United States v. Charles L. Starr, Jr., and Charles L. Starr, III

816 F.2d 94, 1987 U.S. App. LEXIS 4936

• Court: Court of Appeals for the Second Circuit
• Decided: April 9, 1987
• Docket: 122, 123, Dockets 86-1219, 86-1220
• Status: Published

Opinions

MESKILL, Circuit Judge:

This is an appeal from a judgment of conviction entered on May 2, 1986, in the United States District Court for the District of Vermont, Billings, J., after a jury trial. The jury returned a verdict of guilty on all counts under a fifteen count indictment charging defendants Charles L. Starr, Jr. and Charles L. Starr, III with mail fraud and wire fraud in violation of 18 U.S.C. §§ 1341 and 1343 (1982).¹ The indictment alleged that defendants engaged in a scheme to defraud customers of their so called “lettershoppe” business, American Mailing Systems (AMS), by means of “burying” higher rate mailings in lower rate bulk mailings and failing either to pay the postal service the correct postage due or to refund the excess funds to their customers. This appeal followed. We reverse the judgment of the district court.

BACKGROUND

The principals in this criminal prosecution, Charles L. Starr, Jr. (Charles Starr) and Charles L. Starr, III (Larry Starr), father and son, formed Starr Industries, Inc. in 1981 and shortly thereafter began operating a lettershoppe service for bulk mail customers. In the period covered by the grand jury’s indictment, September 4, 1981, through May 1984, the Starrs performed these bulk mailing services under the name American Mailing Systems.

The Starrs had no prior experience in the operation or management of a lettershoppe business. To compensate for their shortfall in practical experience, the Starrs hired Douglas Whitaker to work for and advise them in developing their business. Whitaker, an unindicted co-conspirator, testified for the government, describing the Starrs’ conduct that supposedly showed a scheme to defraud their customers.²

Most of AMS’ customers were institutional entities who advertised educational seminars. They sent unsorted, unaddressed mailing brochures to AMS in one bulk shipment. AMS addressed the brochures, then sorted and packaged them for delivery to the post office.

AMS billed customers for sorting, labeling, packaging and handling their mailings. This charge was entered on the books as income to AMS. The customers individually calculated the postage due for their mailings based on the number of pieces to be mailed and the applicable postage rate. The customers then wrote a check payable to AMS for the cost of the necessary postage. AMS maintained these funds in a separate account. A record of such transfers was kept by Larry Starr in a notebook on his desk. As customers’ mailings were dispatched to the post office, AMS paid the postage due for each customer from this separate account.

The process of actual delivery of the lettershoppe customers’ mailings to the post office entailed a number of different procedures. Individual brochures were assembled in zip code order and placed into mail sacks provided by the post office. AMS presented the mailings to the postal service together with postal form 3602. This form contained the name of the AMS client, the permit number, the rate and pounds or pieces of mail included in the mailing. To verify this information, a postal employee would choose only one sack to determine its contents. When the employee was satisfied that the material in the single sack was being mailed at the proper rate, the postage due was calculated and collected for all of the sacks and they were accepted for delivery.

The Starrs’ scheme to defraud letter-shoppe customers, as charged by the indictment, operated as follows. Douglas Whitaker, aware of the meager verification process employed by the postal service, “buried” or concealed higher postage rate mail inside bulk rate mailing sacks. The process required the various items of mail to be strategically arranged in the sacks to avoid detection by postal employees. Fraudulent postal receipt forms (3602 forms) were then submitted to the post office and the lower postal rate for the mailing was paid for the entire shipment. AMS then prepared a second, false 3602 form to be sent to the customer, indicating that the legally correct postage had in fact been paid. The resulting surplus funds remaining in the separate AMS customer account would then be appropriated by AMS and listed on its books under fictitious income categories such as “presort income.” AMS performed no legitimate labor function that justified the retention of customer funds.

The scheme netted the Starrs approximately $418,000 during the period covered by the indictment. The operation became so profitable that the Starrs carried out a similar scheme at Canadian post offices. AMS customers, however, remained blissfully ignorant of the Starrs’ activities. The customers paid the postage that they themselves calculated to be legally due. Mail was sent on time and arrived at the appropriate destination. In fact, AMS customers testified at trial that they were satisfied with the service they received from AMS.³ The customers’ receipt of 3602 forms, together with their own verification that AMS delivered their mail, effectively concealed the Starrs’ appropriation of customer funds.

Postal officials finally exposed the scheme in January 1984. Police conducted a search of AMS pursuant to a search warrant and seized AMS business records. The Starrs eventually sold the business in May 1984.

