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United States v. Black

June 25, 2008


Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. No. 05 CR 727-Amy J. St. Eve, Judge.

The opinion of the court was delivered by: Posner, Circuit Judge.


Before POSNER, KANNE, and SYKES, Circuit Judges.

At the end of a four-month trial, the jury convicted the defendants of mail and wire fraud in violation of 18 U.S.C. § 1341 and Black in addition of obstruction of justice in violation of 18 U.S.C. § 1512(c). The judge sentenced him to 78 months in prison, Atkinson and Boultbee to 24 and 27 months, and Kipnis to probation with six months of home detention.

The defendants were senior executives (Black was the CEO) of an American company called Hollinger International, which through subsidiaries owns a number of newspapers here and abroad. It was controlled by a Canadian company, since defunct, called Ravelston, which in turn was controlled by Black, who owned 65 percent of its shares. (In between Hollinger and Ravelston was a holding company that we can ignore.) Black effectively controlled Hollinger through his majority stake in Ravelston. He owned some stock in Hollinger, but a much higher percentage of the stock of Ravelston, in which Atkinson and Boultbee also owned stock. So it was in his and their financial interest to funnel income received by Hollinger to Ravelston. This was done by Hollinger's paying large management fees to Ravelston.

Hollinger had a subsidiary called APC, which owned a number of newspapers that it was in the process of selling. When it had only one left-a weekly community newspaper in Mammoth Lake, California (population 7,093 in 2000, the year before the fraud)-defendant Kipnis, Hollinger's general counsel, prepared and signed on behalf of APC an agreement to pay the other defendants, plus David Radler, another Hollinger executive and a major shareholder in Ravelston, a total of $5.5 million in exchange for their promising not to compete with APC for three years after they stopped working for Hollinger. The money was paid. Neither Hollinger's audit committee, which was required to approve transactions between Hollinger's executives and the company or its subsidiaries because of conflict-of-interest concerns, nor Hollinger's board of directors, was informed of this transaction. Or so the jury was entitled to find; the evidence was conflicting.

That Black and the others would start a newspaper in Mammoth Lake to compete with APC's tiny newspaper there was ridiculous. But the defendants argue that really the $5.5 million represented management fees owed Ravelston and that they had characterized the fees as compensation for granting covenants not to compete in the hope that Canada might not treat the fees as taxable income. Although Hollinger is a large, sophisticated, public corporation, no document was found to indicate that the $5.5 million in payments was ever approved by the corporation or credited to the management-fees account on its books. The checks were drawn on APC, though the evidence was that the defendants had no right to management fees from that entity, and were backdated to the year in which APC had sold most of its newspapers. The purpose of the backdating was-or so the jury could find-to make the compensation for the covenants not to compete seem less preposterous. And while management fees were supposed to be paid to Ravelston as well as from a management-fee account, the payments were made to the defendants personally and came from the proceeds of a newspaper sale, facts that increase the implausibility of supposing that these direct payments to the defendants were a means of discharging a debt owed them by Hollinger. It is true that Radler, who pleaded guilty and testified for the government, said that he thought the audit committee had approved the so-called management fees. But the members of the committee testified otherwise and the jury was entitled to believe them.

There is more. The defendants failed to disclose the $5.5 million in payments in the 10-K reports that they were required to file annually with the Securities and Exchange Commission. And they caused Hollinger to represent to its shareholders falsely that the payments had been made "to satisfy a closing condition."

There was still more evidence of the fraud, but there is no need to go into it. The jury convicted the defendants of a second, similar fraud, on equally compelling evidence; there is no need to extend the opinion with a discussion of that either.

The evidence established a conventional fraud, that is, a theft of money or other property from Hollinger by misrepresentations and misleading omissions amounting to fraud, in violation of 18 U.S.C. § 1341. United States v. Orsburn, 525 F.3d 543, 545-46 (7th Cir. 2008). But the jury was also instructed that it could convict the defendants upon proof that they had schemed to deprive Hollinger and its shareholders "of their intangible right to the honest services of the corporate officers, directors or controlling shareholders of Hollinger," provided the objective of the scheme was "private gain." That instruction is the focus of the appeals.

