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United States v. Starr

decided: April 9, 1987.

UNITED STATES OF AMERICA, APPELLEE,
v.
CHARLES L. STARR, JR., AND CHARLES L. STARR, III, DEFENDANTS-APPELLANTS



Appeal from a judgment of conviction entered in the United States District Court for the District of Vermont, Billings, J., on May 2, 1986, upon a jury verdict of guilty under an indictment charging defendants in fifteen counts with mail fraud in violation of 18 U.S.C. § 1341 and wire fraud in violation of 18 U.S.C. § 1343. Judgment reversed and indictment dismissed. Judge Newman concurs in a separate opinion; Judge Van Graafeiland dissents in a separate opinion.

Author: Meskill

VAN GRAAFEILAND, MESKILL and NEWMAN, Circuit Judges.

MESKILL, Circuit Judge.

This is an appeal from judgments of conviction entered on May 2, 1986, in the United States District Court for the District of Vermont, Billings, J., after a jury trial. The jury returned a verdict of guilty on all counts under a fifteen count indictment charging defendants Charles L. Starr, Jr. and Charles L. Starr, III with mail fraud and wire fraud in violation of 18 U.S.C. §§ 1341 and 1343 (1982).*fn1 The indictment alleged that defendants engaged in a scheme to defraud customers of their so called "lettershoppe" business, American Mailing Systems (AMS), by means of "burying" higher rate mailings in lower rate bulk mailings and failing either to pay the postal service the correct postage due or to refund the excess funds to their customers. This appeal followed. We reverse the judgment of the district court.

BACKGROUND

The principals in this criminal prosecution, Charles L. Starr, Jr. (Charles Starr) and Charles L. Starr, III (Larry Starr), rather and son, formed Starr Industries, Inc. in 1981 and shortly thereafter began operating a lettershoppe service for bulk mail customers. In the period covered by the grand jury's indictment, September 4, 1981, through May 1984, the Starrs performed these bulk mailing services under the name American Mailing Systems.

The Starrs had no prior experience in the operation or management of a lettershoppe business. To compensate for their shortfall in practical experience, the Starrs hired Douglas Whitaker to work for and advise them in developing their business. Whitaker, an unindicted co-conspirator, testified for the government, describing the Starrs' conduct that supposedly showed a scheme to defraud their customers.*fn2

Most of AMS' customers were institutional entities who advertised educational seminars. The sent unsorted, unaddressed mailing brochures to AMS in one bulk shipment. AMS addressed the brochures, then sorted and packaged them for delivery to the post office.

AMS billed customers for sorting, labeling, packaging and handling their mailings. This charge was entered on the books as income to AMS. The customers individually calculated the postage due for their mailings based on the number of pieces to be mailed and the applicable postage rate. The customers then wrote a check payable to AMS for the cost of the necessary postage. AMS maintained these funds in a separate account. A record of such transfers was kept by Larry Starr in a notebook on his desk. As customers' mailings were dispatched to the post office, AMS paid the postage due for each customer from this separate account.

The process of actual delivery of the lettershoppe customers' mailings to the post office entitled a number of different procedures. Individual brochures were assembled in zip code order and placed into mail sacks provided by the post office. AMS presented the mailings to the postal service together with postal from 3602. This form contained the name of the AMS client, the permit number, the rate and pounds or pieces of mail included in the mailing. To verify this information, a postal employee would choose only one sack to determine its contents. When the employee was satisfied that the material in the single sack was being mailed at the proper rate, the postage due was calculated and collected for all of the sacks and they were accepted for delivery.

The Starrs' scheme to defraud lettershoppe customers, as charged by the indictment, operated as follows. Douglas Whitaker, aware of the meager verification process employed by the postal service, "buried" or concealed higher postage rate mail inside bulk rate mailing sacks. The process required the various items of mail to be strategically arranged in the sacks to avoid detection by postal employees. Fraudulent postal receipt forms (3602 forms) were then submitted to the post office and the lower postal rate for the mailing was paid for the entire shipment. AMS then prepared a second, false 3602 form to be sent to the customer, indicating that the legally correct postage had in fact been paid. The resulting surplus funds remaining in the separate AMS customer account would then be appropriated by AMS and listed on its books under fictitious income categories such as "presort income." AMS performed no legitimate labor function that justified the retention of customer funds.

