Duff v. United States - Opposition

No. 06-1347

In the Supreme Court of the United States

JAMES M. DUFF, ET AL., PETITIONERS

v.

UNITED STATES OF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE SEVENTH CIRCUIT

BRIEF FOR THE UNITED STATES IN OPPOSITION

PAUL D. CLEMENT
Solicitor General
Counsel of Record
ALICE S. FISHER
Assistant Attorney General
DANIEL S. GOODMAN
Attorney
Department of Justice
Washington, D.C. 20530-0001
(202) 514-2217

QUESTIONS PRESENTED

1. Whether petitioners violated the federal mail- fraud statute, 18 U.S.C. 1341, when they fraudulently procured money by misrepresenting their eligibility to participate in the City of Chicago's affirmative action contracting program.

2. Whether the court of appeals properly accorded a presumption of reasonableness to the sentence im posed by the district court, which was within the applic able range under the Sentencing Guidelines.

3. Whether the courts below properly applied the Sentencing Guidelines in determining that the offenses in this case resulted in a "loss" to the City.

In the Supreme Court of the United States

No. 06-1347

JAMES M. DUFF, ET AL., PETITIONERS

v.

UNITED STATES OF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE SEVENTH CIRCUIT

BRIEF FOR THE UNITED STATES IN OPPOSITION

OPINIONS BELOW

The opinion of the court of appeals (Pet. App. B1-B55) is reported at 464 F.3d 773. The opinion of the district court denying petitioners' motion to dismiss the indictment (Pet. App. H4-H15) is reported at 371 F. Supp. 2d 959. The opinion of the district court on sentencing of petitioner Duff (Pet. App. D24-D36) is unreported.

JURISDICTION

The judgment of the court of appeals was entered on October 4, 2006. A petition for rehearing was denied on January 8, 2007 (Pet. App. A1-A2). The petition for a writ of certiorari was filed on April 6, 2007. The juris diction of this Court is invoked under 28 U.S.C. 1254(1).

STATEMENT

Petitioners Duff and Dolan pleaded guilty to, inter alia, mail fraud, in violation of 18 U.S.C. 1341. Pet. App. B18-B19, D1-D2. Duff was sentenced to 118 months of imprisonment and was ordered to pay restitution in the amount of $12,026,582.02. Id. at B19, D3, D9. Dolan was sentenced to 21 months of imprisonment. Id. at B19. Petitioner Stratton was found guilty by a jury of, inter alia, mail fraud. Id. at B18-B19. He was sentenced to 70 months of imprisonment and was ordered to pay $7,370,739 in restitution. Id. at B19. The court of ap peals affirmed petitioners' convictions and sentences. Id. at B1-B55.

1. Petitioners and several other defendants engaged in "successful schemes to cheat the City of Chicago out of funds slotted for minority- and women-owned busi nesses and to swindle various workers compensation insurance providers out of proper premiums." Pet. App. B1. In order to participate in the City's women-owned business enterprise (WBE) program, Duff installed his mother, Patricia Green Duff, as the sole shareholder of Windy City Maintenance (WCM), even though "she had no real involvement with the business." Id. at B4. For many years, corporate officers of WCM, including Dolan, submitted renewal applications for the program "that reiterated the false description of [Patricia] Green Duff's role" in the company. Id. at B5-B6. As a result, WCM was able to obtain WBE certification throughout the 1990s, thereby obtaining City contracts that it could not otherwise have received. Id. at B6. WCM received $37,512,279 from those contracts. Ibid.

Duff employed a similar scheme to obtain minor ity-owned business enterprise (MBE) certifications for another company that he controlled, Remedial Environ mental Manpower (Remedial). Pet. App. B4-B5. Duff established Stratton, an African-American male, as the nominal majority owner of Remedial. Ibid. After the City denied Remedial's initial request for MBE certifi cation, the company "submitted an entirely new applica tion that reported Stratton was the sole owner of the business and that removed all of the troubling refer ences to Duff and his companies." Id. at B8. The City granted that application. Ibid. After becoming a City- certified MBE company, Remedial obtained approxi mately $74,849,310 in contracts and subcontracts through the City's MBE program. Ibid.1

2. In a 33-count indictment filed in 2003, petitioners and several co-defendants were charged with violations of the federal racketeering, mail-fraud, wire-fraud, money-laundering, and tax statutes. Pet. App. B18-B19. Petitioners (along with defendant Patricia Green Duff) moved to dismiss the mail-fraud and money-laundering charges as they pertained to the WBE and MBE sche mes. Id. at H4-H6. The district court denied that mo tion. Id. at H4-H15.

