147-54.
115. 102 F.3d 1164 (11th Cir. 1997).
116. Id. at 1169-70.
117. United States v. Margiotta, 688 F.2d 108 (2d Cir. 1982).
118. Id. at 139, 142-43 (Winter, J., concurring in part and dissenting in part) ("The limitless expansion of the mail fraud statute subjects virtually every active participant in the political process to potential criminal investigation and prosecution.").
119. United States v. Murphy, 323 F.3d 102 (3d Cir. 2003).
120. Toulabi v. United States, 875 F.2d 122 (7th Cir. 1989).
121. The agency official enabled the license-seeker to cheat on the qualifying exam. The court conceded that the city had been deprived of a kind of intangible property that, in this pre-McNally case, might arguably still be covered by the mail fraud law, and that the city may have materially invested in preparing the exam, and even that what the applicant ultimately obtained might be "new property" in his hands. But the court concluded that what the city was tricked into giving up was just regulatory permission. Indeed, the judge noted wryly that the city did not have a fixed cap on licenses, so the alleged fraud actually increased the city's coffers by one license fee. Id.
122. Cleveland v. United States, 531 U.S. 12 (2000).
123. The Court noted: Licenses pre-issuance do not generate an ongoing stream of revenue. At most, they entitle the State to collect a processing fee from applicants for new licenses. Were an entitlement of this order sufficient to establish a state property right, one could scarcely avoid the conclusion that States have property rights in any license or permit requiring an upfront fee, including drivers' licenses, medical licenses, and fishing and hunting licenses. Such licenses, as the Government itself concedes, are "purely regulatory." Id. at 22.
124. Id. at 21.
125. 106 F.3d 1069 (1st Cir. 1997).
126. Id. at 1072.
127. Id. at 1077.
128. Of course, if the IRS rules created a privacy right in taxpayers, then perhaps the victims would have had some special statutory standing to sue for violation of that protection.
129. Ironically, the courts have been able to do so because if we search for some contractual or common law grounding of fiduciary duty as a basis for defining an honest services obligation, private arrangements often provide these. The briber of a private party is more susceptible to a § 1346 prosecution than the briber of a government official like Cleveland or Toulabi.
130. See supra note 22 and accompanying text.
131. N.Y. PENAL LAW § 180.00 (1999).
132. N.Y. PENAL LAW § 180.05 (1999).
133. 93 F.3d 436 (8th Cir. 1996).
134. Id. at 442. As the court noted in Jain, earlier intangible rights convictions involving private sector relationships usually included proof of tangible harm. Id. at 441. In United States v. Garfinkel, 29 F.3d 1253, 1258 (8th Cir. 1994), for example, the defendant was a University of Minnesota psychiatrist whose fraud deprived a financial sponsor of the benefits of legitimate pharmaceutical research.
135. 93 F.3d at 442 (quoting United States v. D'Amato, 39 F.3d 1249, 1257 (1st Cir. 1996)). A parallel case is United States v. Medina, 485 F.3d 1291 (11th Cir. 2007), where "patient recruiters" were charged with defrauding Medicare by arranging kickbacks for clinics and pharmacies. The convictions were overturned because the court found no evidence that a patient ever received anything different than the legitimately prescribed medicine or care or that Medicare was given false information about the medical basis for the care.
136. 18 U.S.C. § 1952 (2000).
137. Id. The Travel Act was one of several bills enacted into law by the 87th Congress as part of the Attorney General's 1961 legislative program directed against "organized crime." Then-Attorney General Robert Kennedy testified at Senate and House hearings that federal legislation was needed to aid state and local governments which were no longer able to cope with the increasingly complex and interstate nature of large-scale, multiparty crime. The stated intent was to "dry up" traditional sources of funds for such illegal activities. Legislation Relating to Organized Crime: Hearings on H.R. 468, H.R. 1246, etc., Before Subcomm. No. 5 of the H. Comm. on the Judiciary, 87th Cong. (1961) [hereinafter Organized Crime Legislation Hearings].
