The opinion of the court was delivered by: SIFTON
This is a prosecution against United States Aviation Underwriters, Inc. (USAU) and its former president and CEO, John Brennan, on 43 separate counts of mail fraud under 18 U.S.C. § 1341. The defendants have jointly moved for dismissal of the indictment on the grounds that the prosecution involves an extension of the mail fraud statute into an area that has been pre-empted by the McCarran-Ferguson Act, that the prosecution is barred by the statute of limitations, that the indictment fails to allege the elements of mail fraud, and that it is the product of breaches of the attorney/client privilege. For the reasons stated below, the motions for dismissal are denied or deferred for post-trial hearing.
According to the indictment, USAU is a large insurance underwriting company, providing insurance for airlines, aircraft products, and aviation-related risks. In the period covered by the indictment, USAU also managed claims and accounting for a consortium of fourteen large insurers known as the United States Aircraft Insurance Group (USAIG). Brennan was the President, Chairman, and Chief Executive Officer of USAU.
The Aviation Insurance Industry
Because of the magnitude of the potential liability flowing from plane crashes, insurers known as "coinsurers" or "concurrent insurers" regularly combine in a "vertical placement" to provide coverage and minimize individual exposure. To further reduce exposure of individual insurers, the coinsurers may also "reinsure" portions of their risk arising from any individual insurance contract. The reinsurers may, in turn, contract to further spread the risk with other reinsurers, known as "retrocessionaires."
These coinsurers then select a "lead" insurer which, in exchange for a fee, manages claims and litigation arising under the policies. No matter how dispersed the risk, the coinsurers, reinsurers, and retrocessionaires rely on the lead insurer to manage claims arising from the insured. The indictment alleges that a lead insurer owes a fiduciary duty both to the insured and to the other insurers.
Facts Giving Rise to the Indictment
USAIG and six other coinsurers insured USAir. USAU acted as lead insurer for all six coinsurers of USAir's risk. As underwriting manager for USAIG, USAU underwrote USAIG's 29% share of USAir's risk for PSA 1771. However, it reinsured the entire risk, and consequently USAIG had no exposure for any damages imposed on USAir. USAIG also insured Ogden-Allied, but USAU only reinsured 25% of USAIG's losses up to $ 7.5 million on the policy. Losses in excess of that amount were covered by catastrophic excess reinsurance.
According to the indictment, officials of USAir expressed concern about a possible conflict of interest resulting from USAU's control of litigation on behalf of both USAir and Ogden-Allied. The indictment alleges that USAU assured USAir that the liability would be fairly apportioned but that USAU never disclosed to USAir, the coinsurers, reinsurers, or retrocessionaires that it had a direct financial stake in allocating responsibility to USAir in preference to Ogden-Allied.
Many of the lawsuits arising from the crash were settled prior to the trial. Trial as to the remaining parties began on May 31, 1989. The indictment alleges that, after the close of evidence but before a jury verdict was returned, USAU and Brennan, in order to perpetrate the fraud, settled the case and assumed control of the allocation of liability between USAir and Ogden-Allied. Subsequently, USAU and Brennan allocated 100% of the liability to USAir. It is further alleged that the defendants failed to disclose to the coinsurers material facts bearing on the liability of Ogden-Allied for the crash and made affirmative misrepresentations concerning USAir's and Ogden-Allied's relative exposure to damages. When USAir questioned this allocation, the defendants allegedly made further misrepresentations and material omissions intended to mislead USAir as to the extent of Ogden-Allied's trial exposure, the likelihood that the jury verdict would have been returned against USAir alone, and the likelihood of getting Ogden-Allied to pay any portion of the claims.
The indictment alleges that between 1987 and June 1992, the defendants, "together with others known and unknown to the grand jury," knowingly and willfully devised a scheme to defraud USAir and certain of the concurrent insurers, reinsurers and retrocessionaires by means of false and fraudulent pretenses, representations, promises, and the concealment of material facts in order to obtain money and property. In furtherance of this scheme, the defendants allegedly sent and received mail which traveled through the Eastern District of New York. The superseding indictment lists forty-three separate mailings, identified by approximate date of mailing, sender, recipient, and type. Each of these mailings constitutes a separate count of the indictment.
Facts Relating to Defendants' Claim of Privilege
During the investigation of this matter, the government was also looking into USAU's management of litigation arising out of another airline crash. The probe led the FBI to interview Robert Alpert, a former employee of USAU. Alpert began working for USAU in 1973 as a claims attorney. When he left in 1989, and during the period covered by the indictment, he was Director of Claims. The parties agree that Alpert managed the USAir litigation as well as the other litigation under investigation, but they dispute the extent of his responsibility, involvement, and his actual role.
In a November 18, 1992
interview with Special Agent Peter Murray of the FBI's field office in Washington D.C., Alpert informed Murray that USAU had asserted the attorney/client privilege.
Alpert further stated that he did not feel it was a valid claim of privilege but that the issue needed to be resolved before he could testify. Alpert then proceeded to give Murray an account of his handling of the PSA matter among other things.
For reasons not revealed by any party, Alpert never testified in Virginia. Murray instead phoned Special Agent David Edwards in the Melville, New York office and referred the investigation to him. Edwards contacted Alpert and scheduled an interview with him on February 5, 1993. At this meeting, Alpert notified Edwards of USAU's claims of attorney/client privilege and reiterated his belief that he had not acted as an attorney. The government characterizes this interview and others as guarded, abstract, and hypothetical to avoid the breach of any privilege.