The mail-fraud statute establishes criminal penalties for any person who uses the mails to effectuate a "scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, rep resentations, or promises." 18 U.S.C. 1341. Relying on McNally v. United States, 483 U.S. 350 (1987), petition ers contended that the City's interest in the WBE and MBE programs was "purely regulatory" and could not be deemed "property" within the meaning of Sec- tion 1341. Pet. App. H7. The district court rejected that argument. The court explained that, whereas "no mon eys of the state were involved" in McNally or in the sub sequent cases on which petitioners relied, petitioners were accused of "falsely representing the identity of owners and management in Duff family businesses" and thereby "causing over a hundred million dollars in City money to go to businesses that were neither MBE's or WBE's." Id. at H7, H9.2

3. Duff and Dolan pleaded guilty to all counts against them. Pet. App. B19. Four other defendants, including Stratton, proceeded to trial. Ibid. The jury returned guilty verdicts as to all defendants except for Starling Alexander, a Remedial supervisor "who was only tangentially involved in the scheme." Ibid.

In determining Duff's sentence, the district court took into account the amount of the "loss" to the City of Chicago that resulted from WCM's fraudulent participa tion in the WBE program. See Pet. App. D27-D29. The government contended that the amount of the loss was $112,406,850 (the total monies received by the company under the relevant contracts), while Duff "contended that his company performed the work under the contract and that therefore there was no loss at all." Id. at D27. The district court adopted an intermediate position, holding that the relevant "loss" was the company's "profit on the contracts" and "calculat[ing] the profit as $10,933,000." Id. at D28, D29.

4. The court of appeals affirmed petitioners' convic tions and sentences. Pet. App. B1-B55.

a. As in the district court, petitioners contended on appeal that their conduct was not encompassed by the mail-fraud statute because "the only loss Chicago suf fered was to its regulatory interests." Pet. App. B21. The court of appeals rejected that contention, explaining that petitioners had "hatched and executed a plan to obtain fraudulently over $100 million in contracts and subcontracts from the city of Chicago by lying about the [WCM] and Remedial ownership structure." Id. at B23. The court found that petitioners' scheme did not simply deprive the City of "intangible" rights, but rather "pre cisely and directly targeted Chicago's coffers," and was thus "committed both against Chicago as regulator and also against the city as property holder." Id. at B25; see ibid. (explaining that the object of petitioners' fraudu lent scheme "was money, plain and simple, taken under false pretenses from the city in its role as a purchaser of services").

The court of appeals further explained that, although the City of Chicago received the cleaning and janitorial services for which it had contracted, the City "com pletely lost the other type of services for which it was paying the contractors and the Duff companies-ser vices performed by an MBE or an WBE precisely be cause the company is a qualified MBE or WBE." Pet. App. B26. The court noted in that regard that "Chicago was aware that the services rendered by the MBEs or WBEs would not be the most efficient or the lowest- priced possible," and that the City "was willing to pay these premiums" in order to encourage the development of such enterprises. Id. at B27 n.3. For that reason, the court explained, "an efficient, established business, given the advantage of MBE/WBE status, would earn more than it would normally receive under a truly open bidding system, in which it would compete against simi larly established companies with the same experience and efficiencies of scale." Ibid.

b. The court of appeals held that the district court had properly considered the "loss" to the City in calcu lating Duff's sentence, and it rejected Duff's contention that the amount of the relevant loss was zero. Pet. App. B29-B31. The court concluded that, pursuant to former Sentencing Guidelines § 2F1.1, comment. (n. 8(d)) (1998), which governed wrongful acquisition of gov ernment benefits, the district court should have used the full amount of payments received rather than the com pany's profit as the amount of that loss. Pet. App. B30- B31. The court declined to order a remand on that ground, however, both because the government had not cross-appealed and because use of the higher figure would not affect Duff's sentence. Id. at B31.

c. The court of appeals also rejected Duff's conten tion that his sentence was unreasonable. Pet. App. B36- B37. Because the sentence was within the range estab lished by the Sentencing Guidelines, the court of appeals treated that sentence as "presumptively reasonable." Id. at B36. The court concluded that the district court had "adequately explained the reasons for its sentence," ibid., and had provided "a thoughtful and meaningful analysis regarding why Duff's crimes merited 118 months of imprisonment," id. at B37.

