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Fiduciary Issues in Federal Criminal Prosecutions

The word fiduciary derives from the Latin fidere, meaning to trust. "A fiduciary relation exists between two persons when one of them is under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relation." Restatement (Second) of Torts §874 comment a (1979). 
  • "At the heart of the fiduciary relationship lies reliance, and de facto control and dominance. The fiduciary relation exists when confidence is reposed on one side and there is resulting superiority and influence on the other." U.S. v. Kim, 184 F.Supp.2d 1006, 1010-1011 (N.D.Cal. 2002) (citations and quotation apparatus omitted).
  • "Counted among … hornbook fiduciary relations are those existing between attorney and client, executor and heir, guardian and ward, principal and agent, trustee and trust beneficiary, and senior corporate official and shareholder." U.S. v. Chestman, 947 F.2d 551, 568 (2d Cir. 1991) (citation omitted).
  • "It is a cardinal principle that an officer or director of a corporation will not be permitted to make out of his official position an undisclosed profit adverse to the corporation's interests and because of their fiduciary character will not be permitted to acquire for their own advantage interests adverse or antagonistic to the corporation." U.S. v. De La Mata, 266 F.3d 1275, 1297 (11th Cir. 2001). (Affirmed, in part, vacated and remanded in part: 2008)
  • "[A] fiduciary duty cannot be imposed unilaterally by entrusting a person with confidential information." Chestman, 947 F.2d at 567.

Here are some examples of federal criminal cases where guilt can turn on fiduciary issues.

Securities fraud

Misappropriation theory of insider trading

Under the misappropriation theory of insider trading, "a fiduciary's undisclosed, self-serving use of a principal's information to purchase or sell securities, in breach of a duty of loyalty and confidentiality, defrauds the principal of the exclusive use of that information. In lieu of premising liability on a fiduciary relationship between company insider and purchaser or seller of the company's stock, the misappropriation theory premises liability on a fiduciary-turned-trader's deception of those who entrusted him with access to confidential information." U.S. v. O'Hagan, 521 U.S. 642, 652 (1997) (holding criminal liability under § 10(b) of Securities Exchange Act may be predicated on misappropriation theory).

"A corporate insider … such as a member of a company's board of directors, may be liable for violations of Section 10(b) and Rule 10b-5 if he has breached his fiduciary duty to the corporation and its shareholders by making use of material non-public information about the company to attain a personal benefit either by trading in the company's securities himself or by providing tips to allow others to do so." U.S. S.E.C. v. Blackwell, 291 F.Supp.2d 673, 687 (S.D. Ohio 2003).

On the other hand if the inside information is received from someone to whom no fiduciary duty is owed, there is no misappropriation. The leading case is Chiarella v. U.S., 445 U.S. 222 (1980) (employee of financial printer deduced identity of takeover target and traded in its shares without making disclosure; as defendant was not a corporate insider he had no duty to disclose).

See, e.g., United States v. Kim, 184 F.Supp.2d 1006 (N.D.Cal. 2002) (duty to fellow club member who gave information "in confidence" insufficient to ground criminal liability; dismissing indictment for securities fraud and wire fraud); U.S. v. Cassese, 273 F.Supp.2d 481, 486 (S.D.N.Y. 2003) (dismissing securities fraud indictment; no fiduciary duty owed to competitor who was source of information); United States v. Chestman, 947 F.2d 551, 570-571 (2d Cir. 1991) (en banc) (duty to wife and wife's family insufficient to ground securities fraud and mail fraud convictions).

Chestman affirmed convictions for violations of Rule 14e-3(a) (trading on material nonpublic information concerning a pending tender offer) because that rule is a disclosure provision which does not require a fiduciary relationship. Id . at 557; and see 17 C.F.R. §240.14e3(a).

Failure to disclose material information

"Securities fraud can be grounded in nondisclosure where there is a fiduciary duty to disclose[,] and inadequate disclosure which arises when a public statement is made that is false or misleading or is so incomplete as to be rendered false or misleading." U.S. v. Cannistraro, 800 F.Supp. 30, 80-81 (D.N.J. 1992) (citation, footnote and quotation apparatus omitted) (holding cases denying criminal liability under Rule 10-b absent a duty to disclose did not extend to affirmative misrepresentation).