138. A similar enlargement of the term beyond its common-law definition manifested itself in the states prior to 1961. Fourteen states had statutes outlawing commercial bribery generally. An additional twenty-eight had adopted more narrow statutes outlawing corrupt payments to influence private duties in particular fields, including bribery of agents, common carrier and telegraph company employees, labor officials, bank employees, and participants in sporting events. Since 1961, of the eight States which had not adopted nonpublic official bribery statutes, Georgia, Kansas, New Hampshire, New Mexico, North Dakota, and Wyoming now have such statutes. Moreover, a number of the states that did not have a commercial bribery statute in 1961 do so today.
139. Federal statutes specifically using "bribery" in the sense of payments to private persons to influence their actions are the Transportation Act of 1940, 54 Stat. 898 (prohibiting the "bribery" of agents or employees of common carriers), and the 1960 Amendments to the Communications Act, 47 U.S.C. § 509 (2000) (prohibiting the "bribery" of television game show contestants).
140. See Perrin v. United States, 444 U.S. 37, 46 (1979) ("Attorney General Kennedy in his opening statement in both the Senate and House hearings in 1961 expressed his concern that 'gamblers have bribed college basketball players to shave points on games.'").
141. Id.
142. Id.
143. United States v. Welch, 327 F.3d 1081 (10th Cir. 2003).
144. These cash payments, totaling about one million dollars, included medical expenses and personal and vacation travel expenses for IOC members and their relatives and even college tuition for their children. In addition, the defendants allegedly obtained permanent resident alien status for an IOC member's son through submission of false and misleading documents to immigration authorities. Id. at 1085.
145. The Welch court recounted the allegations: To further conceal their illicit activities, Defendants allegedly (1) made payments to IOC members in cash; (2) created and funded a sham program known as the National Olympic Committee Program ostensibly to provide athletes in underprivileged countries with training and equipment; (3) entered into sham contracts and consulting agreements on behalf of the SLBC; (4) recorded payments and benefits which the SLBC provided to IOC members inaccurately in corporate books and records; (5) placed false, fraudulent, and misleading information in SLBC financial records and statements, and (6) failed to disclose material information in public documents. Id. at 1086.
146. UTAH CODE ANN. § 76-6-508(1)(a) (2007).
147. The federal court noted: "The Utah Supreme Court, in a civil law context, defines 'agent' as a person authorized by another to 'act on his behalf and subject to his control.'" Welch, 327 F.3d at 1102 (quoting Gildea v. Guardian Title Co., 970 P.2d 1265, 1269 (Utah 1998)). A fiduciary is a person in whom another places particular confidence. A fiduciary has a duty to act primarily for the benefit of the other and thus also may be an agent. See RESTATEMENT (SECOND) OF AGENCY § 13 (1958) ("An agent is a fiduciary with respect to matters within the scope of his agency."). "Generally, in a fiduciary relationship, the property, interest, or authority of the other is placed in the charge of the fiduciary." Welch, 327 F.3d at 1103 (quoting First Sec. Bank v. Banberry Dev. Corp., 786 P.2d 1326, 1333 (Utah 1990)).
148. Welch, 327 F.3d at 1101-02.
149. Id. at 1093.
150. Id. at 1099. As the court put things rather haughtily: The IOC entrusts its members with the power and responsibility to select on behalf of the IOC the host city for the Olympic Games. To ensure fairness in the site-selection process, IOC members must make their selection with undivided loyalty to the IOC free from commercial influence. IOC members appear subject to the control of the IOC at least to the extent they operate under certain express standards of conduct designed to promote fairness, and may be expelled from the "organization" for failure to adhere to these standards . . . . [W]e view the question of a principal-agent/fiduciary relationship between the IOC and its members as one of fact which the Government must establish and against which Defendants may defend. Id. at 1103.
151. Id. at 1099.
152. See Hills, supra note 16.
153. A parallel example is United States v. Szur, 289 F.3d 200 (2nd Cir. 2002), where the Second Circuit considered the conviction of a defendant charged with both a § 1346 violation as well as a Travel Act violation. The defendants were involved in a scheme to sell securities to customers and receive a commission of 50% of the sales proceeds without disclosing to the customers the excessive commissions. The theory of the prosecution was that the defendants owed a fiduciary duty to disclose the commissions to their customers and, therefore, deprived the customers of their honest services. The defendants argued that they were not under an obligation to disclose the commissions, but the Court rejected the claim and found that they were under a fiduciary obligation to disclose the commissions. The Travel Act claim was that under the New York commercial bribery statute, it is a violation of fiduciary duty to accept a bribe: An employee, agent or fiduciary is guilty of commercial bribe receiving in the second degree when, without the consent of his employer or principal, he solicits, accepts or agrees to accept any benefit from another person upon an agreement or understanding that such benefit will influence his conduct in relation to his employer's or principal's affairs. N.Y. PENAL LAW § 180.05 (1999). Since the violation of the Travel Act, just as the mail fraud violation, required a fiduciary duty violation, the Court found that the defendants were appropriately convicted of the Travel Act violation as well. Notably, the court reasoned backwards to the presence of a fiduciary duty, but inferred that duty simply from the size of the commission. Szur, 289 F.3d 200.