ARGUMENT

1. Petitioners contend (Pet. 6-20) that the conduct in which they engaged did not violate the mail-fraud stat ute, 18 U.S.C. 1341, because it did not deprive Chicago of "money or property." That contention lacks merit and does not warrant this Court's review.

a. Contrary to petitioners' contention (Pet. 8-11), the court of appeals' ruling in this case is consistent with this Court's decisions in McNally v. United States, 483 U.S. 350 (1987), and Cleveland v. United States, 531 U.S. 12 (2000). In McNally, the Court rejected the "intangi ble rights" theory of mail-fraud prosecution, holding that the mail-fraud statute in its then-existing form reached only schemes that seek to deprive victims of money or property. McNally, 483 U.S. at 356, 358-359. The Court stated in McNally that Congress "must speak more clearly than it has" in order to criminalize a broader range of fraudulent conduct. Id. at 360.3

In Cleveland, the defendants were charged with us ing false statements to obtain video poker licenses from the State of Louisiana. See 531 U.S. at 15. The Court held that the defendants' conduct was not covered by Section 1341. Id. at 20-27. The Court acknowledged that "video poker licensees may have property interests in their licenses," but found it dispositive that "the li cense is not property in the hands of the State." Id. at 25. The Court "conclude[d] that § 1341 requires the ob ject of the fraud to be 'property' in the victim's hands and that a Louisiana video poker license in the State's hands is not 'property' under § 1341." Id. at 26-27.

Petitioners argue that this case is comparable to McNally and Cleveland because the effect of their con duct was "to deprive the City of its regulatory interest in promoting its MBE/WBE set-aside program through the spending of its funds to promote that interest." Pet. 9. Yet the very phrasing of that claim shows why the court of appeals rejected it. See Pet. App. B23-B25. Petitioners successfully defrauded the city "of its funds" (Pet. 9) rather than of a regulatory interest (such as the licenses at issue in Cleveland) not amounting to a prop erty right. As the court of appeals correctly held, peti tioners' scheme fell within the mail-fraud statute be cause they fraudulently obtained "money, plain and sim ple," using false pretenses to obtain funds "from the city in its role as a purchaser of services." Pet. App. B25.

Petitioners further contend (Pet. 8, 10) that, because their companies performed the relevant services as specified in the contracts, the City suffered no "pecuni ary loss" or "economic harm." As the court of appeals recognized, however, the City did not in fact receive the benefit of its bargain because petitioners' misrepresen tations frustrated the achievement of one of the City's purposes in spending the money-i.e., to foster the de velopment of minority- and women-owned businesses. See Pet. App. B26, B27 n.3. The City presumably could have procured the same services more cheaply had it not wished to encourage the growth of minority- and women-owned businesses, and it therefore did not re ceive everything it paid for when petitioners fraudu lently diverted the City's payments to themselves. See ibid. The City was therefore defrauded of its money or property.4

b. Petitioners contend (Pet. 12-20) that a circuit con flict exists on the question whether the City's "right to control [its] spending" is a "property" interest for pur poses of the mail-fraud statute. The cases on which peti tioners rely are distinguishable, however. Unlike the instant prosecution, none of those cases involved fraud directed at an MBE, WBE, or similar program, and none involved a scheme whose purpose and effect was to divert the victim's funds to expenditures that did not fully accomplish the objectives of the relevant spending program.

In United States v. Mittlestaedt, 31 F.3d 1208 (2d Cir. 1994), cert. denied, 513 U.S. 1084 (1995) (see Pet. 12-13), a consultant to two local communities concealed his interest in real estate projects that he influenced local boards to favor. The court of appeals held that the consultant's failure to disclose his interest did not con stitute mail fraud "unless the omission can or does result in some tangible harm." Id. at 1217. Because the in structions given at trial "effectively permitted the jury to convict [the defendant] for nothing other than a breach of fiduciary duty," id. at 1218, the court of ap peals reversed. Here, in contrast, petitioners' deception harmed the City financially because, "[a]s the govern ment clearly stated at oral argument, Chicago was aware that the services rendered by the MBEs or WBEs would not be * * * the lowest-priced possible," but the City was willing to pay a premium to help build minority- and women-owned businesses. Pet. App. B27 n.3.

