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The 7th U.S. Circuit Court of Appeals has held that the fraud element in the federal mail- and wire-fraud statutes, 18 U.S.C. 1341, 1343, is satisfied where a private contractor misrepresented itself as a minority- or woman-owned and -operated firm, but otherwise fully performed the government contract it obtained through the misrepresentation. James Duff, a white Chicago businessman, pleaded guilty to an indictment charging, among other things, mail and wire fraud relating to the obtaining of more than $100 million of contracts (or subcontracts of contracts) from the city of Chicago by the misrepresentation of one firm he controlled as owned and operated by a member of a minority group and misrepresentation of another firm he controlled as owned and operated by a woman. The plea permitted Duff to challenge the sufficiency of the indictment on the ground that it failed to state an offense because the contracts at issue were fully performed and consequently the city lost no money. With two exceptions, other involved defendants either pleaded guilty or were found guilty after trial. Convictions not precluded by ‘McNally’ or ‘Cleveland’ On appeal, the defendants argued that the city’s only loss was of an intangible right or was regulatory in nature, and that therefore their convictions were precluded by McNally v. U.S., 483 U.S. 350 (1987), and Cleveland v. U.S., 531 U.S. 12 (2000). The argument failed. U.S. v. Leahy, 464 F.3d 773 (7th Cir. 2006). In McNally, the Supreme Court held that Section 1341, as it then existed, did not cover a scheme to deprive a governmental entity of an asserted intangible right to honest and impartial governmental service. The alleged scheme involved the selection of an agency to arrange insurance for the Commonwealth of Kentucky, on the understanding that portions of commissions received by the agency from the commonwealth would be shared with agencies designated by one of the defendants, including one agency in which that defendant had an ownership interest. The court commented that “there was no charge and the jury was not required to find that the Commonwealth itself was defrauded of any money or property. It was not charged that in the absence of the alleged scheme the Commonwealth would have paid a lower premium or secured better insurance.” 483 U.S. at 360. Thereafter, Congress amended the criminal code to provide that “the term ‘scheme or artifice to defraud’ includes a scheme or artifice to deprive another of the intangible right to honest services.” 18 U.S.C. 1346, added by Pub L. No. 100-690, § 7603(a), 102 Stat. 4508 (1988). Plainly, the amendment did not cover the conduct in Leahy. In Cleveland, the alleged fraud was in an application for a state video poker license. The court held that “[s]tate and municipal licenses in general, and Louisiana’s video poker licenses in particular . . . do not rank as ‘property,’ for purposes of section 1341, in the hands of the official licensor.” 531 U.S. at 15. The Leahy defendants argued that, like Kentucky in McNally, Chicago obtained the services it bargained for, and lost no money; and that Chicago’s interest in the identity of the recipients of the money it paid was, like Louisiana’s interest in Cleveland, merely a regulatory or intangible interest, not a property interest. The 7th Circuit distinguished Cleveland on the ground that the alleged mail fraud there resulted in the receipt of a license, whereas for the Leahy defendants, “[t]he object was money, plain and simple, taken under false pretenses from the city in its role as a purchaser of services.” 464 F.3d at 788. In McNally, however, the object-and what was received- also was money. A possible distinction between the McNally facts and the Leahy facts is that Chicago was purchasing more than just performance of its contracts: it was also purchasing the additional benefit of strengthened development of contracting firms owned and operated by members of minority groups or by women. Arguably, the loss of that benefit was a loss to Chicago as a purchaser of services. As a purchaser, Chicago would benefit in the future from increased competition provided by stronger suppliers owned and operated by members of minority groups or women. Chicago did not receive all that it had bargained for. The Leahy defendants knew that Chicago was not obtaining all that it had bargained for when the city established the requirements for participation in its contracting programs. Chicago’s demand for the benefits that were not delivered was not in doubt, and was not articulated only after the fact. Indeed, it was the defendants’ awareness of Chicago’s explicit demand and their desire to obtain contracts without satisfying that demand