On Appeal from the United States District Court for the Western District of Pennsylvania D.C. Criminal Nos. 03-cr-0125-1 & 03-cr-0125-2 (Honorable David Stewart Cercone).
The opinion of the court was delivered by: Scirica, Chief Judge.
Before: SCIRICA, Chief Judge, RENDELL, and SMITH, Circuit Judges.*fn1
This case requires us to address the scope of the legal theory of "honest services" fraud as applied to the conduct of persons who are not public officials. Defendants appeal their convictions of honest services mail and wire fraud, 18 U.S.C. §§ 1341, 1343, 1346, and 2. We will affirm the judgment of the District Court on counts 3, 5, 6, 7, 8, and 9 because the Superseding Indictment is sufficient as to those counts. We will vacate the judgment on counts 10, 11, 13, 19, 20, 21, and 22 because the specific facts alleged in those counts of the Superseding Indictment do not constitute honest services fraud under § 1346.
The Ben Franklin Technology Center (BFTC) was a publicly-funded, non-profit corporation based in Pittsburgh, Pennsylvania. The Commonwealth of Pennsylvania created BFTC in the early 1980s-along with three other organizations-in an effort to encourage the development and commercialization of new technology. BFTC administered funds allocated by the Commonwealth through the Department of Community and Economic Development for economic development grants. The Commonwealth provided BFTC with these funds upon the condition that BFTC would spend them for approved purposes-such as grants and administrative expenses-and in conformity with the public mission of the organization. Any breach of BFTC's obligations to the Commonwealth could have jeopardized BFTC's state funding.
In 1995, BFTC entered into an agreement with the United States Navy to administer, on behalf of the Office of Naval Research, a project known as the National Network for Electro-Optics Manufacturing Technology (NNEOMT). The NNEOMT operated as a consortium: the Navy provided funding and the BFTC administered the program, including the disbursement of the appropriate amounts to subcontractors who were involved in the research and development of electro-optics technologies. The NNEOMT Agreement provided that any funds allocated thereunder were to be used solely for administering NNEOMT.
From September of 1994 to July of 1998, Lawrence McGeehan was the President and Chief Executive Officer of BFTC, and Kathleen Haluska was the Vice-President and Chief Operating Officer. Together, McGeehan and Haluska were responsible for BFTC's daily operations and budget-related issues, including the administration of the NNEOMT Agreement.
A federal grand jury returned an Indictment charging McGeehan and Haluska (collectively, "defendants") with twenty counts of mail fraud in violation of 18 U.S.C. §§ 1341, 1346, and 2, and two counts of wire fraud in violation of 18 U.S.C. §§ 1343, 1346, and 2. A Superseding Indictment charged the same twenty-two counts of the Indictment and alleged an additional seven counts of fraud against the United States in violation of 18 U.S.C. §§ 1031 and 2.
The Superseding Indictment charged that, instead of faithfully managing BFTC's operations and fulfilling its administrative duties under the NNEOMT Agreement, McGeehan and Haluska caused the BFTC to use its funding from the Commonwealth and the Navy to pay for personal expenditures for themselves and others, and to cover costs that did not have a proper business purpose.
Counts 1 through 9 of the Superseding Indictment alleged that defendants devised a scheme to defraud BFTC of their honest services by misusing its funding, making "excessive expenditures for purposes such as lavish travel and entertainment," subverting its fiscal controls, improperly withholding information from BFTC's Board of Directors, and threatening, intimidating, and/or removing employees who questioned their misuse of authority.
Counts 10 through 22 of the Superseding Indictment alleged that BFTC, under the management of defendants, "owed the United States Navy a duty of honest services pursuant to its cont[r]act to administer NNEOMT," and that the defendants "devised a scheme and artifice to defraud the United States Navy of the intangible right of honest services owed to it by BFTC . . . ." The Superseding Indictment further alleged that defendants defrauded the Navy of BFTC's honest services using mail and wire communications, which caused BFTC to use NNEOMT funds for unauthorized purposes.
Counts 23 through 29 alleged that defendants knowingly caused BFTC to execute a scheme and artifice to defraud and to obtain money and property from the Navy having a value in excess of one million dollars or ...