154. Or "classic commercial bribery" as one major commentator refers to it. Franklin A. Gevurtz, Commercial Bribery and the Sherman Act: The Case for Per Se Illegality, 42 U. MIAMI L. REV. 365, 391 (1987).
155. 15 U.S.C. § 13(c) (2000).
156. See Gervurtz, supra note 145, at 376-78; id. at 368 n.21 ("While the Supreme Court twice provided dicta favorable to the interpretation that section 2(c) proscribes bribery, it never ruled on the question." (citations omitted)).
157. Unlike §§ 2(a) and 2(b) of the Clayton Act, as amended by Robinson-Patman in 1936, which require a showing of actual or threatened harm, § 2(c) makes certain behavior "per se" illegal, meaning that no harm need be demonstrated. Gevurtz and others argue that "commercial bribery" should fall within the ambit of 2(c) because it is ipso facto harmful since it is merely a substitute for a lower price that would otherwise be available. Gevurtz, supra note 145, at 393.
158. Id. at 391.
159. Id. at 393.
160. See, e.g., Stephen Horan & D. Bruce Johnsen, Does Soft Dollar Brokerage Benefit Portfolio Investors: Agency Problem or Solution? (Law and Econ. Working Paper Series, Paper No. 04-50, 2004), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=615281; Jonathan Klick, Performance of Bond Pooling: An Efficiency Argument for Insurance Steering (Sept. 15, 2004) (unpublished manuscript), available at http://www.isnie.org/ISNIE04/Papers/Klick%20Paper.pdf.
161. A series of lower court opinions, although rejecting defendant liability under § 2(c), have raised questions about when courts may be tempted to find criminal liability for commercial bribery. In a pair of cases with similar facts, Bridges v. MacLean-Stevens Studios, 201 F.3d 6 (1st Cir. 2000), and Stephen Jay Photography v. Olan, 903 F.2d 988 (4th Cir. 1990), school photographers offered a commission to the school district in exchange for the right to become the exclusive provider of on-site school portraits. When districts accepted the commission, the cost of the commission was passed on to the parents. When districts refused the commission, the cost of the photographs would remain at their original prices. In MacLean-Stevens, the parents sued the photographer under § 2(c) on grounds that the photographer had offered a bribe to the district, the parents' agent, and as a result of that agreement, the parents had been forced to pay above market prices for the photographs. In Stephen Jay, a competing photographer brought suit against the two photographers who had each received exclusive contracts to a certain percentage of schools in the district. Although the court in MacLean-Stevens "assume[d] without deciding that commercial bribery is actionable under section 2(c)," the decision did note that "five circuits have concluded that commercial bribery is within the ambit of section 2(c)." 201 F.3d at 11 (citing cases). A central issue in the cases is whether the school districts had acted as intermediaries or representatives on the parents' (buyers') behalf and, therefore, whether the payments from the photographers (sellers) to the school districts had crossed the "seller-buyer" line. The First and Fourth Circuits each concluded that there was no violation of § 2(c) in these instances because the seller-buyer line had not been crossed - the district in each case, by indicating to the parents that the decision to buy portraits from the school's provider, or to buy portraits at all, was optional, "did not assume a position resembling that of a . . . purchasing agent." MacLean- Stevens, 201 F.3d at 12 (citing Stephen Jay, 903 F.2d at 993).
162. See also S. REP. NO. 1502, at 7 (1936) ("The relation of the broker to his client is a fiduciary one. To collect from a client for services rendered in the interest of a party adverse to him, is a violation of that relationship; and to protect those who deal in the streams of commerce against breaches of faith in its relations of trust, is to foster confidence in its processes and promote its wholesomeness and volume.").
