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United States v. Nicolo

November 27, 2007


The opinion of the court was delivered by: David G. Larimer United States District Judge


This is a criminal action against four defendants, John Nicolo, Constance Roeder, Charles Schwab, and David Finnman, charging them with various offenses involving an alleged scheme to defraud the Town of Greece, New York ("Greece"), Eastman Kodak Company ("Kodak"), and other companies in the Western District of New York. Although the alleged scheme involved numerous acts taking place over a period of years, and cannot neatly be summarized in a sentence or two, in general it involved the payment of kickbacks by Nicolo to Schwab, Finnman and other coconspirators in return for the coconspirators' hiring Nicolo, or companies owned by Nicolo, to perform appraisals of real property owned by Kodak and other entities, mostly within Greece.

A jury trial in this case is currently scheduled to begin on March 10, 2008. On September 13, 2007, the Court heard oral argument on pretrial motions filed by Nicolo and Roeder. Finnman's motion was argued on September 20, 2007, Schwab's motion was argued on October 19. This Decision and Order constitutes my rulings on all defendants' motions.


I. Defendants' Motions to Dismiss the Honest Services Fraud Counts*fn1

A. Constitutional Challenges

Defendants Nicolo, Schwab and Finnman have moved to dismiss Counts 1-4, 7, 10-17, and 20-22, which charge that defendants acted together to defraud the taxpayers of Greece, Kodak, and other entities of their right to honest services, and to dismiss Counts 33-53, which charge Nicolo with money laundering offenses in connection with the fraud counts recited above. All of these counts will be collectively referred to as the "honest services fraud" counts.

The statute under which defendants are charged in these counts, 18 U.S.C. § 1346, provides that "[f]or the purposes of th[e] chapter [of the United States Code that prohibits, inter alia, mail fraud, 18 U.S.C. § 1341, and wire fraud, 18 U.S.C. § 1343], the term 'scheme or artifice to defraud' includes a scheme or artifice to deprive another of the intangible right of honest services."*fn2 Nicolo contends that § 1346 is unconstitutional, for a number of reasons.

To a great extent, defendants' challenges to the statute are foreclosed by the Second Circuit's decision in United States v. Rybicki, 354 F.3d 124 (2d Cir. 2003), cert. denied, 543 U.S. 809 (2004). In Rybicki, the Court of Appeals, sitting en banc, held, inter alia, that § 1346 was not unconstitutional on its face, nor was it unconstitutionally vague as applied to the facts of Rybicki, in which the defendant attorneys were alleged to have used the mails and wires to induce certain insurance adjusters, in return for payments and against the interests of the insurance companies that employed them, secretly to expedite insurance claims in favor of the attorneys' clients, and that in furtherance of this scheme, the insurance adjusters engaged in material omissions in the information that they gave to the insurance companies.

In the case at bar, defendants recognize that the Second Circuit has already ruled, adversely to them, on some of the arguments that they raise in support of their motions to dismiss the honest services fraud counts. See Nicolo's Mem. of Law (Dkt. #74-3) at 29; Schwab's Mem. of Law (Dkt. #122) at 5. Defendants also concede that "no court of appeals has definitively declared the 'honest services' statute unconstitutional." Id. They state, however, that they are nevertheless "mount[ing] constitutional challenges" to the statute ""[b]ecause the United States Supreme Court has yet to address the constitutionality of § 1346." Nicolo's Mem. of Law at 30; Schwab's Mem. of Law at 5-6.

To the extent that the Second Circuit in Rybicki has already rejected defendants' arguments concerning the constitutionality of § 1346, then, defendants raise those arguments simply to preserve their rights should the Supreme Court overrule Rybicki. Unless and until that happens, however, Rybicki remains the law in this circuit, and I deny defendants' motions to dismiss the honest services fraud counts on the grounds that § 1346 is facially "void for vagueness," see Rybicki, 354 F.3d at 129-32, 144.