"[E]ven in the absence of any general fiduciary duty resulting from discretionary authority, we hold that [the brokers were] under a duty to disclose [50% commissions on stock sales] because the information would have been relevant to a customer's decision to purchase the stock. Accordingly, wire fraud charges …, which were premised on the existence of a duty to disclose the commissions, were proper theories of conviction for the jury's consideration." U.S. v. Szur, 289 F.3d 200, 212 (2d Cir. 2002).

In U.S. S.E.Cv. Park, 99 F.Supp.2d 889 (N.D.Ill. 2000), a broker who "advised" investors through an expensive premium Internet site did not have a duty to disclose his "scalping" (acquiring shares, touting them, and profiting by the interest thus created) just because he was an investment advisor. But "because the alleged facts may show that Defendants enjoyed a relationship of trust and confidence with their subscribers or may have assumed a duty to disclose their scalping, the SEC … properly alleged its claims based on Defendants omission." Id . at 900.

Bank fraud

Violation of a fiduciary duty is not an essential element of bank fraud. See, e.g., U.S. v. Colton, 231 F.3d 890, 904 (4th Cir. 2000). But a prosecution theory based on reckless disregard of fiduciary duties is sufficient to ground an indictment and support a conviction for bank fraud — see, e.g., U.S. v. Ely, 142 F.3d 1113, 1120-1121 (9th Cir. 1998).

For example, in U.S. v. De La Mata, 266 F.3d 1275 (11th Cir. 2001), a ring of officers and directors of a Florida bank manipulated business deals involving their bank so as to realize an undisclosed profit to themselves. They were indicted on federal charges including bank fraud, money laundering, false statements to a federally insured institution, false entries, and misapplication of bank funds. De La Mata claimed that a scheme to defraud a financial institution must be predicated upon an affirmative duty to disclose; although the court found no support for that theory, it held that even if it were so, such a duty would arise from the bankers' fiduciary duties as well as from federal laws and the bank's internal regulations. See Id . at 1297.

In Ely, the indictment alleged that the defendant directors declared dividends without regard to prudent banking practices and with reckless disregard for the effects the payment of these dividends would have " on the bank. The court held that allegation was sufficient to charge a crime under 18 U.S.C. § 1344(a), even though the statute does not refer to false representation but makes it a crime "to defraud a financial institution."

The fraud charged in Ely was the reckless disregard by fiduciaries of the property committed to their care. See Id ., 142 F.3d at 1120-1121. The court held that "[i]f the indictment charged the directors in their capacity as directors with throwing the bank's money out the window, or if the indictment charged the chairman, abetted by the directors, of ordering the cashier to turn over $2 million to him for his personal use, it could scarcely be doubted that crimes under §1344(a) were being alleged. The brazen openness with which these hypothetical handouts were made would not remove the stain of fraud. Here, the charge is of the use of a legal form, the declaration of dividends, to extract from Statebank cash that should not have been paid out. Neither the openness of the maneuver nor the legal form in which it was dressed remove the stain of fraud if in fact the fiduciaries acted in reckless disregard of the property of Statebank." Id., 142 F.3d at 1121.

Common Law Fraud, Federalized by Mail and Wire Fraud Laws

"The elements required for conviction under [18 U.S.C.] §1341 (mail fraud) and §1343 (wire fraud) are identical except for the means of communication." U.S. v. Sun-Diamond Growers, 138 F.3d 961, 973 (D.C. Cir. 1998) aff'd 526 U.S. 398 (1999) (citation omitted).

Criminal liability for mail and wire fraud can turn on the existence of a fiduciary relationship. For example, in U.S. v. Brown, 79 F.3d 1550 (11th Cir. 1996) a Florida real estate firm's agents deceived buyers about the investment value of the homes they sold them. But the Court of Appeals reversed their fraud convictions.

In Brown the court held that when there is a special relationship of trust, such as a fiduciary relationship, the trusted party must always disclose facts where nondisclosure could result in harm. Where there is a fiduciary relationship, the federal fraud statutes "are broadly interpreted and were intended by Congress to protect the careless and the naive from lupine predators." Id. at 1556

But in Brown, the defendants were not in the kind of legal relationship with its customers which required them to disclose pricing structures under every circumstance. Instead, the firm and its customers were entering into an arm's length transaction of considerable financial importance to the customer. Under federal law the firm and the defendants had no general affirmative obligation to disclose the sales price disparity between its houses and its competitors' houses. See Id. at 1556-1557.