163. Restricting liability to fiduciary relationships may have the effect of mooting the "services rendered" language in § 2(c) because an agent in a fiduciary relationship may not receive any benefits without reporting and/or delivering those benefits to the buyer. Tarnowski v. Resop, 51 N.W.2d 801 (Minn. 1952).
164. Moreover, the broad application of § 2(c) to commercial bribery has the effect of adding to the expansion of federal criminal law into areas traditionally in the purview of state criminal law or non-criminal financial regulation. Bruce H. Kobayashi & Larry E. Ribstein, The Hypocrisy of the Milberg Indictment: The Need for a Coherent Framework on Paying for Cooperation in Litigation, 2 J. BUS. & TECH. L. 369, 371 (2007), available at http://ssrn.com/abstract=955952.
165. See Klick, supra note 151, at 5 ("[S]ellers have the incentive to provide low quality goods and services because there is no expectation of future business dealings . . . .").
166. Although the government has sometimes declined to enforce prohibitions on steering arrangements prescribed in consent decrees, states have picked up the anti-steering slack in an attempt to protect consumers. Id. at 2.
167. Id. at 3.
168. Horan & Johnsen, supra note 151, at 4.
169. In the typical "soft dollar" arrangement, a manager will commit to providing a broker with a certain threshold amount of his portfolio's business. In exchange, the broker offers the manager an upfront payment of sorts in the form of research - such as Bloomberg screens, stock diagnostic software, or access to proprietary research - that the manager would normally have to buy from a third party. The costs of brokerage execution - commissions on the total value of the quantity bought or sold (not on the buyer's or seller's net gain) - are generally charged directly to the portfolio. Although investors hope that brokers will execute trades as expediently as possible, capitalizing on their short-lived information advantage, "[b]ecause brokers have no immediate stake in the diligence with which they search, they may shirk in performing portfolio executions." Id. at 5 (citation omitted).
170. Id.
171. Horan and Johnsen also provide empirical evidence to show that a soft dollar system has generated efficient outcomes for the market by improving the performance (quality) of portfolios: "[The study's] results are consistent with the [incentive alignment hypothesis] . . . . The incentive alignment hypothesis holds that soft dollars discourage shirking and provide a mechanism by which managers can better capture the returns to identifying mispriced securities by assuring execution quality."). Id. at 20. Gevurtz would probably endorse what Horan and Johnsen refer to as the "unjust enrichment hypothesis," which posits that "soft dollars allow managers to misappropriate investors' wealth," or that the practice is basically a way in which a buyer's agent can steal from the buyer. Id.
172. Gevurtz, supra note 145, at 375.
173. 935 F.2d 445 (2d Cir. 1991).
174. Id. at 451-53.
175. Id. at 462.
176. 286 F.3d 92 (2d Cir. 2002).
177. Id. at 100.
178. Id. at 107 (emphasis omitted). "[I]t could make a criminal out of anyone who breaches any contractual representation: that tuna was netted dolphin-free; that stationery is made of recycled paper; that sneakers or T-shirts are not made by child workers; that grapes are picked by union labor - in sum so called consumer protection law and far more." Id. at 108.
179. Id. at 109.
180. 287 F.3d 257 (2d Cir. 2002).
181. Id. at 261.
182. United States v. Rybicki, 354 F.3d 124 (2d Cir. 2003) (en banc).
183. Id. at 145-46.
184. Id. at 146-47.
185. 345 F.3d 952 (7th Cir. 2003).
186. Id. at 956.
187. Id. at 957.
188. See United States v. Vinyard, 266 F.3d 320, 327-29 (4th Cir. 2001) (reasonably foreseeable harm); United States v. Cochran, 109 F.3d 660, 667 (10th Cir. 1997) (requiring materiality); United States v. Jordan, 112 F.3d 14, 19 (1st Cir. 1997) (requiring "articulable harm" or clear intended gain).
189. United States v. Rybicki, 354 F.3d 124, 155, 162-63 (2d Cir. 2003) (en banc) (Jacobs, J., dissenting).
190. 459 F.3d 509 (5th Cir. 2006).