The scheme netted the Starrs approximately $418,000 during the period covered by the indictment. The operation became so profitable that the Starrs carried out a similar scheme at Canadian post offices. AMS customers, however, remained blissfully ignorant of the Starrs' activities. The customers paid the postage that they themselves calculated to be legally due. Mail was sent on time and arrived at the appropriate destination. In fact, AMS customers testified at trial that they were satisfied with the service they received from AMS.*fn3 The customers' receipt of 3602 forms, together with their own verification that AMS delivered their mail, effectively concealed the Starrs' appropriation of customer funds.

Q. So to put it in the converse, as an overall review made by you, you're satisfied that the mail went out as you had directed?

A. Yes.

Q. And in connection with these mailings, you had determined in advance the amount of postage that you expected to pay in order to have these mailings sent out. Correct?

A. That's right.

Q. And are you satisfied upon reviewing your records and looking at your checks that at no time you paid anymore [sic] than the amount of postage that you had predetermined should be associated with the transmission of those mailings? Understand my question?

A. I'm satisfied that we didn't pay any more than we should have paid.

Q. So far as your companies are concerned, we can agree that you and your companies got what it paid for from American Mailing. Correct?

A. Yes.

J. App. at 63-64.

Postal officials finally exposed the scheme in January 1984. Police conducted a search of AMS pursuant to a search warrant and seized AMS business records. The Starrs eventually sold the business in May 1984.

On August 1, 1985, a District of Vermont grand jury returned an indictment that charged the Starrs with fifteen counts of mail and wire fraud. The indictment contained a detailed description of the alleged scheme to defraud customers. According to the indictment:

The purpose of defendants [sic] scheme was to defraud its lettershoppe customers by inducing them, by means of false and fraudulent pretences [sic], representations and promises and by concealing material facts, to pay and prepay postage money for mailing their advertising material.

J. App. at 10-11.

At trial, the Starrs moved for judgment of acquittal at the close of the government's evidence. They argued, inter alia, that the evidence could not support a finding that they intended to defraud their lettershoppe customers. Instead, the Starrs argued, the government at most proved a scheme to defraud the United States Postal Service. They contended that such a scheme was not properly charged by the indictment and urged the court to direct a verdict in their favor. The court, however, denied the motion. The Starrs were ultimately convicted and this appeal followed.

Discussion

Properly viewed, the Starrs' claim is one of insufficiency of the evidence with regard to the element of intent to defraud the lettershoppe customers.*fn4 Br. of Defendants at 17-19. Of course, our scope of review for such a claim is limited. "[T]he relevant question is whether, after viewing the evidence in the light most favorable to the prosecution, any rational trier of fact could have found the essential elements of the crime beyond a reasonable doubt." Jackson v. Virginia, 443 U.S. 307, 319, 61 L. Ed. 2d 560, 99 S. Ct. 2781 (1979). Nevertheless, on the basis of the record before us, we conclude that there was insufficient evidence that the object of the Starrs' scheme was to defraud their lettershoppe customers. This evidentiary deficiency applies equally to the mail fraud and wire fraud counts.

J. App. at 65-67.

An essential element of the government's proof in a mail fraud prosecution or a wire fraud prosecution is proof of a "scheme or artifice to defraud." 18 U.S.C. §§ 1341, 1343. Critical to a showing of a scheme to defraud is proof that defendants possessed a fraudulent intent. However, the government is not required to prove that an intended victim was actually defrauded to establish a violation by the defendants. Durland v. United States, 161 U.S. 306, 315, 40 L. Ed. 709, 16 S. Ct. 508 (1896); United States v. Andreadis, 366 F.2d 423, 431 (2d Cir. 1966). No actual pecuniary injury, therefore, need result to the victim of the fraud.