"In the private sector context, 18 U.S.C.] §1346 [defining fraud] poses special risks. Every material act of dishonesty by an employee deprives the employer of that worker's ‘honest services,' yet not every such act is converted into a federal crime by the mere use of the mails or interstate phone system. Aware of the risk that federal criminal liability could metastasize, we held … that not every breach of a fiduciary duty works a criminal fraud. Rather, there must be a failure to disclose something which in the knowledge or contemplation of the employee poses an independent business risk to the employer. Absent reasonably foreseeable economic harm, proof that the employer simply suffered only the loss of the loyalty and fidelity of the employee is insufficient to convict." Sun-Diamond Growers, 138 F.3d at 973 (citations, footnote and quotation apparatus omitted).

"[U]nder the intangible-rights theory of federal mail or wire fraud liability, a valid indictment need only allege, and a finder of fact need only believe, that a defendant used the interstate mails or wire communications system in furtherance of a scheme to misuse his fiduciary relationship for gain at the expense of the party to whom the fiduciary duty was owed." U.S. v. Hausmann, 345 F.3d 952, 956 (7th Cir. 2003) (lawyer failed to disclose to his clients a kickback scheme with a chiropractor).


"Embezzlement is the fraudulent appropriation of property by a person to whom such property has been intrusted [sic], or into whose hands it has lawfully come. It differs from larceny in the fact that the original taking of the property was lawful, or with the consent of the owner, while in larceny the felonious intent must have existed at the time of the taking." Moore v. U.S., 160 U.S. 268, 269-270 (1895); accord e.g., U.S. v. Smith, 373 F.3d 561, 565 (4th Cir. 2004).

The funds embezzled need not have come into the embezzler's hands through a fiduciary relation with the beneficial owner of the funds. Thus in Smith, supra, the defendant was properly convicted of embezzling from the Social Security Administration for keeping his mother's continuing pension payments after she died.

One who has been entrusted with funds by a principal has a duty to hold or use them for the benefit of another, which is by its nature a fiduciary duty. "But that he had lawful possession of the funds … did not give him the right to appropriate them for his own purposes. Thus, it was his lack of legal entitlement to own the funds that renders his misappropriation of them after their deposit embezzlement." Smith at 567 (emphasis by the court).

The federal embezzlement statute, 18 U.S.C. §656, does not mention fiduciary obligations, but they are implicit in its definition of the crime. The statute provides that whoever "being an officer, director, agent or employee of, or connected in any capacity with any Federal Reserve Bank ... embezzles, abstracts, purloins or willfully misapplies any of the moneys, funds or credits of such bank … shall be fined … or imprisoned ..." Thus in U.S. v. Doane, 975 F.2d 8, 12 (1st Cir. 1992) an attorney for a bank was held to come under this statute as an agent because of his fiduciary relation with the bank.

Fiduciaries ex oficio (e.g. attorneys, guardians, ERISA plan fiduciaries)

Violations of these duties are usually prosecuted either civilly or under state criminal law, or both, although the facts of a state law violation can have an impact at federal sentencing.

There are federal examples of criminal consequences for ex oficio fiduciaries:

  1. "[A] doctor convicted of using her position to commit Medicare fraud is involved in a fiduciary relationship with her patients and the government and hence is subject to an [abuse of trust] enhancement under § 3B1.3." U.S. v. Ntshona, 156 F.3d 318, 321 (2d Cir. 1998).
  2. As noted, in U.S. v. Doane, 975 F.2d 8, 12 (1st Cir. 1992) an attorney for a bank was held to come under the embezzlement statute because of his fiduciary relation with the bank.
  3. Goodstein was "clearly a fiduciary with discretionary authority or discretionary responsibility in the administration of the DuPage [profitsharing] Plan. Viewing the evidence in the light most favorable to the government, we think a reasonable jury could have concluded that [he], acting in a fiduciary capacity, knowingly used profit sharing funds in an unauthorized manner, thereby converting the funds in violation of 18 U.S.C. section 664." U.S. v. Goodstein, 883 F.2d 1362, 1372 (7th Cir. 1989).