191. Id. at 519-20 (citation omitted).
192. The court hypothesized that the breach in question actually increased Enron's stock price, exactly as Enron had hoped. On the other hand, it noted the Government's argument that the detriment lay in Enron's spending money (in the form of fees paid to Merrill and bonuses paid to employees) "for the 'sole purpose of misleading shareholders and the investing public.'" Id. at 520 n.8. The court found this less than fully convincing because it implied something that could not be proved - that the deal actually caused Enron's downfall. Id.
193. Id. at 520.
194. Id. at 521-22 (emphasis omitted). The court cites but distinguishes the intriguing case of United States v. Gray, 96 F.3d 769 (5th Cir. 1996), where "university basketball coaches were convicted of mail and wire fraud for fraudulently establishing the academic eligibility of transfer students recruited to play on the basketball team." 459 F.3d at 522 n.13. There the court "rejected the defendants' argument that their actions furthered the fortunes of the basketball team and of the university and were therefore not within the purview of fraud statutes." Id. In the Brown court's view, Gray is dissimilar because it "presents only the coaches' own belief that their scheme benefited the university; no one or any authority outside the cadre of coaches encouraged, approved, or even knew of the wrongdoing." Id. But the court conceded its real fear: "The Government, in fact, would go even further; it plainly stated at oral argument its position, explicitly based on Gray, that the honest-services charge would reach the Defendants' conduct even absent an oral buyback agreement. The Government's desire to build on Gray crystalizes [sic] the danger we face of defining an ever-expanding and ever-evolving federal common-law crime." Id.
195. Brown, 459 F.3d at 534 (DeMoss, J., concurring and dissenting).
196. Id. at 535.
197. Id.
198. For a discussion of Sarbanes-Oxley, see infra Part III.C.
199. See e.g., TSC Industries v. Northway, Inc., 426 U.S. 438 (1976) (false or misleading proxy statements to shareholders).
200. See infra notes 239-46 and accompanying text.
201. Chiarella v. United States, 445 U.S. 222 (1980) (rejecting insider trading liability for document printer who had no fiduciary duty to corporation).
202. SEC v. Dirks, 463 U.S. 646 (1983) (limiting "tippee" liability where "tipper" did not seek illicit gain).
203. In Dirks, the insiders were attempting to publicly disclose an ongoing fraud at the company. Id. at 649-50.
204. Chiarella, 445 U.S. at 233 (citation omitted).
205. United States v. O'Hagan, 521 U.S. 642 (1997).
206. O'Hagan was a lawyer in a firm retained to assist a company about a potential tender offer, though he did no work on the matter. Both while and after his firm advised the company, he used confidential information about the tender offer plan to buy both call options for the target's stock and stock itself, and turned a huge profit after the tender offer announced boosted the price. Id. at 647-48.
207. Id. at 652-53.
208. Id. at 656.
209. Id. at 653.
210. Id. at 656. As the Court said: In such a case, the Government states, "the proceeds would have value to the malefactor apart from their use in a securities transaction, and the fraud would be complete as soon as the money was obtained." In other words, money can buy, if not anything, then at least many things; its misappropriation may thus be viewed as sufficiently detached from a subsequent securities transaction that § 10(b)'s "in connection with" requirement would not be met. Id. at 656-57 (citation omitted).
211. Id. at 665.
212. See 15 U.S.C. § 78ff(a) (Supp. V 2006).
213. O'Hagan, 521 U.S. at 658.
214. Id. at 680, 681-82 (Thomas, J., concurring and dissenting) (citations omitted).
215. Id. at 689 (citation omitted).
216. See Transcript of Oral Argument at 7, O'Hagan, 521 U.S. 642 (No. 96-842) ("[J]ust as in [Carpenter v. United States], if [the defendant] had gone to the Wall Street Journal and said, look, you know, you're not paying me very much. I'd like to make a little bit more money by buying stock, the stocks that are going to appear in my Heard on the Street column, and the Wall Street Journal said, that's fine, there would have been no deception of the Wall Street Journal."). The Government's concession and the dissent's interpretation resonate with a recent insight by Joseph Bankman and Ian Ayres. Substitutes for Insider Trading, 54 STAN. L. REV. 235 (2001). Ayres and Bankman argue that even vigorous enforcement of insider trading law might leave insiders free to use the information to trade instead on the stock of that firm's rivals, suppliers, customers, or the manufacturers of complementary products. They note that such substitute trading can be quite profitable and, they argue, is even less desirable than banned insider trading.
