Ethics and Honest Services: Promoting your book is one thing – fraud is quite another (or was it fraud?) … just ask Michael Jimenez and Marie Mason

The former fiscal manager for the Hillsborough County Head Start program goes on trial in federal court along with his wife and another Head Start employee on fraud charges.

Michael Jimenez is charged with conspiring with fellow Head Start employee Marie Mason to have the pre-school program buy $9,000 worth of books authored by Jimenez’ wife, Johana Melendez Santiago.

U.S Attorney Robert O’Neill is handling the government’s case personally. O’Neill is also the lead prosecutor in the government’s public corruption case against former Hillsborough County Commissioner Kevin White.

Jimenez, Melendez and Mason each face three felony counts related to the book sale including obtaining “by fraud” more than $5,000 from a government agency, and obtaining money by “false and fraudulent pretenses” that deprived citizens and Head Start clients of their right to “honest services.”Defense attorneys say their clients did not intend to defraud the government. The purchase of 750 copies of “Travel Boy Helps Sebastian,” a book that teaches children about germs, was not done covertly, and the county got good value for the money spent. The 47-page book retails on Amazon.com for about $25 and is available in English and Spanish.

“The county bought the books …. That’s not fraudulent,” said Jeffrey Brown, Melendez’ lawyer. “The county paid for the books and the county got the books.”

Details in the federal indictment closely mirror evidence unearthed by a Hillsborough County investigator last year. Emails showed Melendez contacted her husband on April 15, 2010, concerning a “book order.”

“Here’s a letter of presentation of my book in case they need justification,” Melendez wrote, adding, “I’ll have the quote sent immediately.” She followed up with an email to a Head Start procurement employee.

Six days later, Jimenez forwarded the presentation to the procurement employee.

Mason, the agency’s family and mental health director, initiated an internal purchase request form for the book on May 3 of that year.

Originally, the agency was going to purchase 2,000 copies of the book. But several employees told the county investigator they were pressured to reduce the order to 750 copies so it wouldn’t be reviewed by the county’s procurement office.

“It was further part of the conspiracy that the conspirators would and did keep the total price of the purchase of the books under $10,000 so that the process of purchasing the books would not have to go through the bid process,” the indictment stated.

O’Neill won a tactical victory Thursday when Bucklew denied a defense motion to exclude evidence that Jimenez and Mason had not disclosed a conflict of interest in approving the purchase of the book. Defense attorneys cited a U.S. Supreme Court ruling last year in Skilling v. United States that a fraud conviction cannot be based on conflicts of financial interest.

“Skilling says you can’t prove honest services fraud by anything other than bribery or a kickback,” said David Weisbrod, attorney for Jimenez.

The judge, however, agreed with O’Neill that the high court ruling did not say conflict of interest evidence could not be admitted, only that it could not be the basis of a conviction for honest services fraud.

However, the defense is expected to hammer at the points they say were raised in Skilling: No bribery or kickbacks took place, therefore there was no fraud.

O’Neill disagreed, saying in the hearing that the Supreme Court has defined “kickback” as any money, gratuity or gift provided directly to people for services or obtaining services.

Head Start, a school readiness program under the U.S. Department of Health and Human Services, is funded with federal and county dollars. When officials in the county’s Family & Aging Services Department learned of the book deal, they passed the information to County Administrator Mike Merrill, who ordered an internal investigation.

Based on the probe’s findings, Merrill tried to fire Jimenez in December. But federal rules require such a termination be approved by the executive committee of the Head Start Policy Council, a group consisting mostly of parents of children in the program.

When the group refused to fire Jimenez, Merrill took the next step under Head Start guidelines by referring the firing to a three-person committee made up of two county officials and the chairman of the policy council. They agreed in March that Jimenez should be fired.

Merrill also had recommended that Mason be fired, but the Head Start committee refused. After negotiations between Mason’s lawyer and the county, she was allowed to come back to work. Mason is now on administrative leave without pay pending the outcome of the trial.

An excellent article about this issue is found here.

THOUGHTS AND COMMENTS WELCOME!

“Honest-Services Fraud” law – taking ethics and fraud deterrence too far?

Is it possible that in our quest for improved ethics and fraud deterrence that we’ve created a capture net that is too broad and too easy to be caught in?