References to fiduciary duties are scattered throughout the federal statutes — references appear in at least 332 sections of the U.S. Code. For example: "It shall be unlawful for any officer, director, employee, agent, or other participant in the management or conduct of the affairs of a rural business investment company to engage in any act or practice, or to omit any act or practice, in breach of the fiduciary duty of the officer, director, employee, agent, or participant if, as a result of the act or practice, the rural business investment company suffers or is in imminent danger of suffering financial loss or other damage." 7 U.S.C. §2009cc-14(b). Similar provisions appear elsewhere — see, e.g., 15 U.S.C. §689n(b) (New Markets Venture Capital company). Issues concerning ERISA fiduciaries are discussed elsewhere on this panel.

The above examples are for illustration, and are not intended as an exhaustive catalogue of situations in which violation of a fiduciary duty can be an element of a federal crime.

Implications for Civil Cases Where Adverse Findings are Made on Fiduciary Issues in a Related Criminal Case

In some circumstances a finding of a fiduciary violation in a criminal case could have a preclusive effect, barring relitigation of the same issue in a subsequent civil case.

"In the case of a criminal conviction based on a jury verdict of guilty, issues which were essential to the verdict must be regarded as having been determined by the judgment." Emich Motors Corp. v. General Motors Corp., 340 U.S. 558, 569, 71 S.Ct. 408, 414 (1951) (allowing plaintiffs "to introduce the prior judgment to establish prima facie all matters of fact and law necessarily decided by the conviction and the verdict on which it was based").

Classic Example

A classic example is Resolution Trust Corp. v. Spagnoli, 811 F.Supp. 1005 (D.N.J. 1993). Spagnoli had pleaded guilty to a thirty-count indictment charging (among other crimes) violations of 18 U.S.C. §§ 215(a)(2) and 371 (conspiracy to solicit payment to bank officer). A bank employee, he had insisted on kickbacks before processing loans. His admissions of the elements of the offense were on the record. Held: the acts to which Spagnoli pled guilty also rendered him liable to the RTC for fraud and breach of fiduciary duty, and he was collaterally estopped from attempting to relitigate those issues. Id . at 1013.

See also Cook County v. Lynch, 560 F.Supp. 136 (N.D.Ill. 1982), where the defendants' RICO convictions established they knowing profited from a scheme involving county officials breaching their fiduciary duty to the county, and so by collateral estoppel the county had made a sufficient showing to force an equitable accounting by defendant for these profits and impose a constructive trust.

For a notable example of collateral estoppel from an SEC civil enforcement action barring relitigation in a subsequent private civil action of claim of breach of fiduciary duties by corporate director, see In re Ivan F. Boesky Securities Litigation, 848 F.Supp. 1119, 1126 (S.D.N.Y. 1994) (breach of former director's fiduciary duties to corporation was established by collateral estoppel by findings in earlier civil suit by SEC against former director; nature of alleged violations was clear, findings were litigated and necessary to earlier result).

But courts will parse very carefully just what has been proved in, and what was necessary to the proof of, a previous criminal action before allowing collateral estoppel or res judicata. For example, the bankruptcy court in In re Johnson, 108 B.R. 129, 133 (Bkrcy. W.D. Tex. 1989) examined the transcript and the jury instructions in an earlier criminal case charging willful misapplication of funds from a Federal Reserve bank, and found "that neither the existence nor the extent of the debtor's fiduciary duty was either addressed in the instructions to the jury or litigated by the parties. Accordingly, a finding of a violation of a fiduciary duty of the nature required by 11 U.S.C. §523(a)(4) was not one of the elements essential to the conviction of the debtor under the federal criminal statute" and it could not be relied on in the bankruptcy action.

"[T]he doctrine of collateral estoppel has limitations to assure that the precluded issue was carefully considered in the first proceeding. For the bar to apply:

  1. the issues in both proceedings must be identical,
  2. the issue in the prior proceeding must have been actually litigated and actually decided,
  3. there must have been a full and fair opportunity for litigation in the prior proceeding, and
  4. the issue previously litigated must have been necessary to support a valid and final judgment on the merits." Gelb v. Royal Globe Ins. Co., 798 F.2d 38, 44 (2d Cir. 1986) (holding conviction for fraud based on false insurance claims after arson barred litigation of claims against insurance company).