I also find that § 1346 is not unconstitutionally infirm as applied to defendants in the case at bar. The Court of Appeals in Rybicki stated that "when ... the interpretation of a statute does not implicate First Amendment rights, it is assessed for vagueness only 'as applied,' i.e., 'in light of the specific facts of the case at hand and not with regard to the statute's facial validity.'" 354 F.3d at 129 (quoting United States v. Nadi, 996 F.2d 548, 550 (2d Cir.), cert. denied, 510 U.S. 933 (1993)). The court held that § 1346 was not invalid as applied in Rybicki, because the statute, "together with either section 1341 or section 1343, 'gives the person of ordinary intelligence a reasonable opportunity to know' that conduct of the type in which the defendants engaged with the specific intent to defraud ... deprived the [victim] insurance companies of the 'honest services' of their employees and is therefore prohibited by law." Id. at 132 (quoting Village of Hoffman Estates v. Flip-side, Hoffman Estates, Inc., 455 U.S. 489, 498 (1982)).

In the case at bar, defendants' vagueness challenges to § 1346 are couched largely in terms of the statute's facial invalidity. Nicolo does raise one argument, however, concerning the alleged vagueness of the statute as applied to him. Specifically, Nicolo asserts that while the indictment alleges that Nicolo participated in a scheme to defraud Kodak and the Greece taxpayers of their right to honest services, it fails to identify any fiduciary duty owed by Nicolo to those putative victims. The government responds that it is unnecessary to allege that Nicolo himself had a fiduciary duty to the victims, because Nicolo is alleged to have conspired with, and to have aided and abetted, individuals who did have fiduciary duties--which they breached--to their employers and to the public.

I agree with the government's position. A number of courts have held that fraud charges involving a breach of fiduciary duty may properly be brought against a nonfiduciary based on a conspiracy or aiding-and-abetting theory. See, e.g., United States v. Martin, 228 F.3d 1, 18 (1st Cir. 2000) (evidence of nonfiduciary defendant's willing participation in co-defendant's breach of fiduciary duty supported finding that nonfiduciary's participation in scheme to defraud fiduciary's employer of fiduciary's honest services was sufficient to maintain liability for aiding and abetting pursuant to 18 U.S.C. § 2); United States v. Kenrick, 221 F.3d 19, 32 n. 17 (1st Cir.) ("Even if [the nonfiduciary defendant] did not execute the scheme, there was sufficient evidence that he 'associated himself with the venture, participated in it as something he wished to bring about, and sought by his actions to make it succeed' to find him guilty of aiding and abetting [the fiduciary's] fraud") (quoting United States v. Colon-Munoz, 192 F.3d 210, 223 (1st Cir. 1999), cert. denied, 529 U.S.1055 (2000)), cert. denied, 531 U.S. 561 (2000); United States v. Paradies, 98 F.3d 1266, 1282 (11th Cir. 1996) (affirming conviction of non-fiduciary defendants, who paid off city council member in exchange for political influence, of aiding and abetting violation of § 1346), cert. denied, 521 U.S. 1106 (1997); United States v. Alkins, 925 F.2d 541 (2d Cir. 1991) (affirming convictions of Department of Motor Vehicles ("DMV") employees and a car dealership owner for mail fraud conspiracy, even though car dealership owner, while closely involved with the DMV employee defendants who were in a fiduciary relationship with the state, did not himself owe the state any similar duty); United States v. Mahaffy, No. 05-CR-613, 2006 WL 2224518, at *17 (E.D.N.Y. Aug. 2, 2006) ("even though the Watley defendants may not have had a duty to the Brokerage Firms or the firms' clients, and thus might not have committed the substantive [securities fraud] offense directly, it is axiomatic "that a defendant who does not directly commit a substantive offense may nevertheless be liable if the commission of the offense by a co-conspirator in furtherance of the conspiracy was reasonably foreseeable to the defendant as a consequence of their criminal agreement") (citing Cephas v. Nash, 328 F.3d 98, 101 n. 3 (2d Cir. 2003)).

Nicolo also notes that in United States v. Brown, 459 F.3d 509 (5th Cir. 2006), cert. denied, 127 S.Ct. 2249 (2007), the Fifth Circuit stated that "[i]n order that not every breach of fiduciary duty owed by an employee to an employer constitute an illegal fraud, [there must be] some detriment to the employer" to support a conviction under § 1346. Id. at 519. Nicolo argues that the indictment here fails to allege any actual harm to Kodak, or that the services provided to Kodak pursuant to the kickback scheme did not achieve Kodak's corporate objective of lowering its property tax assessments. Nicolo's Mem. of Law at 40 n. 44.