Years ago I spent time in federal prison.  I am not proud of that fact, but it’s a fact that I cannot change.  Like Bernie Madoff, I defrauded clients (through the creation of a Ponzi scheme) and, when the card was pulled from the house of cards I created, I found myself facing that dreaded walk into federal prison.  Those 23 steps from the curb into federal prison were the longest 23 steps of my life.

Yet, while I was there…(as you can imagine) I became acquainted with many folks – most of whom had, in fact, done the crime.  They, like I, were paying the price for our crimes by doing the time (so to speak).  From that experience, one thing I learned was the broad sweeping power to convict of the word – CONSPIRACY.

It became clear that the government could use CONSPIRACY laws to capture “would be” criminals or make it easy to win convictions for those who committed crime, but otherwise would walk. Now it would appear that the broad bush word CONSPIRACY has been replaced with an even broader bush (or criminal capture net) called “HONEST SERVICES.”

HERE’S THE CONCEPT – according to an article in Fortune Magazine:

If a judge or governor accepts bribes, for instance, he is not necessarily stealing money from anyone, but he is depriving the public of the “honest services” they have a right to expect from him. Likewise, if a corporate purchasing officer accepts secret kickbacks from vendors, he’s depriving his employer of his “honest services.”

“Look around at all the high-profile cases today,” says Richard Craig Smith, a former federal prosecutor now with the law firm Fulbright & Jaworski. “Ninety-five percent of them are charged under honest-services fraud. That’s not just an accident.”

In fact, recent defendants in such cases compose a white-collar rogues’ gallery for our times, featuring such tarnished luminaries as former governor Rod Blagojevich of Illinois; former U.S. congressman William Jefferson of Louisiana; newspaper magnate and former Hollinger International CEO Conrad Black; lobbyist Jack Abramoff; and former Enron CEO Jeff Skilling.

HERE’S THE RUB – Just about anything that someone might perceive as wrong could be captured with the very wide net of the “Honest-Services” doctrine.  The Fortune article goes on to say:  “The feature that prosecutors love about honest-services fraud is precisely what critics say dooms it constitutionally: its nearly infinite adaptability. “There’s almost no fact pattern that cannot be fit around 1346,” says Smith, referring to the section of Title 18 of the U.S. Code that defines the offense. Read literally, it seems broad enough to catch any deceit at all. If so, then who among us is not guilty?”

If the law is so vague, broad and ill defined that you could commit a crime without knowing that you’ve committed one…then it is possible that the law that prosecutors love could be struck down as unconstitutional.  In fact thee are two cases before the Supreme Court on that very issue.

The law “invites abuse by headline-grabbing prosecutors in pursuit of local officials, state legislators, and corporate CEOs who engage in any manner of unappealing or ethically questionable conduct,” wrote U.S. Supreme Court Justice Antonin Scalia.  “Carried to its logical conclusion,” he continued, it “also renders criminal a state legislator’s decision to vote for a bill because he expects it will curry favor with a small minority essential to his reelection; a mayor’s attempt to use the prestige of his office to obtain a restaurant table without a reservation; [or] a salaried employee’s phoning in sick to go to a ball game.”

“If you defraud someone out of money,” explains Susan Necheles, a white-collar defense lawyer at New York’s Hafetz & Necheles, “there’s clearly a crime, and there are plenty of statutes that cover it. When the government resorts to honest-services fraud, on the other hand, it’s almost always because there’s a real question whether this was a crime or just aggressive business behavior.”

SO HERE’S THE QUESTION:

As an ethics and fraud prevention speaker, I wonder, in the governments efforts to rein in fraud – have they gone too far in their efforts to broadly define “Honest-Services” for purposes of prosecuting and convicting those accused of (shall we say) “ethical” crimes?  The Fortune Magazine article provides an outstanding framework for this law’s background (read here).

In December the Supreme Court signaled, hearing an “Honest Services” case that the law was ambiguous and therefore likely to be struck down.  “A citizen is supposed to be able to understand the criminal law,” Breyer said, yet it was unclear what the law in question branded as a crime.

Early next year, the justices will hear a third case testing the honest-services fraud law, brought by former Enron Chief Executive Jeffrey K. Skilling.  The justices hinted that they would put off ruling on the issue until they had considered Skilling’s case, since his lawyers argued most directly that the entire law should be thrown out as too vague.

QUESTION:  Do you feel that this statute should be struck down for being too vague?  If so, what should replace it?

COMMENTS ARE WELCOME!