For a detailed analysis of collateral estoppel issues after a criminal conviction, see Resolution Trust Corp. v. Keating, 186 F.3d 1110, 1114- 1118 (9th Cir. 1999).

An acquittal does not form the basis for collateral estoppel against a civil claimant. "[T]he difference in the burden of proof in criminal and civil cases precludes application of the doctrine of collateral estoppel. The acquittal of the criminal charges may have only represented an adjudication that the proof was not sufficient to overcome all reasonable doubt of the guilt of the accused. As to the issues raised, it does not constitute an adjudication on the preponderance-of-the-evidence burden applicable in civil proceedings." One Lot Emerald Cut Stones and One Ring v. U.S., 409 U.S. 232, 235, 93 S.Ct. 489, 492 (1972) (citation and quotation apparatus omitted).

A recent case suggests another possible effect in a civil action of a potential fiduciary violation established in a criminal action. In April 2004, three former officers of Computer Associates, a major software company, pleaded guilty to obstruction of justice in the Eastern District of New York, admitting that they lied to investigators during an internal company investigation focused on potential securities fraud issues. The novel criminal prosecution was based on the theory that even though the defendants lied to a non-government investigator, they knew their lies would be reported to federal investigators.

The prosecution of the Computer Associates defendants gives rise to many new and interesting questions in both civil and criminal contexts. Within the topics discussed here, these include:

  1. Do the guilty pleas establish a breach of fiduciary duty on the part of the three officers for a future civil action? One theory is that as company officers they owed their company the duty of candor and disclosure of material facts, but instead lied to investigators acting on behalf of their company, in order to protect themselves.
  2. Do the guilty pleas (or the associated allocutions by the defendants) foreclose a defense to a civil securities fraud action, either against them personally or against the company?
  3. Can a company officer or director be held civilly liable for refusing to cooperate with a company investigation on Fifth Amendment grounds, on the theory that he or she must resolve a conflict of interest in the company's favor?

Case law answers to these questions are scarce. For more on the Computer Associates case, see Alex Berenson, "Case Expands Type of Lies Prosecutors Will Pursue," New York Times, May 17, 2004.

Examples of Federal Criminal Cases Where Fiduciary Issues Can Affect Sentencing

The Sentencing Guidelines

Federal sentencing is governed by the U. S. Sentencing Guidelines ("Guidelines" or "U.S.S.G."), which were established, in part, to correct the perceived abuse of leniency for white collar defendants.

The Guidelines determine a sentencing range by coordinating a criminal history score, which is usually at the lowest level for white collar defendants because they are typically first offenders, with an offense level, set by the Guidelines at a base for the type of crime and then varied by specific characteristics of the particular offense, and adjusted up or down for various factors including the defendant 's role in the offense.

The mechanistic approach the Guidelines imposed has indeed resulted in harsher treatment for white-collar defendants, and has curtailed the sentencing discretion of federal judges to the point where some have resigned in protest.

Federal sentencing practice has become a legal specialty of its own, with specialist consultants. The current edition of the United States Sentencing Guidelines is more than 1800 pages long, including 662 amendments, and there have been thousands of cases interpreting the Guidelines since they were established in 1987.

Adjustment for Abuse of Position of Trust

U.S.S.G. § 3B1.3 provides for a two -level enhancement "if the defendant abused a position of public or private trust …," provided this abuse is not "included in the base offense level or specific offense characteristic." This is the main vehicle for varying a federal sentence because of misuse of a fiduciary relationship.

Applicaiton of the Abuse of Trust Enhancement

U.S.S.G. § 3B1.3 Application Note 1 explains that a position of public or private trust is "characterized by professional or managerial discretion …" Those holding such positions "ordinarily are subject to significantly less supervision than employees whose responsibilities are primarily nondiscretionary in nature. For this enhancement to apply, the position of public or private trust must have contributed in some significant way to facilitating the commission or concealment of the offense …."

"This adjustment, for example, applies in the case of an embezzlement of a client's funds by an attorney serving as a guardian, a bank executive 's fraudulent loan scheme, or the criminal sexual abuse of a patient by a physician under the guise of an examination. This adjustment does not apply in the case of an embezzlement or theft by an ordinary bank teller or hotel clerk because such positions are not characterized by the above -described factors." Id.