On August 1,1985, a District of Vermont grand jury returned an indictment that charged the Starrs with fifteen counts of mail and wire fraud. The indictment contained a detailed description of the alleged scheme to defraud customers. According to the indictment:

The purpose of defendants [sic] scheme was to defraud its lettershoppe customers by inducing them, by means of false and fraudulent pretences [sic], representations and promises and by concealing material facts, to pay and prepay postage money for mailing their advertising material.

J.App. at 10-11.

At trial, the Starrs moved for judgment of acquittal at the close of the government’s evidence. They argued, inter alia, that the evidence could not support a finding that they intended to defraud their lettershoppe customers. Instead, the Starrs argued, the government at most proved a scheme to defraud the United States Postal Service. They contended that such a scheme was not properly charged by the indictment and urged the court to direct a verdict in their favor. The court, however, denied the motion. The Starrs were ultimately convicted and this appeal followed.

DISCUSSION

Properly viewed, the Starrs’ claim is one of insufficiency of the evidence with regard to the element of intent to defraud the lettershoppe customers.⁴ Br. of Defendants at 17-19. Of course, our scope of review for such a claim is limited. “[T]he relevant question is whether, after viewing the evidence in the light most favorable to the prosecution, any rational trier of fact could have found the essential elements of the crime beyond a reasonable doubt.” Jackson v. Virginia, 443 U.S. 307, 319, 99 S.Ct. 2781, 2789, 61 L.Ed.2d 560 (1979). Nevertheless, on the basis of the record before us, we conclude that there was insufficient evidence that the object of the Starrs’ scheme was to defraud their letter-shoppe customers. This evidentiary deficiency applies equally to the mail fraud and wire fraud counts.

An essential element of the government's proof in a mail fraud prosecution or a wire fraud prosecution is proof of a “scheme or artifice to defraud.” 18 U.S.C. §§ 1341,1343. Critical to a showing of a scheme to defraud is proof that defendants possessed a fraudulent intent. However, the government is not required to prove that an intended victim was actually defrauded to establish a violation by the defendants. Durland v. United States, 161 U.S. 306, 315, 16 S.Ct. 508, 512, 40 L.Ed. 709 (1896); United States v. Andreadis, 366 F.2d 423, 431 (2d Cir.1966). No actual pecuniary injury, therefore, need result to the victim of the fraud.

Although the government is not required to prove actual injury, it must, at a minimum, prove that defendants contemplated some actual harm or injury to their victims. Only a showing of intended harm will satisfy the element of fraudulent intent. Such was our holding in United States v. Regent Office Supply Co., 421 F.2d 1174 (2d Cir.1970). In Regent, an indictment was handed down charging defendant with mail fraud. It appeared that defendant’s salesmen engaged in aggressive marketing techniques designed to sell their products, including frequent misrepresentations of certain facts. For instance, these salesmen represented that they had been referred by a friend, that they had a large inventory to be disposed of, or that the agent was a doctor who needed to dispose of stationery. 421 F.2d at 1176. These facts, however, were only collateral to the sale and did not concern the quality or nature of the goods being sold. The misrepresentations, therefore, did not go to the basis of the customers’ bargain with the salesmen. The customers received exactly what they paid for and no customer testified that he had been cheated. On the basis of these facts, we concluded in Regent that defendant did not contemplate an actual injury to the alleged victims of the fraud. At most, the evidence had shown an intent to deceive and to induce the customers to enter into the transaction. Absent any evidence of an intent to harm the victims, however, we concluded that the evidence was insufficient to demonstrate a fraudulent intent as required by the mail fraud statute. 421 F.2d at 1181.

Our decision in Regent identifies an important distinction that the government appears to lose sight of in this case. Misrepresentations amounting only to a deceit are insufficient to maintain a mail or wire fraud prosecution. Instead, the deceit must be coupled with a contemplated harm to the victim. Moreover, the harm contemplated must affect the very nature of the bargain itself. Such harm is apparent where there exists a “discrepancy between benefits reasonably anticipated because of the misleading representations and the actual benefits which the defendant delivered, or intended to deliver.” 421 F.2d at 1182.

Proceeding now to the facts before us, we note that the government adduced no evidence of an intent to harm the letter-shoppe customers. Although all reasonable inferences must be drawn in favor of the government on this appeal, we are convinced that the jury must have resorted to rank speculation in finding fraudulent intent here.