Nicolo's reliance on Brown is misplaced. In Rybicki, the Second Circuit discussed the two common types of honest services cases: those involving bribes or kickbacks, and those involving self-dealing. In bribery or kickback cases, the court explained, "a defendant who has or seeks some sort of business relationship or transaction with the victim secretly pays the victim's employee (or causes such a payment to be made) in exchange for favored treatment." 354 F.3d at 139. "In the self-dealing cases, the defendant typically causes his or her employer to do business with a corporation or other enterprise in which the defendant has a secret interest, undisclosed to the employer." Id. at 140.

The court went on to state that the two types of cases "are thus of the same general import ..., with this apparent difference: In bribery or kickback cases, the undisclosed bribery itself is sufficient to make out the crime, but in self-dealing cases, the existence of a conflict of interest alone is not sufficient to do so. ... In the self-dealing context, though not in the bribery context, the defendant's behavior must thus cause, or at least be capable of causing, some detriment--perhaps some economic or pecuniary detriment--to the employer." Id. at 141 (emphases added).

Brown is not to the contrary. In Brown, the Fifth Circuit held that "where an employer intentionally aligns the interests of the employee with a specified corporate goal, where the employee perceives his pursuit of that goal as mutually benefitting him and his employer, and where the employee's conduct is consistent with that perception of the mutual interest, such conduct is beyond the reach of the honest-services theory of fraud as it has hitherto been applied." 459 F.3d at 522. Applying that principle to the facts before it, the court held that "the scheme as alleged [in which the defendant Enron executives were accused of 'parking' the company's assets, and thereby temporarily removing them from the company's balance sheet, in order to make Enron appear more profitable than it really was] falls outside the scope of honest-services fraud." In reaching that conclusion, however, the court noted that the private and personal benefit, i.e. increased personal bonuses, that allegedly diverged from the corporate interest was itself a promise of the corporation. According to the Government, Enron itself created an incentive structure tying employee compensation to the attainment of corporate earnings targets. In other words, this case presents a situation in which the employer itself created among its employees an understanding of its interest that, however benighted that understanding, was thought to be furthered by a scheme involving a fiduciary breach; in essence, all were driven by the concern that Enron would suffer absent the scheme. Given that the only personal benefit or incentive originated with Enron itself--not from a third party as in the case of bribery or kickbacks, nor from one's own business affairs outside the fiduciary relationship as in the case of self-dealing--Enron's legitimate interests were not so clearly distinguishable from the corporate goals communicated to the Defendants (via their compensation incentives) that the Defendants should have recognized, based on the nature of our past case law, that the "employee services" taken to achieve those corporate goals constituted a criminal breach of duty to Enron.

Id. (emphasis added).

The case at bar does involve alleged kickbacks. For example, Count 1 of the indictment alleges that in return for causing Nicolo to be hired to perform real property appraisal services for Kodak and another company, Global Crossing, Finnman (who worked for both companies at different times) "received money representing kickbacks" from Nicolo and Schwab. Dkt. #70 at 15. Counts 4 and 7 allege that unindicted coconspirator Mark Camarata, an accountant in Kodak's Corporate Tax Department, received similar kickbacks. Id. at 33, 37-38, 52, 54. Given those allegations, there is no requirement that the government allege any concrete detriment to Kodak. Rybicki, 354 F.3d at 141; see also United States v. Kuznetsov, No. 05 CR 916, 2007 WL 2020110, at *19 (S.D.N.Y. July 11, 2007) ("According to Yakovlev's own testimony, the secret monies he accepted were in the nature of bribes or kickbacks. The Government was thus not required to prove that Yakovlev had intended his conduct to pose a detriment to the [victim] United Nations").

