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UNITED STATES v. KELLY

January 16, 1981

UNITED STATES of America
v.
David E. KELLY & Matthew Palmer, Jr.



The opinion of the court was delivered by: DITTER

I. INTRODUCTION

Defendants were convicted of five substantive counts of mail fraud and a sixth count of conspiracy to commit mail fraud in violation of 18 U.S.C. § 1341 and 18 U.S.C. § 371 respectively. Presently before me are their post-trial motions in which they contend principally that the acts for which they were convicted did not comprise a "scheme or artifice to defraud" within the meaning of the mail fraud statute and that the mails were not utilized for the purpose of executing the scheme. After a careful consideration of the matters raised by the defendants, I have concluded that the Government did allege and prove a cognizable violation of the mail fraud statute and conspiracy. Accordingly, the post-trial motions will be denied.

 II. FACTUAL BACKGROUND

 While employed at Sperry Univac's applications development center *fn1" in Blue Bell, Pennsylvania, defendants David E. Kelly and Matthew Palmer, Jr., *fn2" attempted to develop a system for computerizing the generation of sheet music. Simply described, the system involved the programming of musical scores into a computer storage facility and subsequently transcribing the programs into manuscript form by means of a plotting device. *fn3" This stands in distinct contrast to the process currently utilized in the music business which consists of someone's reading a manuscript to an artist who manually draws the notes and symbols. The defendants' computerized process would purportedly have resulted in significant savings of both time and cost to the music publishing industry. *fn4" In developing this program, the defendants utilized substantial amounts of computer time and storage capacity within the central processing unit of the applications development center. At no time did anyone from Sperry Univac give Kelly or Palmer authority to make such use of the company's resources nor did either defendant advise anyone of their activities.

 While still employed at Univac, Kelly, Palmer, and an associate, Sam Casale, entered into a business agreement with Broomall Industries, Inc. "to establish a working relationship with regard to the development and promotion of a Computer Aided Manuscript Preparation Service" (Tr. 5-83). Under the terms of the agreement, Broomall was to arrange financing and to furnish defendants with access to a flat bed plotter and other graphics equipment to permit the further development of what was christened the "allegro" system. *fn5" Thereafter, Kelly, Palmer, Casale, and Andrew Trolio, president of Broomall, caused certain promotional materials to be mailed to five musical publishing companies inviting them to send representatives to an allegro demonstration.

 Eventually, defendants' use of Univac's resources was discovered by company personnel. Following an investigation by Univac security officials and the F.B.I., Kelly and Palmer were indicted on five counts of mail fraud and one count of conspiracy to commit mail fraud. In essence, the indictment alleged that by unauthorized utilizing their employer's computer time and storage facilities for the development of a private business venture, defendants defrauded Univac of their loyal and faithful services as employees and used the United States mails in furtherance of their fraudulent scheme by causing the promotional materials to be mailed. The defendants were found guilty by a jury on all counts.

 III. GENERAL CONSIDERATIONS

 In view of the unique factual circumstances giving rise to these convictions, it is necessary to consider the general purpose and scope of the mail fraud statute before addressing the many contentions advanced by the defendants. In pertinent part, 18 U.S.C. § 1341 provides:

 
Whoever, having devised or intending to devise any scheme or artifice to defraud ... for the purpose of executing such scheme or artifice or attempting to do so, places in any post office or authorized depository for mail matter, any matter or thing whatever to be sent or delivered by the Post Office ... or knowingly causes to be delivered by mail according to the direction thereon ... shall be fined not more than.$ 1000.00 or imprisoned not more than five years or both.

  The essential elements of mail fraud are (1) a scheme or artifice to defraud and (2) the use of the United States mails in execution of the scheme. Pereira v. United States, 347 U.S. 1, 8, 74 S. Ct. 358, 362, 98 L. Ed. 435 (1954); United States v. McNeive, 536 F.2d 1245, 1247 (8th Cir. 1976); United States v. Dreer, 457 F.2d 31, 33 (3d Cir. 1972). *fn6" The broad, amorphous statutory language, coupled with the lack of legislative history explaining its intended meaning, has generally permitted the courts considerable latitude in determining what types of schemes come within the purview of the statute. Interpreting the statute for the first time, the Supreme Court held that the perimeters of the term "scheme or artifice to defraud" are not limited to common law concepts of fraud or false pretenses and that the existence of such a scheme is not contingent upon a violation of state law. Durland v. United States, 161 U.S. 306, 313-314, 16 S. Ct. 508, 511, 40 L. Ed. 709 (1896). *fn7" The effect of such an expansive interpretation of the statute was summarized by the United States Court of Appeals for the Fourth Circuit:

 
As a result of the failure to limit the term "scheme or artifice to defraud" to common law definitions of fraud and false pretenses and schemes prohibited by State law, the mail fraud statute generally has been available to prosecute a scheme involving deception that employs the mails in its execution that is contrary to public policy and conflicts with accepted standards of moral uprightness, fundamental honesty, fair play and right dealing.

