United States v. Andrew George
477 F.2d 508 (1973)
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Rule of Law:
A scheme to deprive an employer of its employee's honest and faithful services through secret kickbacks constitutes a 'scheme to defraud' under the mail fraud statute, regardless of whether the employer suffered a demonstrable pecuniary loss.
Facts:
- Peter K. Yonan was a buyer for Zenith Radio Corporation, responsible for negotiating prices with cabinet suppliers.
- Zenith had a conflict-of-interest policy, which Yonan had signed, prohibiting employees from receiving any gratuities from suppliers.
- Yonan arranged for Irving H. Greensphan, president of supplier Accurate Box Corporation, to pay him kickbacks on cabinets sold to Zenith.
- To conceal the scheme, Greensphan's company paid fictitious 'commission' invoices submitted by A & G Woodworking Co., a company owned by a mutual friend, Andrew George.
- George then funneled a portion of these payments, totaling over $100,000, to Yonan.
- Accurate was the sole bidder and supplier for the specific cabinets involved in the scheme.
- Yonan never disclosed the kickback arrangement to his employer, Zenith.
- Zenith's management believed the prices charged by Accurate were fair and reasonable and was satisfied with the quality of the cabinets.
Procedural Posture:
- Peter K. Yonan, Andrew George, and Irving H. Greensphan were indicted in federal district court on multiple counts of mail fraud and aiding and abetting.
- The case was tried before a jury.
- The jury returned a verdict finding all three defendants guilty as charged.
- The defendants (appellants) appealed their convictions to the United States Court of Appeals for the Seventh Circuit.
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Issue:
Does an employee's scheme to receive undisclosed kickbacks from a supplier, thereby depriving his employer of his honest services and the opportunity to negotiate a better price, constitute a 'scheme to defraud' under the mail fraud statute, even if the employer suffered no direct financial loss and was satisfied with the supplier's product?
Opinions:
Majority - Cummings, Circuit Judge
Yes. An employee's scheme to receive undisclosed kickbacks constitutes a 'scheme to defraud' under the mail fraud statute because it deprives the employer of the employee's honest and faithful services and of material information that could have led to a better bargain. The court's reasoning is that the gravamen of the mail fraud offense is the scheme to defraud itself, not the successful completion of the fraud or proof of an actual loss by the victim. The fraud here consisted of Yonan holding himself out as a loyal employee acting in Zenith's best interests while secretly profiting from his position. This deprived Zenith of two things: first, Yonan's honest services, and second, the material knowledge that its supplier was willing to sell for substantially less (the amount of the kickback), which denied Zenith the 'chance to bargain with the facts before him.' The elaborate concealment involving a third-party conduit and fictitious invoices demonstrated the defendants' fraudulent intent.
Analysis:
This case is a landmark decision in establishing the 'honest services' fraud theory under the mail fraud statute. It significantly broadened the statute's scope beyond simple schemes of monetary or property theft. The ruling affirmed that intangible rights, such as the right of an employer to an employee's honest and loyal service, are protected by the statute. This interpretation became a powerful tool for federal prosecutors in cases of both private and public corruption where a direct financial loss to the victim was difficult to prove. While the Supreme Court later limited this doctrine in McNally v. United States, Congress responded by explicitly codifying 'the intangible right of honest services' into the mail fraud statute (18 U.S.C. § 1346).
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