Furthermore, the indictment does allege harm to Kodak and the other victims: the victims' payment of fees for work that was never actually performed. For example, Count 7 alleges that defendants "obtained money from Kodak, ITT Industries and IBM by causing Nicolo to be paid unwarranted and unnecessary fees with respect to certain contracts Nicolo had with these companies." Dkt. #70 at 53. Count 7 further alleges that "[d]espite his hiring [by Camarata to perform certain work for Kodak], Nicolo provided essentially no services to Kodak in connection with the reduction in the real property tax assessment for Kodak Park Greece." Id. at 56.

In addition, if in fact Nicolo was paying kickbacks to Camarata in return for Camarata engineering the hiring of Nicolo and Nicolo's companies by Kodak, that in itself suggests that Kodak was paying inflated prices for Nicolo's services. In United States v. Lamoreaux, 422 F.3d 750 (8th

Cir. 2005), for example, the defendant was convicted of mail fraud under 18 U.S.C. § 1341. The evidence at trial showed that the defendant, who had been the president of a closely held corporation ("NuCare"), received kickbacks from another company ("Albers Medical") in exchange for his negotiation of certain agreements between NuCare and Albers Medical.

On appeal, the defendant argued that the evidence was insufficient to support his conviction because the government had failed to prove that the defendant intended to harm NuCare, or that his scheme actually harmed NuCare. Specifically, he asserted that the government had failed to prove intent to defraud because there was no proof that NuCare could have negotiated a better contract with Albers Medical absent the secret kickbacks. Rejecting that argument, the Eighth Circuit stated that "proof that a customer made substantial and secret kickbacks to a corporate fiduciary is sufficient to support a finding of intent to harm because actual harm may reasonably be inferred from the fact that the customer paid the fiduciary amounts to which the corporation was entitled."

In support of its holding, the Lamoreaux court cited United States v. George, 477 F.2d 508 (7th Cir. 1973), in which the defendant, a purchasing agent for the victim corporation ("Zenith"), received kickbacks from another company in exchange for Zenith's business. Rejecting the defendant's contention that Zenith was not harmed because the prices that the defendant negotiated were within Zenith's normal profit margin, the Seventh Circuit stated that the defendant's "undisclosed receipt of the kickbacks by itself warrants a finding that he intended to defraud Zenith of his honest and loyal services. His employment duty was to negotiate the best possible deal for Zenith, or at least to apprise Zenith that [the other company] would be satisfied with a lesser profit margin. He is presumed to know that he could not personally profit by any decrease in price he could negotiate ... and that any such decrease should be made available to Zenith." Id. at 513-14 (footnote omitted).

The same reasoning applies here. As the court put it in George, "[i]t is preposterous to claim" that Kodak would not have considered the kickbacks alleged here to have been material both to its decision to hire Nicolo and his companies, and to the price Kodak agreed to pay for his purported services. Id. at 513. See also United States v. Richman, 944 F.2d 323, 330 (7th Cir. 1991) ("inducement for a company to part with money based upon an implicit false premise violates the mail fraud statute when any portion of the money the company is induced to pay is fraudulently given to the company's own employee without the company's knowledge and/or consent").

In addition, although Kodak may have had a general desire to get its tax assessments reduced, that does not mean that it endorsed, or would have endorsed had it know of them, the particular means by which that was achieved in this case. Thus, in United States v. Reyes, No. CR 06-00556, 2007 WL 831808 (N.D.Cal. Mar. 16, 2007), in which the defendants were alleged to have engaged in a scheme involving backdating stock options for their own personal gain, the court, denying a motion to dismiss the honest services fraud charges, stated that

[t]o say that [the corporate victim] recognized stock options as a legitimate tool for recruiting talent is not to suggest that the company necessarily recognized any use of that tool by [defendants] Reyes and Jensen as legitimate. Without an allegation that the company in fact condoned backdating, as opposed to merely the use of stock options, the indictment cannot be construed as affirmatively recognizing that Defendants were pursuing their alleged backdating scheme in the company's best interests. In fact, the only fair construction of the indictment is that the company did not sanction the Defendants' alleged backdating scheme and that Defendants implemented the scheme for their own personal gain. After all, the indictment explicitly alleges that Reyes and Jensen concealed their scheme from the company and its directors. ... Thus, although the indictment recognizes the possibility that stock options may be employed in a legitimate fashion to promote a company's interests, it does not necessarily follow, as Defendants contend, that the indictment also therefore recognizes their alleged backdated scheme as furthering legitimate corporate purposes. 2007 WL 831808, at *5.*fn3