217. Thus, the dissent criticizes the Court for conflating causation and correlation: That the misappropriator may both deceive the source and "simultaneously" hurt the public no more shows a causal "connection" between the two than the fact that the sun both gives some people a tan and "simultaneously" nourishes plants demonstrates that melanin production in humans causes plants to grow. In this case, the only element common to the deception and the harm is that both are the result of the same antecedent cause - namely, using non-public information. But such use, even for securities trading, is not illegal, and the consequential deception of the source follows an entirely divergent branch of causation than does the harm to the public. 521 U.S. at 691.
218. Id. at 690 n.6.
219. In fact, Justice Thomas's concern about the slippery slide towards the embezzlement case came perilously close to truth in a later opinion by the Court itself. In O'Hagan he questioned the Court's attempt to distinguish the embezzlement case. Accepting the Government's description of the scope of its own theory, it becomes plain that the majority's explanation of how the misappropriation theory supposedly satisfies the "in connection with" requirement is incomplete. The touchstone required for an embezzlement to be "used or employed, in connection with" a securities transaction is not merely that it "coincide" with, or be consummated by, the transaction, but that it is necessarily and only consummated by the transaction. Where the property being embezzled has value "apart from [its] use in a securities transaction" - even though it is in fact being used in a securities transaction - the Government contends that there is no violation under the misappropriation theory. 139 F.3d at 683. In that light, consider SEC v. Zandford, 535 U.S. 813 (2002),where a securities broker persuaded William Wood, an elderly man in poor health, to open a joint investment account for himself and his mentally retarded daughter. According to the SECs complaint, the "stated investment objectives for the account were 'safety of principal and income.'" Id. at 815 (quoting Petition for Writ of Certiorari at 27a, Zandford, 535 U.S. 813 (No. 01-147)). The Woods granted Zanford discretion to manage their account and a general power of attorney to engage in securities transactions for their benefit without prior approval. Relying on Zandford's promise to "conservatively invest" their money, the Woods entrusted him with $419,255. Before William Wood's death in 1991, all of that money was gone - drawn and spent by Zandford for his personal use. The SEC brought a civil case under 10b-5, claiming that the Woods had been defrauded by Zandford. That civil case was dismissed by the lower courts because of a failure to show any connection between the theft and the securities transactions other than that the transactions allowed for the embezzled case proceeds. The Supreme Court reinstated the civil case brought by the SEC: Taking the allegations in the complaint as true, each sale was made to further respondent's fraudulent scheme; each was deceptive because it was neither authorized by, nor disclosed to, the Woods. With regard to the sales of shares in the Woods' mutual fund, respondent initiated these transactions by writing a check to himself from that account, knowing that redeeming the check would require the sale of securities. Indeed, each time respondent "exercised his power of disposition for his own benefit," that conduct, "without more," was a fraud. In the aggregate, the sales are properly viewed as a "course of business" that operated as a fraud or deceit on a stockbroker's customer. 535 U.S. at 820-21 (citation omitted).
220. See notes 80-82 supra and accompanying text.
221. United States v. Carpenter, 791 F.2d 1024 (2d Cir. 1986), aff'd, 484 U.S. 19 (1987). The Second Circuit noted, "a reputable newspaper, even if it could lawfully do so, would be unlikely to undermine its own valued asset, its reputation, which it surely would do by trading on the basis of its knowledge of forthcoming publications." Id. at 1033; see Jonathan R. Macey, From Fairness to Contract: The New Direction of the Rules Against Insider Trading, 13 HOFSTRA L. REV. 9, 43 (1984). "Although the employer may perhaps lawfully destroy its own reputation, its employees should be and are barred from destroying their employer's reputation by misappropriating their employer's informational property. Appellants' argument that this distinction would be unfair to employees illogically casts the thief and the victim in the same shoes." Carpenter, 791 F.2d at 1033.
222. 947 F.2d 551 (2d Cir. 1991).
223. Id. at 569-70.
224. "[M]arriage does not, without more, create a fiduciary relationship. 'Mere kinship does not of itself establish a confidential relation.' . . . Rather, the existence of a confidential relationship must be determined independently of a preexisting family relationship." Id. (citations omitted). The court added that "more than the gratuitous reposal of a secret to another who happens to be a family member is required to establish a fiduciary or similar relationship of trust and confidence." Id.
