UNITED STATES of America, Appellant,
v.
Samuel EVANS, Guriel Eisenberg, Rafael Israel Eisenberg,
William Northrop, Abraham Bar'Am, Nico Minardos,
Alfred Flearmoy, Herman Moll, Ralph
Kopka, and Hans Bihn,
Defendants-Appellees.
No. 673, Docket 87-1400.
United States Court of Appeals,
Second Circuit.
Argued Jan. 25, 1988.
Decided April 7, 1988.
Lorna G. Schofield, New York City, Asst. U.S. Atty. for S.D. New York (Rudolph W. Giuliani, U.S. Atty. for S.D. New York, Aaron R. Marcu, Asst. U.S. Atty., of counsel), for appellant.
Lawrence S. Bader, New York City (Grand & Ostrow, J. Kelly Strader, of counsel), for defendant-appellee Evans.
Before FEINBERG, Chief Judge, MESKILL and MAHONEY, Circuit Judges.
FEINBERG, Chief Judge:
This case arises out of defendants' alleged efforts to arrange sales of arms from various foreign countries to Iran, and, in furtherance of that scheme, to deceive the United States about the true destination of the arms. The government brings an interlocutory appeal, pursuant to 18 U.S.C. Sec. 3731, from an order of the United States District Court for the Southern District of New York, Leonard B. Sand, J., dismissing 46 counts of a 55-count indictment charging defendants with mail and wire fraud in violation of 18 U.S.C. Secs. 1341 and 1343. The government raises two issues: (1) whether, to make out a violation of the mail and wire fraud statutes, the government must show that the goal of the fraudulent scheme was to deprive the party deceived (rather than someone else) of money or property, and (2) whether the right of the United States to veto sales of U.S.-made or licensed weapons by one foreign government to another is a property right for wire and mail fraud purposes. For the reasons stated below, we agree with the district court that the government must prove that the scheme aimed at depriving it of money or property, and that the right to control future arms sales is not a property right for this purpose. We therefore affirm the decision of the district court dismissing the wire and mail fraud counts of the indictment.
I. Background
The government alleges that Samuel Evans, general counsel to Adnan Khashoggi (a leading figure in the now well-publicized Iran-Contra affair), and the other defendants planned to sell to Iran arms that were manufactured in, or by license from, the United States and that are now owned by various foreign countries by deceiving the United States about the true identity of the country purchasing the arms in order to obtain the necessary government approval for the transaction. Specifically, defendants are charged with conspiring to provide and providing false end user certificates and other documents to the United States, hoping to deceive the government into thinking the arms were being sold to an acceptable country. In fact, the arms were destined for Cyrus Hashemi, a government agent pretending to be an Iranian buyer. Hashemi's negotiations with defendants were tape-recorded, and the undercover operation was terminated before any arms changed hands. See United States v. Evans,
The original indictment in this case was returned in May 1986 and was followed by five superseding indictments, the latest of which ("the indictment") was filed in July 1987. Counts one to four of the indictment allege conspiracies to violate the Arms Export Control Act, 22 U.S.C. Sec. 2751, et seq., and to make false statements in connection with proposed arms sales in violation of 22 U.S.C. Sec. 2778(c) and 18 U.S.C. Sec. 1001. All defendants are charged in at least one of these counts. Counts 5 to 48 charge various defendants with wire fraud, 18 U.S.C. Sec. 1343, and counts 49 and 50 charge mail fraud, 18 U.S.C. Sec. 1341. (We hereafter refer to the wire and mail fraud counts collectively as the "federal fraud" counts, and, because the statutes share the same relevant language, we apply the same analysis to both sets of offenses. See Carpenter v. United States, --- U.S. ----,
The only counts at issue in this appeal are the federal fraud counts, which are stated in the following pattern: One paragraph charges defendants with having "devised and intended to devise a scheme and artifice to defraud and to obtain money and property by means of false and fraudulent pretenses and representations"; a later paragraph charges that "it was in part the object of this scheme ... that the defendants ... would obtain by fraud ... (a) property, to wit, the U.S. Defense Articles listed in this paragraph, among others, for Iran, and (b) money, to wit, commissions for themselves from the sale of said U.S. Defense Articles." Another paragraph charges that the fraud was that defendants "would make and cause to be made to the United States Department of State or Defense false statements regarding the ultimate destination of the above described U.S. Defense Articles." Succeeding paragraphs list acts of wire and mail use.