"[R]ecognizing the fiduciary nature of the ‘trust' relationships set forth as examples in the commentary — i.e., attorney/client, bank executive/bank client, and doctor/patient relationships — courts have emphasized that, to qualify as a ‘position of trust' the guideline enhancement requires more than a mere showing that the victim had confidence in the defendant. Something more akin to a fiduciary function is required." U.S. v. Snook, 366 F.3d 439, 447 (7th Cir. 2004) (citations and quotation apparatus omitted).

Thus an asbestos-abatement contractor, even though he operated without close supervision, is not in the same category as the positions listed in the Application Note, see U.S. v. Technic Services, Inc ., 314 F.3d 1031, 1051 (9th Cir. 2002).

But the Second Circuit held that "a position of trust exists, even in the absence of a fiduciary relationship [such as discretionary investment authority], where a defendant-broker affirmatively establishes a trust relationship by recommending a stock to his clients." U.S. v. Santoro, 302 F.3d 76, 80 (2d Cir. 2002).

The presence of a position of public or private trust "is analyzed from the perspective of the victim of the crime." Technic Services, 314 F.3d at 1051.

"A sentencing court must carefully distinguish between those arms-length commercial relationships where trust is created by the defendant 's personality or the victim's credulity and those where a fiduciary or personal trust relationship exists with the victim, and the defendant takes advantage of the relationship to perpetrate or conceal the offense. Only the latter circumstances justify the enhancement. At bottom, § 3B1.3's critical term position of public or private trust is a term of art, appropriating some of the aspects of the legal concept of a trustee or fiduciary." U.S. v. Caplinger, 339 F.3d 226, 237 (4th Cir. 2003) (citations and quotation apparatus omitted).

For example, in U.S. v. Mullens, 65 F.3d 1560, 1566 (11th Cir. 1995), the appellate court reversed an abuse of trust enhancement in a mail and wire fraud case because it was "not aware of any evidence suggesting that Mullens had a special, close, or personal attachment, or fiduciary relationship, with any member of the country club that significantly contributed to his ability to perpetrate or conceal the ponzi scheme."

But in U.S. v. Bennett, 9 F.Supp.2d 513, 523-524 (E.D.Pa.), aff'd 161 F.3d 171 (3d Cir. 1998), the defendant 's position as a fiduciary and sole director of a non-profit organization qualified him for an abuse of trust enhancement after conviction in a charitable fraud scheme. In causing "significant misrepresentations to be made in order to secure and maintain" his organization's tax-exempt status, Bennett violated his fiduciary duties both to the public" and to the organization. And "as the government proved, defendant used these positions of trust to enable the perpetration of the crimes." Id.

In the case law on the abuse of trust enhancement, the focus is on lack of supervision of the defendant's activities. But a fiduciary relationship is sufficient to allow the enhancement to be applied.

For example, in U.S. v. Mabrook, 301 F.3d 503 (7th Cir. 2002) the defendant was convicted of mail and wire fraud for persuading his victims to invest in a business he knew was failing. An abuse of trust enhancement was held proper, among other reasons, "because he made use of the corporate form, thereby assuming a fiduciary duty with respect to his investors." Id . at 510.

"We recognize that Bracciale's plea agreement listed breach of fiduciary duty as an element of his underlying fraud offense. [But] the base offense level of six in §2F1.1 [U.S.S.G] is for various forms of fraud and is not dependent on how the defendant committed the fraud or the elements of the particular fraud crime involved. For sentencing guideline purposes, Bracciale's abuse of his position of trust or breach of his fiduciary duty is captured only by the abuse-of-trust enhancement. Thus, the district court did not err in applying the abuse-of-trust enhancement." U.S. v. Bracciale, 374 F.3d 998, 1006 (11th Cir. 2004) (finding no "doubledipping" in applying abuse of trust enhancement for fiduciary violation).

When the misuse of a fiduciary relationship is a necessary element of the offense, it should not ordinarily raise the offense level, as that would be "double-dipping." See, e.g., U.S. v. Broderson, 67 F.3d 452, 456 (2d Cir. 1995).

