UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT OF NEW YORK
August 24, 1978
UNITED STATES of America
Norman TURKISH, Jules Nordlicht, Michael A. Kellogg, Frank Knell, and Donald B. Conlin, Defendants
The opinion of the court was delivered by: BRODERICK
ON MOTIONS TO DISMISS
This action is now before me on motions by defendants Donald B. Conlin, Michael A. Kellogg, Frank Knell and Norman Turkish ("defendants"), pursuant to Rule 12, F.R.Cr.P., to dismiss Count I of the indictment as insufficient for failing to allege the commission of a crime and as unconstitutionally vague as applied. For the reasons hereafter stated, defendants' motions are denied.
Count I of the indictment charges defendants with conspiracy "to defraud the United States by impeding, impairing, obstructing and defeating the lawful functions of the Department of the Treasury in the collection of income taxes" in violation of 18 U.S.C. Section 371. The principal objects of the conspiracy are identified in the indictment as the fraudulent creation of purportedly tax-deductible losses for an oil company client of defendant Kellogg through fixed, rigged, prearranged, and risk-free commodity futures transactions on the Crude Oil Market that would guarantee the realization by the client of a certain amount of losses before the end of its fiscal year and a similar amount of gains in its next fiscal year, and the manipulation of contract prices on the Crude Oil Market to achieve the predetermined losses and gains.
"An indictment is sufficient if it, first, contains the elements of the offense charged and fairly informs a defendant of the charge against which he must defend, and, second, enables him to plead an acquittal or conviction in bar of future prosecutions for the same offense. . . . (T)he language of the statute may be used in the general description of an offense, but it must be accompanied with such a statement of the facts and circumstances as will inform the accused of the specific offense, coming under the general description, with which he is charged." Hamling v. United States, 418 U.S. 87, 117, 94 S. Ct. 2887, 2907, 41 L. Ed. 2d 590 (1974) (citations omitted).
The offense charged in the instant indictment is violation of 18 U.S.C. Section 371. Violation of Section 371 occurs "if two or more persons conspire either to commit any offense against the United States, or to defraud the United States, or any agency thereof in any manner or for any purpose, and one or more of such persons do any act to effect the object of the conspiracy . . . ." The indictment does contain the elements of the offense charged and does fairly inform the defendants of the charge against which they must defend. The indictment charges that the defendants agreed upon means by which the conspiracy would be carried out,
and that the object was to defraud an agency of the United States
and the indictment recites certain overt acts allegedly done in furtherance of the conspiracy.
Under United States v. Del Toro, 513 F.2d 656, 664 (2d Cir. 1975), this is proper pleading:
"An agreement that might defraud the federal government in its functions at some time in the future, followed by an overt act, makes out the conspiracy charged."
Defendants do not attack the indictment on the grounds that it does not allege an agreement or overt acts. They contend that the indictment fails because neither of the objects of the conspiracy alleged the creation of tax deductible losses and the manipulation of contract prices on the crude oil market was unlawful when the alleged conspiratorial agreement was made. Defendants misapprehend the nature of "conspiracy to defraud the United States" under Section 371.
"To conspire to defraud the United States means primarily to cheat the government out of property or money, but it also means to interfere with or obstruct one of its lawful governmental functions by deceit, craft or trickery, or at least by means that are dishonest . . ." Hammerschmidt v. United States, 265 U.S. 182, 188, 44 S. Ct. 511, 512, 68 L. Ed. 968 (1924). See also United States v. Dennis, 384 U.S. 855, 861-62, 86 S. Ct. 1840, 1844, 16 L. Ed. 2d 973 (1966). "(T)his statutory language (Section 371) is not confined to fraud as (it is) defined in the common law. . . ."
In the case before me, the government has alleged that defendants obstructed the lawful function of the Department of the Treasury by deceit, craft or trickery or at least dishonest means. The sham tax deductions and the market manipulations are not alleged to be crimes, but presumably are the allegedly "dishonest means" used to obstruct the collection of taxes, a lawful government function. Defendants' accurate statement that the taxpayer has a right "to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits"
is inapposite. The indictment does not charge as a substantive offense the avoidance of taxes, or market manipulation, nor does it charge a conspiracy to avoid taxes or to manipulate the market. It charges a conspiracy to defraud the United States; the alleged tax deduction sham and market manipulation are averred only as "way(s) of consummating the conspiracy and which, like the use of a gun to effect a conspiracy to murder, (are) purely ancillary to the substantive offense." United States v. Manton, 107 F.2d 834, 839 (2d Cir. 1939).
Defendants also attack Section 371 as unconstitutionally vague as applied. As discussed above, the statute as used in this indictment clearly sets forth a criminal offense. Defendants cannot reasonably claim that they are without lawful notice that a conspiracy to use trickery or dishonest means to obstruct the collection of taxes is a crime. Whether the government will be able to prove that defendants are guilty of the crime alleged in the indictment is a question ultimately for the jury. However, I am not here concerned with proof, but only the sufficiency of the indictment and the constitutionality of the statute as applied in this case.
I am cognizant of and concerned with possible overreaching in the employment in an indictment of the second horn of Section 371 conspiracy "to defraud the United States." This portion of the statute was drafted and used during the nineteenth century in the context of serious deficiencies in the federal criminal laws. The situation today is vastly different from that which prompted the passage of the statute, and the use of this second horn of the statute must be carefully scrutinized to avoid its application when another statute, more precisely drawn and applicable to the acts alleged, is available. This concern has prompted me to direct that the government furnish particulars and comply with discovery demands on a more comprehensive basis than would have obtained if the charges had been brought under the first horn of Section 371 or under a substantive statute.
However, I find no inadequacy in the application of the statute in this indictment, and potential problems relating to proof can properly be dealt with during the trial and in the charge to the jury. See generally Goldstein, Conspiracy to Defraud the United States, 68 Yale L.J. 405 (1959); United States v. Rosenblatt, 554 F.2d 36, 40-41 (2d Cir. 1977); United States v. Johnson, 337 F.2d 180, 185 (4th Cir. 1964), (citing Krulewitch v. United States, 336 U.S. 440, 445-48, 69 S. Ct. 716, 93 L. Ed. 790 (1949) and Kotteakos v. United States, 328 U.S. 750, 760-74, 66 S. Ct. 1239, 90 L. Ed. 1557 (1946)).