Section 1346 of the federal criminal code, added in 1988 in order to overrule McNally v. United States, 483 U.S. 350 (1987), defines "scheme or artifice to defraud" in section 1341 to include a scheme or artifice to "deprive another of the intangible right of honest services." The defendants do not deny that Hollinger was entitled to their honest services. They were senior executives of Hollinger and owed the corporation fiduciary obligations, implying duties of loyalty and candor. It is not as if Black had merely been using his power as controlling shareholder to elect a rubber-stamp board of directors or to approve a merger favorable to him at the expense of the minority shareholders. He was acting in his capacity as the CEO of Hollinger when he ordered Kipnis to draft the covenants not to compete and when he duped the audit committee and submitted a false 10-K. On his own theory, the fees that he collected, which the jury was entitled to find were never owed to him, were management fees rather than dividends. The defendants' unauthorized appropriation of $5.5 million belonging to a subsidiary of Hollinger was a misuse of their positions in Hollinger for private gain, which is just the kind of conduct that we said in United States v. Bloom, 149 F.3d 649, 655-57 (7th Cir. 1998), was the essence of honest services fraud. See also United States v. Hausmann, 345 F.3d 952, 955-57 (7th Cir. 2003); United States v. Rybicki, 354 F.3d 124, 141-42 (2d Cir. 2003) (en banc).

So if the jury found such a misappropriation, this would mean that the defendants, having both deprived their employer of its right to their honest services and obtained money from it as a result, were guilty of both types of fraud. United States v. Turner, 465 F.3d 667, 678-79 (6th Cir. 2006); United States v. Caldwell, 302 F.3d 399, 408 (5th Cir. 2002). Nothing is more common than for the same conduct to violate more than one criminal statute. But the section 1346 instruction, which we quoted, did not require that the jury find that the defendants had taken any money or property from Hollinger; all it had to find to support a conviction for honest services fraud was that the defendants had deliberately failed to render honest services to Hollinger and had done so to obtain a private gain. The defendants do not deny that they sought a private gain. But they presented evidence that it was intended to be a gain purely at the expense of the Canadian government. They argue that for the statute to be violated, the private gain must be at the expense of the persons (or other entities) to whom the defendants owed their honest services-a group not argued to include the Canadian government.

They are making a no harm-no foul argument, and such arguments usually fare badly in criminal cases. Suppose your employer owes you $100 but balks at paying, so you help yourself to the money from the cash register. That is theft, e.g., State v. Winston, 295 S.E.2d 46, 51 (W. Va. 1982); Edwards v. State, 181 N.W.2d 383, 387-88 (Wis. 1970); State v. Self, 713 P.2d 142, 144 (Wash. App. 1986), even though if the employer really owes you the money you have not harmed him. You are punishable because you are not entitled to take the law into your own hands. Harmlessness is rarely a defense to a criminal charge; if you embezzle money from your employer and replace it (with interest!) before the embezzlement is detected, you still are guilty of embezzlement.

The application of this principle to honest services mail and wire fraud is straightforward. As explained in United States v. Orsburn, supra, 525 F.3d at 546, section 1346 was added "to deal with people who took cash from third parties (via bribes or kickbacks). United States v. Holzer, 816 F.2d 304 (7th Cir. 1987), supplies a good example. Judge Holzer accepted bribes from litigants. What he took from his employer, the state's judicial system, was the honest adjudication service that the public thought it was purchasing in exchange for his salary." See also United States v. Sorich, 523 F.3d 702, 707-08 (7th Cir. 2008); United States v. Thompson, 484 F.3d 877, 884 (7th Cir. 2007); Man-Seok Choe v. Torres, 525 F.3d 733, 737 (9th Cir. 2008); United States v. Kemp, 500 F.3d 257, 279-80 (3d Cir. 2007); United States v. Rybicki, supra, 354 F.3d at 139-42. Similarly, if ...

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