The government's allegations that Chicago was fraudulently induced to make expenditures that did not fully serve the City's objectives similarly distinguishes the present case from United States v. Evans, 844 F.2d 36 (2d Cir. 1988) (see Pet. 13-14). In that case, Evans was charged with scheming to deceive the government about the true end-users of arms to be purchased by foreign governments. The court concluded that the gov ernment's interest in "prohibiting a particular use of a commodity that the government does not use or possess [i.e., the arms sold to and owned by foreign countries] ordinarily does not create a property right." Id. at 42. Here, in contrast, the government did not seek to im pose restraints on the resale of a commodity it had sold; rather, the mail-fraud statute was applied to a scheme to defraud the City of the benefit of its bargain.

In United States v. Regent Office Supply Co., 421 F.2d 1174 (2d Cir. 1970) (see Pet. 13), the defendants engaged in aggressive sales pitches to private custom ers. The court reversed the defendants' mail-fraud con victions because the defendants' "agents did not attempt to deceive their prospective customers with respect to the bargain they were offering." Id. at 1182. Here, by contrast, petitioners deceived the City into believing that its contractual payments would serve to foster minority- and women-owned businesses-an objective for which the City was willing to pay a premium.

The Third Circuit's decision in United States v. Zauber, 857 F.2d 137 (1988), cert. denied, 489 U.S. 1066 (1989) (see Pet. 14), is also inapposite. The defendants in Zauber were convicted of pre-McNally mail- and wire-fraud counts that charged them with depriving a union pension fund of the right to honest services by its employees. Id. at 143. Applying this Court's interven ing McNally decision, the Third Circuit said that it would "not strain to interpret a defective indictment as implicitly alleging that the kickback scheme's purpose was to deprive the pension fund beneficiaries of money." Ibid. In contrast, the mail- and wire-fraud counts in the indictment in the present case did allege that petitioners and others engaged in a scheme to obtain money, specifi cally "to obtain fraudulently over $100 million in con tracts and subcontracts." Pet. App. B23.

Petitioners' reliance (Pet. 14-15) on United States v. Bruchhausen, 977 F.2d 464 (9th Cir. 1992), is likewise misplaced. The defendants in Bruchhausen devised and executed a scheme to purchase American technology and to smuggle it to Soviet-bloc countries. See id. at 466. Although representatives of the American manufactur ers who had sold the defendants the technology testified that they would not have entered into the transactions if they had known the ultimate destination of the goods, see ibid., the court held that the manufacturers had not been defrauded of "property" within the meaning of the mail-fraud statute, see id. at 467-468. The court ex plained that, although a "manufacturer may have an interest in assuring that its products are not ultimately shipped in violation of law, * * * that interest in the dis position of goods it no longer owns is not easily charac terized as property." Id. at 468 (emphasis added). Here, by contrast, the harm to Chicago was not that the contractual payments petitioners received were subse quently disbursed in ways that the City found objection able. Rather, petitioners' scheme frustrated the full achievement of Chicago's contracting purposes by induc ing the City to pay money to companies whose participa tion in the program did not further the City's objective of fostering minority- and women-owned businesses.

2. Petitioners contend (Pet. 21-24) that the court of appeals erred in treating the sentences imposed by the district court, which were within the applicable ranges under the Sentencing Guidelines, as "presumptively rea sonable." Pet. App. B36. After the petition was filed, this Court issued its decision in Rita v. United States, 127 S. Ct. 2456 (2007). The Court in Rita held that a court of appeals may apply a presumption of reasonable ness in reviewing a within-Guidelines sentence. See id. at 2462-2468. In light of that decision, petitioners' chal lenge lacks merit and does not warrant review.