Evans, joined by the other defendants, challenged the federal fraud counts. Evans argued that McNally v. United States, --- U.S. ----,
Prior to oral argument on the correct interpretation of McNally, Judge Sand sent a letter to the parties asking them also to address what we hereafter call the "alienation theory"--"whether the 'right' of the United States to control future 'alienation' of armaments may properly be classified as a 'property right' " for purposes of the federal fraud statutes. Broadly speaking, the limits on alienation that Judge Sand referred to prohibit a foreign country from transferring United States arms to another foreign country without the consent of the United States. These restrictions are created either by a statutorily-required clause in the contract between the United States seller and the original foreign buyer, see 22 U.S.C. Sec. 2753(a)(2), or by regulation, see, e.g., 22 C.F.R. Secs. 123.9(a), 123.10(d). See generally United States v. Evans,
After briefing and oral argument, Judge Sand rendered an oral decision from the bench on July 30, 1987. He held that McNally requires that the defendants have planned that the victim of the deception--here, the United States--lose money or property, and that the interest of the United States in the alienation of arms is not property for McNally purposes. Since the United States, although deceived, lost no money or property, the court granted defendants' motion to strike the federal fraud counts. However, the court expressed some doubts about the correctness of its ruling on the alienation theory. It called the question "close and difficult," and noted that "[w]ere the court to require the defendants to stand trial on all counts and were the mail and wire fraud counts ultimately to be held invalid," a new trial would have been required since "asking a jury to return 46 [extraneous] verdicts ... would have a very significant impact on the trial." The judge concluded "that on balance the preferred procedure and the procedure with which the court is comfortable on the merits" is to find that the interest of the United States is not a property right and to strike the federal fraud counts. This appeal followed. No trial date has been set for the remaining counts pending resolution of this appeal.
II. Whose Property Must be Taken
The federal fraud statutes prohibit devising or intending to devise a "scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises." 18 U.S.C. Secs. 1341, 1343. The leading case interpreting the relevant language is McNally v. United States, --- U.S. ----,
Nonetheless, this may be the correct view of the statute. If a scheme to defraud must involve the deceptive obtaining of property, the conclusion seems logical that the deceived party must lose some money or property. See United States v. Covino,
The government argues that the legislative history of the predecessors to the current statute reveals that Congress intended the statutes to forbid activities that would be permitted by this reading of the law. In particular, the government observes that Congress amended the law in 1889 specifically to prohibit schemes in which defendants mailed letters offering to sell counterfeit money at a fraction of face value. Sometimes defendants would defraud those who sent them money by not sending any counterfeit in return, and sometimes defendants would send the counterfeit and defraud the merchants to whom it was passed by depriving them of the value of the currency they thought they were getting. See Rakoff, The Federal Mail Fraud Statute (Part I), 18 Duquesne L. Rev. 771, 797-98 (1980). The government argues that the district court's interpretation of the law would prevent prosecution of defendants who actually sent the counterfeit, since the defendants defrauded the merchants who accepted the counterfeit currency but received money from those to whom they had sold the counterfeit. However, this objection is easily answered. The point is not that the defendant must receive the same money or property that the deceived party lost, but only that the party deceived must lose money or property. Since defendants who sent the counterfeit currency would be deceiving the merchants and since the merchants would lose money from the scheme, such defendants could be convicted even under this interpretation of this law.
However, the case before us today does not require us to decide this general question. As already quoted, the Supreme Court has made clear that "any benefit which the Government derives from the [wire or mail fraud] statute[s] must be limited to the Government's interest as property-holder." McNally,
Defendants assert that we may not consider the alienation theory because it is not raised in the indictment; were we to consider it, they argue, we would violate their fifth-amendment right to a grand jury indictment. We do not decide this issue because, even assuming that the indictment alleges that defendants schemed to deprive the United States of the right to control alienation of the weapons, we find that such a right is not "money or property" under McNally.
III. The Alienation Theory
According to the government, "[t]he right at issue here is the right of the United States Government to prevent the resale or retransfer of U.S. military weaponry from foreign nations to other, unacceptable foreign powers." The government claims that this right "constitutes an interest in, and a right to exercise control over, property." The government's argument in favor of this alienation theory has three steps. First, the government says that McNally requires that we interpret "property" broadly. Next, it urges that "property" is defined by the common law, and, finally, it claims that the common law recognizes as a property right a non-possessor's interest in the alienation of an object.