"If the offense involved theft or embezzlement from an employee pension or welfare benefit plan and the defendant was a fiduciary of the benefit plan, an adjustment under this section for abuse of a position of trust will apply." U.S.S.G. § 3B1.3 Application Note 4(A). "Fiduciary of the benefit plan" is defined in 29 U.S.C. 1002(21)(A).

Specific Offense Characteristics.

In the Guidelines system, each offense has a base offense level and may also have "specific offense characteristics" that may adjust the level up or down. See U.S.S.G., Chapter Two, Introductory Commentary.

For example, in the fraud Guideline, §2B1.1, the amount of loss is a specific offense characteristic, see §2B1.1(b)(1). There are 13 others listed in the fraud Guideline alone, many with complex subdivisions.

The only specific offense characteristic in the Guidelines specifically referencing a fiduciary relation is that for bribery. U.S.S.G. §3E5.1(b)(1) provides a two -level enhancement "if the defendant was a fiduciary of the benefit plan or labor organization."

In U. S. v. Glick, 142 F.3d 520 (2d Cir. 1998), Glick made illegal payments to Loeb, the trustee of a welfare fund established as a vehicle for employment-based health benefits, in return for the exclusive right to market the welfare fund's health insurance program. The fund qualified as an employee welfare benefit plan under ERISA, and Glick was convicted under 18 U.S.C. § 1854 and given the two -level enhancement at sentencing.

Glick claimed the enhancement should not have been applied to him — that "as a matter of law, he cannot qualify as a fiduciary because he performed only mundane tasks that are routinely performed by salespersons, and lacked managerial control." Id. at 527.

But, Application Note 3 to § 2E5.1 defines "fiduciary" by reference to the ERISA definition in 29 U.S.C. § 1002(21)(A), which provides, in part, that a person "is a fiduciary with respect to a plan to the extent … he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets ...." [emphasis added]. Since the money out of which he paid his commission and bribes were constructively plan assets from the time they were collected, Glick qualified.

"Glick may not have exercised fiduciary power over the entire Welfare Fund, or even with respect to the monies he forwarded to Loeb. Glick did, however, exercise fiduciary power in regard to those assets he used to pay his commissions." Id. at 528 n.9.

This specific offense characteristic is not applied in addition to the abuse of trust adjustment. See U.S.S.G. §3E5.1, Application Note 4.

Note that the post-Sarbanes-Oxley amendments to U.S.S.G. § 2B1.1 (the fraud Guideline), involving such positions as investment advisor and officer or director of publicly held company (see §2B1.1(b)(14)), do not turn on fiduciary issues. Those issues are addressed in fraud cases by applying the abuse of trust adjustment.

Impact of Blakely v. Washington

In a far-reaching decision, the U.S. Supreme Court held on June 24, 2004 that a criminal defendant has a federal constitutional right to have a jury decide on any factual circumstance the presence of which is used to impose a more severe sentence than the statute provides for without that circumstance. See Blakely v. Washington, 124 S.Ct. 2531 (2004).

Although the case dealt with a state sentencing regime, it is assumed that this decision applies to the federal sentencing guidelines also. But this has not yet been authoritatively decided.

The U.S. Supreme Court has granted certiorari, on an accelerated basis, to two cases in the coming October term, with argument scheduled on the first day of term. The Court is expected to use these cases, U.S. v. Booker, No. 04-104, and U.S. v. Fanfan, No. 04-105, to decide whether Blakely really does apply to federal sentencing, and if so whether the whole scheme is unconstitutional or whether parts can still be used. See, e.g., "Supreme Court Acts Quickly to Consider Validity of Federal Sentencing Guidelines," 75 BNA Criminal Law Reporter 516 (August 4, 2004).

But assuming Blakely applies in federal sentencing, it will require additional charging and proof (or an admission by the defendant) before factors can be considered which now are routinely used to raise sentences above the basic level assigned to the underlying crime.

Specifically, both the existence of a fiduciary duty, and its violation, would have to be charged and proved (or admitted) for this circumstances to increase the sentence beyond the base level which would have applied in its absence

Today's Aggressive Prosecutorial Environment

The Justice Department in more recent administrations has been very aggressive in charging, negotiating pleas, proposing sentences, and demanding waivers.

For example, a memorandum from Attorney General John Ashcroft, dated September 22, 2003 and entitled "Department Policy Concerning Charging Criminal Offenses, Disposition of Charges, and Sentencing," directs that prosecutors charge the "most serious, readily provable offense or offenses," which "generate the most substantial sentence." The use of "statutory enhancements is strongly encouraged."