3. Petitioners contend (Pet. 24-26) that the courts below erred in concluding that petitioners' offenses caused a "loss" to the City within the meaning of former Sentencing Guidelines § 2F1.1 (1998). Petitioners ap pear to argue (see Pet. 25) that, because the "loss" Guideline is limited to crimes involving "pecuniary harm" to the victim, any impairment of the City's efforts to foster minority- and women-owned businesses would not trigger the Guideline. That argument lacks merit and does not warrant this Court's review.

Petitioners' scheme caused the City to pay more than $100 million to companies that were not eligible to re ceive the funds. The existence of a "loss" to the City is particularly apparent in light of Chicago's willingness to pay "premiums" (Pet. App. B27 n.3) in order to achieve the full range of its contracting objectives, i.e., to sup port and foster MBEs and WBEs. In any event, peti tioners do not contend that a circuit conflict exists on this question. And, to the extent that the applicability of the relevant Guideline to cases like this one requires clarification, the Sentencing Commission rather than this Court is the body primarily entrusted with that task. See Braxton v. United States, 500 U.S. 344, 347- 348 (1991).

Petitioners further contend (Pet. 26-29) that the court of appeals erred in determining, under the applica tion note covering wrongful acquisition of "government benefits," that the "loss" to the City was equal to the full amount of the contractual payments (more than $100 million) that petitioners' companies received, rather than to the profit ($10,933,000) that petitioners realized on those contracts. See Pet. App. B29-B31, D27-D29, J1. The Seventh Circuit's holding is correct and (as pe titioners acknowledge, see Pet. 26-27) is consistent with the only other court of appeals decision to address the question. See United States v. Bros. Constr. Co. of Ohio, Inc., 219 F.3d 300, 317-318 (4th Cir.), cert. denied, 531 U.S. 1037 (2000). The court of appeals' determination that the higher loss figure should have been applied, moreover, did not affect the sentence that was ulti mately imposed. See Pet. App. B31. Further review is not warranted.

CONCLUSION

The petition for a writ of certiorari should be denied.

Respectfully submitted.

PAUL D. CLEMENT
Solicitor General
ALICE S. FISHER
Assistant Attorney General
DANIEL S. GOODMAN
Attorney

AUGUST 2007

1 In another fraudulent scheme, Windy City Labor Services (Windy Labor), which was also controlled by Duff, obtained workers compensa tion insurance from a risk pool established by the State of Illinois. Pet. App. B10-B18. Duff kept Windy Labor's insurance premiums artifi cially low "by making what would turn out to be massive and long-term misrepresentations," falsely representing that a high percentage of Windy Labor's employees were "clerical" workers. Id. at B13. As a result of the "extensive scheme to hide the true nature of Windy Labor's business, the company paid approximately $1.09 million less in premiums than it should have." Id. at B18. The petition for a writ of certiorari does not challenge the application of the mail-fraud statute to that scheme.

2 Petitioners also sought dismissal of the money-laundering charges in the indictment. Petitioners argued that, because the alleged "spe cified unlawful activity" underlying those charges was mail fraud, and the charged conduct did not constitute a violation of the mail-fraud statute, the money-laundering charges could not stand. See Pet. App. H14. Because the district court rejected petitioners' challenges to the mail-fraud allegations, the court likewise denied petitioners' motion to dismiss the money-laundering counts. Ibid.

3 Shortly after this Court's decision in McNally, Congress enacted 18 U.S.C. 1346, which provides that, for purposes of the mail- and wire- fraud statutes, "the term 'scheme or artifice to defraud' includes a scheme or artifice to deprive another of the intangible right of honest services." See Cleveland, 531 U.S. at 19-20.

4 That the City was defrauded of its money or property is further confirmed by this Court's holding in Carpenter v. United States, 484 U.S. 19 (1987). There, the Court concluded that the term "property" in Section 1341 is not limited to tangible property, but also encompasses intangible property such as "confidential business information." Id. at 25. The Court also held that Section 1341 does not require proof of "a monetary loss, such as giving the information to a competitor"; rather, "it [was] sufficient that the [victim] ha[d] been deprived of its right to exclusive use of the information, for exclusivity is an important aspect of confidential business information and most private property for that matter." Id. at 26-27. It follows a fortiori that petitioners' scheme, which diverted tangible property to an ineligible recipient, thereby preventing the City from using the funds to achieve the full range of its contracting objectives, is covered by the statute.