Although we do not necessarily disagree that "property" is to be interpreted broadly, we note that the government's citation to McNally does not support the government's position. Citing Durland v. United States,
We agree with the government's second contention that common-law definitions can help elucidate the meaning of "property" under McNally, although we caution that definitions created for one purpose cannot always be transported into another. It is also undeniable that under some circumstances a right to control the future alienation and use of a thing is a property right. As the government points out, law students in real property class have traditionally learned about the fee simple determinable, the fee simple subject to a condition subsequent, the possibility of reverter, and the power of termination, all of which are devices through which a nonpossessor controls land. Similarly, in Carpenter the Supreme Court held that the Wall Street Journal's interest in the exclusive pre-publication use of the contents of its columns was a property right.
However, the fact that the common law recognizes some rights to control alienation as property does not mean that all such rights are property rights within the meaning of the federal fraud statutes. The analogy to the common law cuts both ways. In Carpenter, the court pointed out that the right in question there--exclusive use of confidential business information--was recognized in various contexts.
One difference between the right asserted here and traditional real-property rights is that common-law real property estates usually provide that an estate holder will, under some circumstances, have the right to possess the land.1 However, the United States will never have the right to possess the weapons involved in this case, even if a foreign government violates the resale restrictions. Instead, either the President or Congress may determine that a violation warrants restrictions on future sales of weapons to the violator. 22 U.S.C. Sec. 2753(c)(1)-(4). The government concedes that the violations have no effect on the purchaser's title or on the seller's right to profits from the illegal sale. This elaborate, integrated scheme substitutes for the traditional property remedies of replevin, damages or specific performance, a substitution that is further proof that the right is not property. Moreover, as this court has said in a different context: "When Congress has provided specific and elaborate enforcement provisions, and entrusted their use to particular parties, we will not lightly assume an unexpressed intent to create additional ones," like federal fraud prosecutions here. Fox v. Reich & Tang, Inc.,
The government responds that the nature of the remedy does not affect the characterization of the interest. It explains that the remedy is unusual because the offending party is often a foreign sovereign, and no judicial forum exists to enforce rights against foreign sovereigns. The government argues that "[t]he realities of international law and politics ... which prevent the United States from filing a replevin or damages action ... whenever a foreign country breaches its agreement not to resell arms ... hardly leads [sic] to the conclusion that the United States has no rights.... It simply explains why Congress enacted the retaliatory remedies." We do not disagree with the government's characterization of the problems Congress faced, and we do not enter the longstanding debate about the relationship between rights and remedies. However, the difficulty Congress faced highlights that the interest here is of a different character than run-of-the-mill property rights.
There are other important dissimilarities between the basic assumptions made by the common law of property and those made in the world of international arms sales. Property law disfavors restraints on alienation and dead-hand control by prior owners. In contrast, Congress has enacted elaborate laws to limit who may possess or sell weapons. Moreover, the usual rules of economics are not supposed to govern arms sales, which instead are regulated by foreign and human-rights policies in addition to supply and demand. Because the background for the rules governing arms sales differs so greatly from the background of common-law property, we are reluctant to engraft principles from one sphere to the other.
All of these distinctions suggest to us that the government's interest here is ancillary to a regulation, not to property. A law prohibiting a particular use of a commodity that the government does not use or possess ordinarily does not create a property right. If it did, many government regulations would create property rights. For example, laws preventing the sale of heroin or the dumping of toxic waste would create government property rights in the drugs or chemicals. Admittedly, the line between regulation and property is difficult to draw with scientific precision, see generally B. Ackerman, Private Property and the Constitution (1977), and we do not mean to imply that the government never has a property interest in the limits it imposes on property use.
In this criminal case, however, our evaluation of the differences between weapons and more usual property is colored by the rule of lenity, which the Supreme Court recently directed we consider when interpreting the statutes at issue here. In McNally, the Court explained that "when there are two rational readings of a criminal statute, one harsher than the other, we are to choose the harsher one only when Congress has spoken in clear and definite language.... 'There are no constructive offenses; and before one can be punished, it must be shown that his case is plainly within the statute.' "
Because of the substantial differences between international arms sales and common-law property transactions, we conclude that the United States's interest in regulating foreign resales of arms is not a property right for wire and mail fraud purposes. In so doing, we do not fear that wrongdoing will go unpunished because the government can prosecute defendants under other existing laws, and indeed is doing so. In addition, if Congress feels that still more laws are necessary, it can enact them.
The judgment of the district court is affirmed.
Notes
We recognize that restrictive covenants may create non-possessory interests in land. However, as discussed in the text, the government does not allege that title to the weapons is encumbered by the alienation restrictions, and covenants are therefore distinguishable