The jury heard the following evidence that the Starrs practiced a deceit on their customers. The Starrs represented that funds deposited with them would be used only to pay for their customers’ postage fees. In fact, the Starrs used only a portion of those funds to pay postage; the remainder was appropriated to their own use. Moreover, the Starrs caused fraudulent postal receipt forms to be sent to their customers in order to avoid detection of their scheme. Clearly, their lettershoppe customers were deceived.

The record, however, shows little else. Specifically, the evidence does not identify what harm, if any, the Starrs intended to inflict on their customers. In fact, proof offered on this element is quite to the contrary. The Starrs did in fact mail their customers’ brochures promptly as promised and caused them to arrive at the correct destination. The agreement for the timely shipment and handling of bulk mail was the basis of the bargain between the Starrs and their customers. The Starrs in no way misrepresented to their customers the nature or quality of the service they were providing. Indeed, satisfied customers were a necessary ingredient in the successful operation of their business. Therefore, because AMS customers received exactly what they paid for, there was no discrepancy between benefits “reasonably anticipated” and actual benefits received. An intent to defraud the lettershoppe customers was not demonstrated either directly or circumstantially.

We wish to address the assertion made by Judge Van Graafeiland in his dissenting opinion that customers’ bargains were violated because mail was “dumped” or not mailed. Lori Lemnah, an AMS employee, did in fact testify on cross-examination by the defense that approximately thirty sacks of mail were dumped on one occasion. Tr. III-120. A full reading of her testimony, however, indicates that this occurred as a result of Douglas Whitaker’s inadvertance in failing to deliver the mailing on time to the post office. Tr. III-102-04, 119-21. Testimony from this witness provides not the slightest support for the notion that the mail was dumped as part of a scheme to defraud the Starrs’ customers. At most, Ms. Lemnah’s testimony demonstrates that the dumping was an isolated occurrence motivated by Whitaker’s desire to conceal his misfeasance from his employer, AMS. Defense counsel’s purpose in extracting this testimony from a government witness was to expose Whitaker as an untrustworthy employee. The dissenting opinion does not reconcile Lemnah’s testimony with the complete lack of testimony from AMS customers that they had been cheated.

Judge Van Graafeiland also argues that AMS pocketed the savings in postage gained as a result of presorting first class mail instead of refunding the difference to customers. Ms. Lemnah testified that AMS presorted mail for only one customer, Timberlane Dental Group. Tr. 11-176. Postage savings with respect to the Timberlane account amounted to $60 per month. Again, however, there is no showing that this legitimate charge to a single customer operated as part of an overall scheme to defraud defendants’ lettershoppe customers of over $400,000. A close reading of Lemnah’s testimony reveals that the charge was justified as part of AMS’ labor cost in presorting Timberlane mailings. Tr. Ill — 2 — 5.

The government contends that the Starrs defeated the expectations of their customers by misappropriating funds paid to them to cover postage fees. This expectation, according to the government, was part of the bargain between AMS and its customers and resulted in an injury sufficient to support a finding of fraudulent intent. We do not agree. Although it may be assumed that the use to which the money would be put, and the concomitant expectation that it would be used for a specific purpose, implicitly constituted a part of the bargain between the parties, that defeated expeetation alone would not affect the nature or quality of the services that was the basis of the customers’ bargain. The misappropriation of funds simply has no relevance to the object of the contract; namely, the delivery of mail to the appropriate destination in a timely fashion. Nor does the government’s argument explain how the Starrs intended the misappropriation to cause direct pecuniary harm to their alleged victims. As previously noted, an inference of such intention is unreasonable in light of the purpose of the scheme. Therefore, any “harm” intended by the Starrs is, at most, metaphysical and certainly not of the character identified in Regent as being sufficient to infer fraudulent intent.

The government also argues that AMS customers suffered a harm because they were entitled to a refund of monies not paid to the postal service. This argument is without merit. As between the postal service, the Starrs and AMS customers, only the postal service could legally claim a right to the unspent postage fees. The customers at that point had received the service for which they had paid. If the money not paid to the postal service were refunded to the customers, they could become accessories to the fraud committed by the Starrs unless they immediately turned over the money to the post office. Once AMS customers paid for and received the service to which they were entitled, they were in no position to claim a refund for themselves.

Judge Van Graafeiland in his dissenting opinion argues that, according to postal regulations, principals are liable for postage deficiencies caused by their agents. Under postal regulation DMM § 111.3 (1985), the mailer is “required to assure that he has complied with the prescribed laws and regulations governing domestic mail.” Therefore, according to the dissenting opinion, the Starrs caused harm to their lettershoppe customers because the post office now has recourse against the customers for postage deficiencies.