that led to the fraud. The loss to the city of Chicago arguably is distinguishable from the loss to Kentucky in McNally. The honest services of Kentucky’s employees were not something the private individuals were to provide to the commonwealth: Honest services were not expected to be an additional benefit to the commonwealth from doing business with the private parties. Corrupting those acting for the commonwealth was not acceptable conduct, but it did not deprive the commonwealth of a benefit it was expecting from the particular contract with its insurance agent. It also is arguable, however, that Chicago’s interest in strengthening firms owned and operated by minority group members or by women was predominantly governmental in nature: that Chicago was seeking principally to foster development of a community in which previously disadvantaged groups could participate fully, and that any benefit from increased competition to Chicago as a contractor was incidental to that larger purpose. On this analysis, Chicago’s interest in Leahy is indistinguishable from Kentucky’s in McNally. The 7th Circuit held that “here the fraud was committed against Chicago as regulator and also against the city as property holder.” Id. That was true of McNally as well. In each case, the governmental entity engaged in a commercial transaction from which the defendant obtained money by fraud. The 7th Circuit’s unholding of the mail fraud conviction reflects the kind of approach to Section 1341 that led to coverage of intangible rights before McNally. Court rejects defendants’ reliance on U.S. v. Ashman U.S. v. Ashman, 979 F.2d 469, 479 (7th Cir. 1992), held that where, under the rules of the Chicago Board of Trade, the price of a commodity had reached its upper or lower limit for the day, and consequently there could be no difference between the price in an “open-outcry” trade on the floor and the price in an arranged private trade, a customer’s interest in obtaining a price by open outcry was not a property interest for purposes of the anti-fraud statutes. The Leahy court rejected the defendants’ invocation of Ashman. Id. In Ashman, there was no reason to believe that the customers had any interest in an open-outcry price: it could not differ from the price set in a private trade. Therefore, the customers suffered no loss from the private trades. In Leahy, however, it was clear from the outset that Chicago wanted something more than contractual performances at the agreed prices-and the defendants knowingly failed to provide that something more. Court rejects defendants’ reliance on ‘U.S. v. Waters’ Finally, the 7th Circuit rejected the defendants’ reliance on U.S. v. Walters, 997 F.2d 1219 (7th Cir. 1993). There, Walters, a sports agent, signed contracts to represent college football players in future negotiations with National Football League teams. Because the players were still eligible for intercollegiate games, the contracts violated National Collegiate Athletic Association (NCAA) rules. The players misrepresented their contract status on forms they submitted to their universities, which mailed the forms to the NCAA. The Walters court expressed doubt as to whether the mailings were sufficiently integral to the scheme to satisfy section 1341. The court’s primary holding, however, was that Section 1341 was not violated because Walters received nothing from the supposed victims of the scheme-the universities and the NCAA. Rather, he would receive money only as commissions if he succeeded in negotiating future contracts for the players with National Football League teams. The government’s theory was that the universities were defrauded of the athletic scholarship money they provided the athletes. Section 1341, however, requires that the violator obtain money or property. The court held it dispositive that Walters neither obtained nor tried to obtain money or property from any supposed victim. To avoid giving Section 1341 excessive scope, it was necessary that it be limited to fraudulent schemes in which the defendant seeks to obtain money or property from the victim. 997 F.2d at 1224. Per U.S. Circuit Judge Frank H. Easterbrook, the Walters court further opined that it would be undesirable to permit Section 1341 to be used to “make criminals of the cheaters” whose conduct would erode cartels. Id. (noting that “[m]any scholars understand the NCAA as a cartel.”). The Leahy defendants, however, were unlike Walters because they did obtain money from the victim, the city of Chicago; and their conduct was not arguably benign from an antitrust perspective. Richard Cooper is a partner at Williams & Connolly in Washington. He can be reached via e-mail at [email protected].

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