Edwards and Sean O'Shea, an Assistant United States Attorney for the Eastern District of New York, thereafter interviewed Alpert on several occasions with respect to USAir and the other airline disaster under investigation without informing USAU. As a result of these meetings, the government states it became convinced that (i) Alpert did not act as an attorney with respect to USAU and (ii) even if he had, the communications fell within the crime-fraud exception.
On February 9, 1993, the government interviewed one of Alpert's subordinates, David Zoffer, regarding substantially the same matters. Zoffer is also an attorney. However, since the parties' focus is on Alpert, Alpert's contacts with the FBI will control this analysis except where noted.
At some point in February, the government is said to have approached USAU and asked the company to waive any privilege with respect to Alpert's testimony. USAU refused. On February 12, 1993, the government served Alpert with a subpoena to testify before a grand jury.
By letter dated February 17, 1993, Alpert advised USAU and Brennan that he had been subpoenaed and that he anticipated questions about USAir and the other matter. USAU instructed Alpert to claim the attorney/client privilege. In the meantime, the government continued to meet with Alpert.
On the same day that the government subpoenaed Alpert, it served a subpoena duces tecum on General Re, USAU's parent company. The subpoena was reissued on March 27, 1993, to narrow its scope. USAU produced documents on March 27 and April 21 in response to these subpoenas but withheld others claiming attorney/client and attorney work-product privilege on its own behalf and on behalf of Ogden-Allied.
On February 16 and 23, Judge Platt issued decisions under seal with respect to Alpert's testimony. The contents of the decisions were not disclosed to USAU or the other airline whose representatives appeared before Judge Platt. The day after the order was entered, USAU and the other airline requested a stay pending an appeal of the order. The same day, the government advised the court and defendants that the stay was moot for reasons that the government would only reveal under seal at the court's request. Judge Platt issued a memorandum and order that day that, even if the stay were not moot, there would be no basis for granting it. USAU inferred that the government had already elicited the desired testimony and discontinued its appeal.
The government interviewed Alpert on at least five occasions between March and June 1994. By letters dated May 31, June 27, and August 26, Zornow provided the government with a privilege log of approximately 94 documents withheld by USAU, all of which related to the other matter and not to USAir. On August 17, 1994, Ogden-Allied formally waived its attorney/client privilege, and USAU released documents it withheld on behalf of Ogden-Allied and continued to withhold its own documents.
Alpert's grand jury testimony took place on September 21, 1994. He was interviewed four more times between November 21, 1994, and April 11, 1995. Although defendants knew that Alpert had some contact with the government, they maintain that, until the FBI turned over its notes on August 22, 1995, they knew of no contact before the grand jury subpoena was issued, were unaware of the extensive contact throughout the period from February 1993 through April 1995, and believed that all communications were limited to the other crash, not USAir.
The defendants jointly move to dismiss the indictment and the superseding indictment on the ground that they are based on the theory that a fiduciary duty existed between USAU and its insureds, coinsurers, reinsurers, and retrocessionaires which as a matter of law does not exist. If such a duty is found to exist defendants contend that the prosecution is pre-empted by the McCarran-Ferguson Act, that the prosecution is barred by the applicable statute of limitations, that the indictments fail to allege conduct upon which a mail fraud prosecution may be maintained, and that they were obtained in violation of the attorney/client privilege. Each of these motions is considered below.
The Existence of a Fiduciary Duty
Both the original and superseding indictments allege in nearly identical language that "the 'lead insurer' owes a fiduciary duty of loyalty to other insurers involved in a vertical placement, the coinsurers, the retrocessionaires and its insured." Indictment at P 6; see also Superseding Indictment at P 6. The indictment contemplates four possible fiduciary relationships: (i) that between USAU and its insureds, (ii) that between USAU and its concurrent insurers, (iii) that between USAU and its own reinsurers and retrocessionaires (the "primary reinsurers"), and (iv) that between USAU and its concurrent insurers' reinsurers and retrocessionaires (the "secondary reinsurers"). Defendants maintain that, because USAU owed none of these entities or groups a fiduciary duty, the indictment is insufficient and must be dismissed.
The government and the defendants have assumed without discussion that state law, rather than federal law, controls the disposition of this issue. The parties have further assumed that the relevant state is New York. Where a defendant in a federal mail fraud prosecution has disputed the existence of a fiduciary duty, the Second Circuit has resolved the dispute by applying federal law, drawing however on the law of various states and the common law.
United States v. Margiotta, 688 F.2d 108, 122 (2d Cir. 1982); see also United States v. Chestman, 947 F.2d 551, 568 (2d Cir. 1991).
A complication in Margiotta, also present in this case, is whether the use of a federal fiduciary standard offends principles of federalism. In Margiotta, a potential federalism conflict emerged because the federal prosecution sought to hold a state republican party chairman, who did not hold public office, accountable for his conduct as a "de facto public leader." Margiotta, 688 F.2d at 123. The Margiotta court recognized that
theoretically, the application of the federal mail fraud statute to state and local politicians raises federalism concerns. In fact, Margiotta has argued that if New York state does not require individuals who are not public officeholders to act in a disinterested manner, a federal court's application of such a requirement constitutes an improper intrusion ...