225. The court held that the recipient of the inside information fell outside the fiduciary circle. First, "Keith was an extended member of the Waldbaum family, specifically the family patriarch's (Ira Waldbaum's) 'nephew-in-law.'" Id. at 570. Second was the matter of Ira's discussions of the business with family members. "'My children,' Ira Waldbaum testified, 'have always been involved with me and my family and they know we never speak about business outside of the family.' His earlier testimony indicates that the 'family' to which he referred were his 'three children who were involved in the business.'" Id. The court concluded, "In sum, because Keith owed neither Susan nor the Waldbaum family a fiduciary duty or its functional equivalent, he did not defraud them by disclosing news of the pending tender offer to Chestman. Absent a predicate act of fraud by Keith Loeb, the alleged misappropriator, Chestman could not be derivatively liable as Loeb's tippee or as an aider and abettor." Id. at 571.
226. 14 F. Supp. 2d 508 (S.D.N.Y. 1998).
227. United States v. Willis, 737 F. Supp. 269 (S.D.N.Y. 1990).
228. Id. at 274-75.
229. The Hippocratic Oath provides: Whatsoever things I see or hear concerning the life of men, in my attendance on the sick or even apart therefrom, which ought not be noised abroad, I will keep silence thereon, counting such things to be as sacred secrets. Id. at 272. The court abruptly jumped to the following question-begging conclusion: [B]y practicing psychiatry, Dr. Willis held himself out as a physician with recognized obligations of confidentiality for his patient's secrets. By not advising his patient of his intention to disclose her confidential information and to profit personally from it, Dr. Willis fraudulently induced his patient to confide in him in connection with his purchase and sale of securities. Id. at 274.
230. "Courts recognize that a patient has a cause of action against a psychiatrist who discloses confidential information learned in the course of treatment. Furthermore, Mrs. Weill had an economic interest in preserving the confidentiality of the information disclosed because Willis' release of the information might have jeopardized her husband's advancement to CEO of BankAmerica in which she had a financial interest." Id. (citations omitted).
231. 184 F. Supp. 2d 1006 (N.D. Cal. 2002).
232. Id.
233. Id. at 1011.
234. The SEC stated in its Executive Summary: Rule 10b5-1 addresses an important unsettled issue in insider trading law: whether the Commission must show in its insider trading cases that the defendant "used" the inside information in trading, or merely that the defendant traded while in "knowing possession" of the information. The Rule would state the general principle that insider trading liability arises when a person trades while "aware" of material nonpublic information, but also provides four exceptions to liability. In these four situations, where a trade resulted from a pre-existing plan, contract, or instruction that was made in good faith, it will be clear that the trader did not use the information he or she was aware of. Selective Disclosure and Insider Trading, Exchange Act Release Nos.
235. Selective Disclosure and Insider Trading. As the SEC noted: Two courts have considered this issue in criminal cases: United States v. Chestman, [947 F.2d 551 (2d Cir. 1991)], and United States v. Reed, [601 F. Supp. 685 (S.D.N.Y 1985)]. Although Chestman and Reed took into account common law notions of fiduciary and confidential relationships, they both took a relatively narrow view of when a duty of confidence exists in the context of criminal liability for insider trading. In Reed, the court did not find a father-son relationship sufficient in itself to provide the required duty of confidence. But it stated that if family members have a prior history of sharing confidences, such that one family member has a reasonable expectation that the other will keep those confidences, there may be a sufficient relationship of trust and confidence. The final determination is left to the fact finder. Selective Disclosure and Insider Trading, Exchange Act Release Nos. 33-7787, 34-42259 (Dec. 20, 1999) (citations omitted).
236. Id.
237. Id.
238. ATT'Y GEN., FIELD GUIDANCE ON NEW CRIMINAL AUTHORITIES ENACTED IN THE SARBANES-OXLEY ACT OF 2002 (H.R. 3763) CONCERNING CORPORATE FRAUD AND A CCOUNTABILITY § 807 (2002).
239. See White Collar Crime: Leahy Faults Ashcroft Guidance on Implementation of Sarbanes-Oxley Act, 71 Crim. L. Rep. (BNA) 583 (Aug. 14, 2002).
240. Id.
241. 148 CONG. REC. S7421 (daily ed. July 26, 2002).