Although the government is not required to prove actual injury, it must, at a minimum, prove that defendants contemplated some actual harm or injury to their victims. Only a showing of intended harm will satisfy the element of fraudulent intent. Such was our holding in United States v. Regent Office Supply Co., 421 F.2d 1174 (2d Cir. 1970). In Regent, an indictment was handed down charging defendant with mail fraud. It appeared that defendant's salesmen engaged in aggressive marketing techniques designed to sell their products, including frequent misrepresentations of certain facts. For instance, these salesmen represented that they had been referred by a friend, that they had a large inventory to be disposed of, or that the agent was a doctor who needed to dispose of stationery. 421 F.2d at 1176. These facts, however, were only collateral to the sale and did not concern the quality or nature of the goods being sold. The misrepresentations, therefore, did not go to the basis of the customers' bargain with the salesmen. The customers received exactly what they paid for and no customer testified that he had been cheated. On the basis of these facts, we concluded in Regent that defendant did not contemplate an actual injury to the alleged victims of the fraud. At most, the evidence had shown an intent to deceive and to induce the customers to enter into the transaction. Absent any evidence of an intent to harm the victims, however, we concluded that the evidence was insufficient to demonstrate a fraudulent intent as required by the mail fraud statute. 421 F.2d at 1181.

Our decision in Regent identifies an important distinction that the government appears to lose sight of in this case. Misrepresentations amounting only to a deceit are insufficient to maintain a mail or wire fraud prosecution. Instead, the deceit must be coupled with a contemplated harm to the victim. Moreover, the harm contemplated must affect the very nature of the bargain itself. Such harm is apparent where there exists a "discrepancy between benefits reasonably anticipated because of the misleading representations and the actual benefits which the defendant delivered, or intended to deliver." 421 F.2d at 1182.

Proceeding now to the facts before us, we note that the government adduced no evidence of an intent to harm the lettershoppe customers. Although all reasonable inferences must be drawn in favor of the government on this appeal, we are convinced that the jury must have resorted to rank speculation in finding fraudulent intent here.

The jury heard the following evidence that the Starrs practiced a deceit on their customers. The Starrs represented that funds deposited with them would be used only to pay for their customers' postage fees. In fact, the Starrs used only a portion of those funds to pay postage; the remainder was appropriated to their own use. Moreover, the Starrs caused fraudulent postal receipt forms to the sent to their customers in order to avoid detection of their scheme. Clearly, their lettershoppe customers were deceived.

The record, however, shows little else. Specifically, the evidence does not identify what harm, if any, the Starrs intended to inflict on their customers. In fact, proof offered on this element is quite to the contrary. The Starrs did in fact mail their customers' brochures promptly as promised and caused them to arrive at the correct destination. The agreement for the timely shipment and handling of bulk mail was the basis of the bargain between the Starrs and their customers. The Starrs in no way misrepresented to their customers the nature or quality of the service they were providing. Indeed, satisfied customers were a necessary ingredient in the successful operation of their business. Therefore, because AMS customers received exactly what they paid for, there was no discrepancy between benefits "reasonably anticipated" and actual benefits received. An intent to defraud the lettershoppe customers was not demonstrated either directly or circumstantially.

We wish to address the assertion made by Judge Van Graafeiland in his dissenting opinion that customers' bargains were violated because mail was "dumped" or not mailed. Lori Lemnah, an AMS employee, did in fact testify on cross-examination by the defense that approximately thirty sacks of mail were dumped on one occasion. Tr. III-120. A full reading of her testimony, however, indicates that this occurred as a result of Douglas Whitaker's inadvertence in failing to deliver the mailing on time to the post office. Tr. III-102-04, 119-21. Testimony from this witness provides not the slightest support for the notion that the mail was dumped as part of a scheme to defraud the Starrs' customers. At most, Ms. Lemnah's testimony demonstrates that the dumping was an isolated occurrence motivated by Whitaker's desire to conceal his misfeasance from his employer, AMS. Defense counsel's purpose in extracting this testimony from a government witness was to expose Whitaker as an untrustworthy employee. The dissenting opinion does not reconcile Lemnah's testimony with the complete lack of testimony from AMS customers that they had been cheated.

Judge Van Graafeiland also argues that AMS pocketed the savings in postage gained as a result of presorting first class mail instead of refunding the difference to customers. Ms. Lemnah testified that AMS presorted mail for only one customer, Timberlane Dental Group. Tr. II-176. Postage savings with respect to the Timberlane account amounted to $60 per month. Again, however, there is no showing that this legitimate charge to a single customer operated as part of an overall scheme to defraud defendants' lettershoppe customers of over $400,000. A close ...


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