B. Duplicity

In addition to joining in Nicolo's and Schwab's challenges to the honest services fraud counts, see n. 1, supra, Finnman also argues that Count 1 of the indictment, which charges Finnman, Nicolo and Schwab with a conspiracy to commit honest services fraud, should be dismissed as duplicitous. The basis for this argument is Finnman's contention that Count 1 charges two separate and distinct conspiracies in a single count. Although Finnman's arguments in this regard are not always entirely clear, he appears to contend that Count 1 impermissibly charges both a conspiracy to defraud Kodak and a conspiracy to defraud Global Crossing.

To the extent that Finnman asserts that Count 1 should be dismissed on the ground that it charges multiple conspiracies, his motion is premature. "It is well-settled law that '[w]hether the evidence in a case establishes single or multiple conspiracies is a question of fact to be resolved by a properly instructed jury.'" United States v. Torres, No. S2 94 Cr. 466, 1995 WL 261531, at *2 (S.D.N.Y. May 4, 1995) (quoting United States v. Friedman, 854 F.2d 535, 561 (2d Cir. 1988), cert. denied, 490 U.S. 1004 (1989)). See also United States v. Gall, No. 3:95CR98, 1996 WL 684404, at *2 (D.Conn. Aug. 12, 1996) ("The Second Circuit has repeatedly stated that the question of whether the government has established the existence of the charged conspiracy and each defendant's membership in it or, instead, has proven several distinct conspiracies, is one of fact for a properly instructed jury") (citing cases); accord United States v. W.R. Grace, 429 F.Supp.2d 1207, 1225 (D.Mont. 2006); United States v. Melendez, No. 03-80598, 2004 WL 162937, at *4 (E.D.Mich. Jan. 20, 2004); United States v. Cisneros, 26 F.Supp.2d 24, 52 (D.D.C. 1998).

In addition, Count 1 is not duplicitous on its face. The Second Circuit has explained that "[a]n indictment is impermissibly duplicitous where: 1) it combines two or more distinct crimes into one count in contravention of Fed.R.Crim.P. 8(a)'s requirement that there be 'a separate count for each offense,' and 2) the defendant is prejudiced thereby." United States v. Sturdivant, 244 F.3d 71, 75 (2d Cir. 2001).

The fact that a single count charges several acts does not necessarily render it duplicitous, however. "To the contrary, [the Second Circuit] has long held that 'acts that could be charged as separate counts of an indictment may instead be charged in a single count if those acts could be characterized as part of a single continuing scheme.'" United States v. Olmeda, 461 F.3d 271, 281 (2d Cir. 2006) (quoting United States v. Tutino, 883 F.2d 1125, 1141 (2d Cir. 1989)). See also United States v. Salameh, 152 F.3d 88, 148 (2d Cir. 1998) (stating that defendant was properly charged "with membership in a single conspiracy with multiple criminal objectives"); United States v. Coffey, 361 F.Supp.2d 102, 110 (E.D.N.Y. 2005) ("A charge of conspiracy to commit several crimes in one count is not duplicitous because the crime is conspiracy which is one crime regardless of the diversity of its objects") (citing Frohwerk v. United States, 249 U.S. 204, 210 (1919)).

With respect to conspiracy charges, the Second Circuit has stated that [a] conspiracy indictment presents "unique issues" in the duplicity analysis because "a single agreement may encompass multiple illegal objects." In this Circuit "it is well established that [t]he allegation in a single count of a conspiracy to commit several crimes is not duplicitous, for [t]he conspiracy is the crime and that is one, however diverse its objects." United States v. Aracri, 968 F.2d 1512, 1518 (2d Cir. 1992) (quoting United States v. Murray, 618 F.2d 892, 896 (2d Cir. 1980) (additional internal quotation marks omitted). See also Braverman v. United States, 317 U.S. 49, 53 (1942) ("Whether the object of a single agreement is to commit one or many crimes, it is in either case that agreement which constitutes the conspiracy which the ...

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