Another memorandum, issued in January 2003 by United States Deputy Attorney General Larry D. Thompson ("Principles of Federal Prosecution of Business Organizations"), directs prosecutors investigating wrongdoing by companies to elicit privilege waivers.

"One factor the prosecutor may weigh in assessing the adequacy of a corporation's cooperation is the completeness of its disclosure including, if necessary, a waiver of the attorney-client and work product protections, both with respect to its internal investigation and with respect to communications between specific officers, directors and employees and counsel. Such waivers permit the government to obtain statements of possible witnesses, subjects, and targets, without having to negotiate individual cooperation or immunity agreements."

The Department's Response to Blakely is Similarly Aggressive

In his July 2, 2004, memo to federal prosecutors, entitled "Departmental Legal Position and Policies in Light of Blakely v. Washington,", Deputy Attorney General James Comey outlined the Department 's preliminary response to Blakely for federal sentencing purposes.

In his memo Comey says:

  1. The Department's position at this writing is that Blakely affected only the Washington state sentencing regime and does not apply to federal sentencing at all.
  2. If the courts disagree with this view, then the Department 's position will be that the Federal Sentencing Guidelines "cannot be applied at all" in cases in which "the application of the Guidelines requires the resolution of contested factual issues to determine whether upward adjustments or upward departures should be imposed above the maxi mum sentence based solely on the facts admitted by the defendant in a guilty plea or established by the jury's verdict." In that event the court should choose a sentence within the statutory range, but as a discretionary matter, one consistent with what would have been the Guidelines sentence.

This approach would still allow the judge to consider and decide on whatever factual matters the prosecution suggests, without a jury or the constraints of the Rules of Evidence, as long as the result does not exceed the statutory maximum for the crime.

This approach would also presumably avoid the existing grouping provisions, allowing multiple sentences for multiple crimes in a way Chapter 3 Part D of the Guidelines does not now permit.

The Comey memo directs prosecutors to begin immediately to "include in indictments all readily provably Guidelines upward adjustment or upward departure factors" except for prior convictions, which are not covered by Blakely .

Expect Pressure to Waive Blakely Protection

Blakely is explicit that the right to jury fact-finding on aggravating sentencing factors can be waived.

"But nothing prevents a defendant from waiving his Apprendi rights. When a defendant pleads guilty, the State is free to seek judicial sentence enhancements so long as the defendant either stipulates to the relevant facts or consents to judicial factfinding. If appropriate waivers are procured, States may continue to offer judicial factfinding as a matter of course to all defendants who plead guilty.

Even a defendant who stands trial may consent to judicial factfinding as to sentence enhancements, which may well be in his interest if relevant evidence would prejudice him at trial. We do not understand how Apprendi can possibly work to the detriment of those who are free, if they think its costs outweigh its benefits, to render it inapplicable." Blakely, 124 S.Ct. at 2541.

The references to Apprendi are to Apprendi v. New Jersey, 530 U.S. 466 (2000), on which Blakely was based, and which held that any fact (other than the fact of prior conviction) that increases the penalty for the crime beyond the prescribed statutory maximum must be submitted to the jury and proved beyond a reasonable doubt.

The Comey memo states that "in a case in which the defendant agrees to waive his right to resolution of contested factual issues under the Blakely procedural requirements, the Guidelines should be applied. Thus, waivers of 'Blakely rights' in connection with plea agreements may be sought."

The Comey memo also says prosecutors, who will now include sentencing enhancement factors in indictments, should "consider" striking them in return for Blakely waivers.

It may be expected, therefore, that prosecutors will place heavy pressure on defendants to waive the protections of Blakely and consent to judicial factfinding, or to admit aggravating elements which would otherwise have to be proved.

This includes the existence and/or violation of a fiduciary relation if is an element either of the offense or a prosecution theory of the offense, or of a Guidelines-based sentencing enhancement (e.g., abuse of a position of trust).

Article courtesy of Douglas R. Young. Young is a senior litigation partner in the San Francisco law firm of Farella Braun + Martel LLP where he concentrates his practice in the areas of complex commercial litigation and white collar crime defense. 

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