The record shows, however, that AMS, and not the lettershoppe customer, is listed as the “mailer” on the 3602 forms that were submitted to the post office. J.App. at 211-12. Although an AMS customer is listed as the permit holder, AMS appears under the caption “NAME AND ADDRESS OF INDIVIDUAL OR ORGANIZATION FOR WHICH MAILING IS PREPARED (If other than permit holder).”

Furthermore, whether or not the post office has recourse against the Starrs’ customers based on agency principles is irrelevant. No agency theory was included in the indictment or the bill of particulars. The theory was never argued by the government to the jury. Neither was the theory included in the jury charge. Therefore, the jury had no legal basis for inferring injury to the customers from this hypothetical recovery-over by the post office.

The dissenting opinion quotes from the mail fraud statute as follows: “ 'Whoever, having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises, ____’” (emphasis added). The dissenting opinion then argues that the italicized portion of the statute provides direct support for the jury's verdict.

We do not see how the mail fraud statute provides support for this conviction. The statute outlaws any scheme to obtain money by “false or fraudulent pretenses.” Fraudulent intent is a basic element of mail fraud. We have defined fraudulent intent as requiring a contemplated harm to the victim. See United States v. Regent Office Supply, 421 F.2d 1174, 1182 (2d Cir.1970). Unless the dissenting opinion is prepared to say that our holding in Regent was directly contrary to the terms of the statute, then the jury’s verdict, unsupported by evidence of contemplated injury, must fall.

The dissenting opinion also cites language in United States v. Rowe, 56 F.2d 747, 749 (2d Cir.), cert. denied, 286 U.S. 554, 52 S.Ct. 579, 76 L.Ed. 1289 (1932), for the argument that the italicized portion of the mail fraud statute encompasses the conduct of defendants in this case. In Rowe, Judge Learned Hand stated that: “A man is none the less cheated out of his property, when he is induced to part with it by fraud, because he gets a quid pro quo of equal value.” Id. The Rowe case, however, was thoroughly distinguished in Regent. We said in Regent that “neither the Rowe case nor the language quoted will support the conclusion that no definable harm need be contemplated by the accused to find him guilty of mail fraud.” 421 F.2d at 1181. Further, in Rowe itself, the victims suffered a definable harm because they were induced to pay large sums of money for worthless property. After Regent, therefore, there can be no doubt that Rowe has been deprived of much of its vitality.

Although this case involves a contract for services rather than a contract for the sale of goods as in Regent, the evidence produced here calls for the same result. As in Regent, no evidence of tangible injury was shown from which the jury could infer an intent to defraud. Accordingly, “we conclude that the defendants intended to deceive their customers but they did not intend to defraud them.” Regent, 421 F.2d at 1182. The evidence is, therefore, insufficient to support convictions for mail or wire fraud.

We address one further point. In his charge to the jury, the district judge stated: “To act with intent to defraud means to act knowingly, and with a specific intent to deceive someone, ordinarily for the purpose of causing some financial loss to another or bringing about some financial gain to one’s self.” Supp.App. of Gov. at 200 (emphasis added). To the extent that the charge permits the jury to find an intent to defraud based solely on the defendants’ appropriation of a benefit to themselves, it is error. In Regent, we held that “the government can[not] escape the burden of showing that some actual harm or injury was contemplated by the schemer.” 421 F.2d at 1180. While a finding that defendants garnered some benefit from their scheme may be helpful to the jury to establish motive, it cannot be probative of fraudulent intent unless it results, or is contemplated to result, from a corresponding loss or injury to the victim of the fraud. The district court’s charge effectively permits the jury to disregard any evidence of contemplated harm and runs afoul of our Regent holding.

Finally, the dissenting opinion cites United States v. London, 753 F.2d 202 (2d Cir.1985), for the proposition that a trial judge need not charge a jury that it must find contemplated harm to infer fraudulent intent. London held that harm or injury can be inferred “when the scheme has such effect as a necessary result of carrying it out.” Id. at 206. We hold only that it is error for a trial judge to charge a jury that contemplated harm is not an element of fraudulent intent. London did not eliminate contemplated harm as an element of fraudulent intent and the jury charge to that effect in our case was error.

CONCLUSION

Evidence adduced by the government at trial was insufficient to sustain a finding that defendants intended to defraud their lettershoppe customers. Also, the district court’s charge to the jury on intent to defraud is error because it permits the jury to infer such an intent based solely on defendants’ appropriation of a benefit to themselves. The judgment of conviction is reversed and the indictment is dismissed.