242. No. 05-CR-613, 2006 U.S. Dist. LEXIS 53577 (E.D.N.Y. Aug. 2, 2006), reh'g granted 499 F. Supp. 2d 291 (E.D.N.Y. 2007).
243. Id. at *35 (citations omitted).
244. Id.
245. Id. at *39-40. The Mahaffy defendants were all acquitted of the 1348 charges, but the jury hung on the conspiracy count alone. In a recent decision, the court allowed a retrial on the conspiracy count despite the double jeopardy concerns. United States v. Mahaffy, 499 F. Supp. 2d 291 (E.D.N.Y. 2007).
246. 485 U.S. 224 (1988).
247. 17 C.F.R. § 240.10b-5 (2008).
248. Donald C. Langevoort, Basic at Twenty: Rethinking Fraud-on-the- Market (Georgetown Law & Econ. Research Paper No. 1026316, 2007), available at http://ssrn.com/abstract=1026316.
249. Id. at 27.
250. 485 U.S. at 255 (White, J., dissenting) (citation omitted).
251. 544 U.S. 336 (2005).
252. Id.
253. Id. at 345 (citations omitted).
254. Of course, inchoate criminal laws - in the old-fashioned sense of the term - can punish potentially harmful acts done with highly culpable mental states, but normally we can identify the specific harms sought to be prevented.
255. Frank O. Bowman, III, Pour Encourager Les Autres? The Curious History and Distressing Implications of the Criminal Provisions of the Sarbanes-Oxley Act and the Sentencing Guidelines Amendments That Followed, 1 OHIO ST. J. CRIM. L. 373, 379 (2004).
256. U.S. SENTENCING COMM'N, FIFTEEN YEARS OF GUIDELINES SENTENCING: AN ASSESSMENT OF HOW WELL THE FEDERAL CRIMINAL JUSTICE SYSTEM IS ACHIEVING THE GOALS OF SENTENCING REFORM vii (2004) ("The Commission's study of past sentencing practices revealed that in the pre-guidelines era, sentences for fraud, embezzlement, and tax evasion generally received less severe sentences than did crimes such as larceny or theft, even when the crimes involved similar monetary loss. A large proportion of fraud, embezzlement, and tax evasion offenders received simple probation.").
257. Frank O. Bowman, III, The 2001 Federal Economic Crime Sentencing Reforms: An Analysis and Legislative History, 35 IND. L. REV. 5, 25 (2001) ("[W]hen the original Sentencing Commission wrote guidelines for economic crimes, it made the idea of 'loss' the linchpin of the enterprise. In both the former theft and fraud guidelines the base offense level resulting from conviction alone was very low (4 in theft cases, and 6 in fraud cases), while the offense level could increase by up to eighteen levels in fraud cases and twenty levels in theft cases, depending on the amount of 'loss' found by the court.").
258. Bowman, supra note 246, at 386.
259. United States v. Booker, 543 U.S. 220 (2005) (applying Blakely v. Washington, 542 U.S. 296 (2004), to the federal sentencing guidelines).
260. E.g., Rita v. United States, 127 S. Ct. 2456 (2007) (holding that courts of appeals should treat sentences by trial courts that are within the guidelines as presumptively reasonable).
261. See Bowman, supra note 248, at 41 ("[T]he 'definition' of actual loss scattered in bits and pieces through the commentary on the former theft and fraud guidelines was a hodgepodge - a core definition ('the value of the property taken, damaged, or destroyed') drawn from the common law of larceny combined with an apparent rule of causation derived by negative inference from the exclusion of a classification of harms ('consequential damages') drawn from civil contract law, plus a gaggle of special rules. Virtually no one defended the old definition.").
262. 18 U.S.C.A. app. § 2B1.1 (West 2008).
263. Bowman, supra note 248, at 38.
264. Id. at 38-39, 41.
265. Id. at 68-70.
266. United States v. Olis, 429 F.3d 540, 541-42 (5th Cir. 2005).
267. Id. at 542.
268. Id.
269. Id.
270. Id. at 545.
271. United States v. Olis, No. H-03-217-01, 2004 WL 3756361, at *1 (S.D. Tex. Mar. 30, 2004).
272. Id.
273. Olis, 429 F.3d at 546-47.
274. Id. at 548.
275. See supra text accompanying note 255.
276. Id. at 544-49.
277. Id. at 548-49.