United States v. Leonard S. Siegel and Martin B. Abrams
717 F.2d 9, 1983 U.S. App. LEXIS 24541 (1983)
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Rule of Law:
A corporate officer's breach of their fiduciary duty to disclose material information, such as the existence of a secret fund generated from unrecorded cash sales and used for non-corporate purposes, constitutes a scheme to defraud under the federal wire fraud statute.
Facts:
- Martin B. Abrams was the chairman and president of Mego International, Inc. (Mego Int'l), and Leonard S. Siegel was its secretary and an executive vice president.
- Abrams and Siegel orchestrated a scheme of unrecorded cash sales of Mego's closed-out or damaged merchandise, generating over $100,000 in cash.
- A warehouse manager, William Stuckey, conducted many of these sales at the direction of Abrams and Siegel, collected the cash, and periodically delivered it to Siegel.
- These cash sales were not recorded on Mego's books, and the funds were kept in an office safe or a bank safe deposit box.
- The indictment alleged the cash was used for non-corporate purposes, including bribing union officials for labor peace, making payoffs to buyers, and for the defendants' personal enrichment.
- Abrams and Siegel failed to disclose the existence of the secret cash fund to Mego's auditors or its stockholders.
- When a customer, Herbert Ristau, threatened to report the cash sales to the Securities and Exchange Commission (SEC), Abrams instructed an employee to give Ristau a credit to prevent him from doing so.
- When confronted by a new company president, Abrams and Siegel attempted to cover up the scheme by persuading Stuckey to lie to an internal investigator and by moving the cash fund to a new safe deposit box.
Procedural Posture:
- Leonard Siegel and Martin Abrams were indicted, along with three other co-defendants, in the United States District Court for the Southern District of New York.
- The indictment included fifteen counts of wire fraud, one count of obstructing federal investigators against Abrams, and other charges.
- Following a seven-week jury trial, the jury convicted Siegel and Abrams on all fifteen wire fraud counts and one tax count.
- The jury also convicted Abrams on the obstruction of justice count but acquitted the three other co-defendants of all charges.
- Siegel and Abrams, the appellants, appealed their convictions on the wire fraud and obstruction counts to the United States Court of Appeals for the Second Circuit, challenging the sufficiency of the evidence.
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Issue:
Does a corporate officer's participation in a scheme involving unrecorded cash sales of company assets, coupled with the non-disclosure of this material information to the company and its stockholders, constitute a scheme to defraud under the federal wire fraud statute, even if direct evidence of personal enrichment is limited?
Opinions:
Majority - Pratt, J.
Yes. A corporate officer's breach of their fiduciary duty to disclose material information to the corporation and its stockholders constitutes a scheme to defraud under the wire fraud statute. The evidence was sufficient for the jury to find that Siegel and Abrams participated in unrecorded cash sales, failed to disclose these material transactions, and breached their fiduciary duties. While direct evidence of self-enrichment was limited, the jury could justifiably infer from the secret nature of the fund and the large amount of unaccounted-for cash that the defendants used some of the proceeds for their own benefit. The harm to the stockholders is the deprivation of material information, and direct, tangible economic loss is not a required element of the crime. The court also held that Abrams' conviction for obstruction of justice under 18 U.S.C. § 1510 must be reversed because the statute did not apply where there was no ongoing or contemplated federal investigation, no particular investigator involved, and the defendant's action was solicited by a threat akin to blackmail.
Concurring-in-part-and-dissenting-in-part - Winter, J.
No. The conviction for wire fraud should be reversed because the wire fraud statute should not be interpreted to create a federal law of fiduciary obligations for corporate officers. This decision improperly federalizes state corporate law, turning simple corporate improprieties and poor record-keeping into federal crimes. There was no evidence that the defendants personally pocketed any money or that the corporation was harmed; the off-the-books transactions were trivial compared to Mego's overall sales. Allowing an inference of a scheme to defraud solely from the existence of unrecorded transactions creates an ill-defined crime, fails to provide adequate notice to corporate officers, and invites selective prosecution. The author concurs with the majority's decision to reverse Abrams' obstruction of justice conviction.
Analysis:
This case is a prominent example of the 'intangible rights' theory of wire fraud, establishing that a scheme to defraud can be based on depriving a victim of the honest and faithful services of a fiduciary. The decision expanded the scope of the wire fraud statute by holding that a breach of a state-law fiduciary duty—specifically, the duty to disclose material information—could serve as the predicate for a federal criminal conviction. It underscored that 'harm' under the statute is not limited to tangible financial loss but includes depriving shareholders of important information. The dissent's powerful critique, arguing against the federalization of corporate governance, presaged the Supreme Court's later decision in McNally v. United States (1987), which significantly curtailed the 'intangible rights' doctrine until Congress reinstated it by statute.