1 . Defendants were sentenced to two years imprisonment, fined $10,000 and each ordered to make restitution of $50,000 on count fifteen. Defendants were given three years probation on counts one through fourteen.

2 . In exchange for his testimony, Douglas Whitaker pleaded guilty to one count of stealing a United States Postal Service date stamp in violation of 18 U.S.C. § 1707 and also pleaded guilty to eleven counts of violating 18 U.S.C. § 1723. After the Starrs were convicted, Whitaker was sentenced to twelve months incarceration, six months of which were to be served and the remainder suspended with one year probation. Whitaker was fined a total of $1,500.

3 . Dan Harding, an AMS customer, for example, testified to the following on direct examination:

Q. So to put it in the converse, as an overall review made by you, you’re satisfied that the mail went out as you had directed?

A. Yes.

Q. And in connection with these mailings, you had determined in advance the amount of postage that you expected to pay in order to have these mailings sent out. Correct?

A. That's right.

Q. And are you satisfied upon reviewing your records and looking at your checks that at no time you paid anymore [sic] than the amount of postage that you had predetermined should be associated with the transmission of those mailings? Understand my question?

A. I’m satisfied that we didn’t pay any more than we should have paid.

Q. So far as your companies are concerned, we can agree that you and your companies got what it paid for from American Mailing. Correct?

A. Yes.

J.App. at 63-64.

4 . Defendants initially mount a rather aggressive, albeit disingenuous, challenge to their mail and wire fraud convictions. Defendants maintain that the government’s proof is at variance with the charging document because the indictment does not charge a scheme to defraud the United States Postal Service and that such a variance must be considered fatal. The Starrs posit that the government constructively amended the indictment by pursuing a theory of the case not considered by the grand jury. Br. of Defendants at 8-16. We cannot agree.

While it is true that the grand jury’s indictment, much to our dismay, does not charge specifically a scheme to defraud the postal service, the indictment does list facts necessary to find fraud either as to the letter shoppe customers or as to the postal service.

The relevant portion of the grand jury’s indictment, paragraph eleven, reads as follows:

IV. THE PURPOSE OF DEFENDANTS [sic] SCHEME

11. The purpose of defendants [sic] scheme was to defraud its letter shoppe customers by inducing them, by means of false and fraudulent pretences [sic], representations and promises and by concealing material facts, to pay and prepay postage money for mailing their advertising material. The defendants doing business as American Mailing Systems "stuffed" and “buried” higher postage rate mail within or under lower postage rate mail and failed to pay the correct postage to both the United States Postal Service and Canada Post (Canadian Postal Service — hereinafter Canada Post) and further failed to refund to the lettershoppe customers the difference between the postage due and postage actually paid. The defendants converted to the defendants’ personal use and/or to the use of the subsidiaries of the Corporation named in paragraph 7 of this count, for start-up capital investment and other purposes in excess of $400,000.00 in postage monies which were due the United States and Canada Post or to the lettershoppe clients.

J.App. at 10-11 (emphasis added).

It is difficult to fathom defendants’ argument that the evidence varied from the particulars in count one of the indictment. In order for the government to prove its overall theory of defrauding the customers, it was necessary to establish facts that constituted some elements of defrauding the postal service. Defendants were not, therefore, deprived of their rights to fair notice of facts the government sought to establish. Moreover, there is no danger that defendants were convicted of an offense not charged in the indictment because the jury was not instructed that defendants could be found guilty of defrauding the postal service. Judge Billings’ charge to the jury was limited to the theory presented by the indictment. The court charged the jury as follows:

Counts 1 through 9 allege that the defendants schemed to defraud its [lettershoppe] customers by inducing them by means of false and fraudulent pretenses, representations, and promises and by concealing material facts to pay and prepay postage money for mailing their advertising material.

Additionally, stuffed and buried higher postage mail within or under lower postage rate mail and, failed to pay correct postage to both the United States Postal Service and the Canadian Postal Service, and further failed to refund to the customers the difference between the postage due and the postage actually paid.

Counts 10 through 14 allege that the defendants schemed to defraud its [lettershoppe] customers by inducing them by means of false and fraudulent pretenses, representations, and promises, and by concealing material facts to pay or prepay postage money for mailing their advertising material.

Additionally, defendants stuffed and buried higher postage mail within or under lower postage rate mail, and failed to pay correct postage to both the United States Postal Service and the Canadian Postal Service, and further failed to refund to the customers the difference between the postage due and the postage actually paid.

J.App. at 65-67.