 United States v. Mandel, 591 F.2d 1347, 1361 (4th Cir.) aff'd per curiam in relevant part 602 F.2d 653 (1979) (en banc) cert. denied 445 U.S. 961, 100 S. Ct. 1647, 64 L. Ed. 2d 236 (1980). Courts have relied upon this broad interpretation of "a scheme to defraud" to hold many types of schemes violative of the mail fraud statute. As one commentator recently noted:

 
First enacted in 1872, the mail fraud statute, together with its lineal descendant, the wire fraud statute, has been characterized as the "first line of defense" against virtually every new area of fraud to develop in the United States in the past century. Its applications, too numerous to catalog, cover not only the full range of consumer frauds, stock frauds, land frauds, bank frauds, insurance frauds, and commodity frauds, but have extended even to such areas as blackmail, counterfeiting, election fraud, and bribery. In many of these and other areas, where legislatures have sometimes been slow to enact specific prohibitory legislation, the mail fraud statute has frequently represented the sole instrument of justice that could be wielded against the ever-innovative practitioners of deceit.

 Rakoff, The Federal Mail Fraud Statute (Part I), 18 Duquesne Law Review 771, 772 (1980).

 It is clear from this brief discussion that the propriety of defendants' mail fraud convictions cannot be evaluated in a technical or mechanistic fashion. Rather, they must be considered in light of the broad language of the statute itself, the expansive interpretation which it has been accorded by the courts, and its general utility in meeting the multifarious types of schemes, complex or simple, which may be devised.

 IV. THE POST-TRIAL MOTIONS

 A. Scheme to Defraud

 The indictment in this case charged defendants with using Univac's computer time and computer storage capacity for their own personal benefit thus defrauding their employer of the honest and faithful performance of their duties as employees. It is well established that a scheme which is directed at depriving an employer of the honest and faithful services of its employees or of its right to have its business conducted honestly may constitute a "scheme to defraud" within the meaning of the mail fraud statute. United States v. Reece, 614 F.2d 1259, 1261 (10th Cir. 1980); United States v. Bohonus, 628 F.2d 1167, 1172 (9th Cir.) cert. denied 447 U.S. 928, 100 S. Ct. 3026, 65 L. Ed. 2d 1122 (1980); United States v. Lea, 618 F.2d 426, 429 (7th Cir.) cert. denied 449 U.S. 823, 101 S. Ct. 82, 66 L. Ed. 2d 25 (1980); United States v. Bryza, 522 F.2d 414, 421-22 (7th Cir. 1975) cert. denied 426 U.S. 912, 96 S. Ct. 2237, 48 L. Ed. 2d 837 (1976); United States v. George, 477 F.2d 508, 512 (7th Cir.) cert. denied 414 U.S. 827, 94 S. Ct. 49, 38 L. Ed. 2d 61 (1973); United States v. Briel, No. 80-318 slip op. at 2-3 (E.D.Pa. 11/10/80); United States v. Procter & Gamble Company, 47 F. Supp. 676, 678 (D.Mass.1942). The defendants advance a number of arguments in assailing the validity of their convictions under this theory. Their threshold contention is that the mail fraud statute does not encompass a scheme to deprive an employer in the private sector of the honest and faithful services of its employees. This argument is completely without merit. It is true that the acceptance of bribes, kickbacks, and other acts of malfeasance by public office holders or public employees may constitute a mail fraud violation since such conduct defrauds citizens of their right to the office holders' honest and faithful services. United States v. Mandel, supra at 1362; United States v. Diggs, 198 U.S. App. D.C. 255, 613 F.2d 988, 998 n. 54 (D.C.Cir.1979) cert. denied 446 U.S. 982, 100 S. Ct. 2961, 64 L. Ed. 2d 838 (1980); United States v. Brown, 540 F.2d 364, 374 (8th Cir. 1976). However, nothing in the text of the mail fraud statute or in the theory underlying its application to political office holders dictates its inapplicability to the fraudulent activities of a private employee. Indeed, the statute has repeatedly and successfully been used to prosecute recreant employees in the private sector. See e.g. United States v. Reece, supra; United States v. Lea, supra; United States v. McCracken, 581 F.2d 719 (8th Cir. 1978); United States v. Bryza, supra; United States v. George, supra; United States v. Brodbeck, 430 F. Supp. 1056 (E.D.Wis.1977).

 The defendants' next contention is that an essential element of a scheme to defraud under the mail fraud statute is the intent to deprive the person being defrauded of money or some other tangible property right. They assert that the Government did not allege or prove that the purpose of defendants' fraudulent scheme was to obtain money from Univac and therefore argue that it failed to establish the existence of a scheme to defraud within the meaning of 18 U.S.C. § 1341. As support for this proposition, defendants rely exclusively upon Hammerschmidt v. United States, 265 U.S. 182, 44 S. Ct. 511, 68 L. Ed. 968 (1924). A fair reading of that decision, however, clearly reveals that it does not compel the restrictive interpretation of the mail fraud statute urged by the defendants. Hammerschmidt did not deal directly with a mail fraud conviction. Rather, it concerned the indictment of thirteen persons charged with conspiracy to defraud the United States by attempting to induce individuals to refuse to register for the draft. The Court held that a conspiracy to defraud the Government necessarily entailed an element of "misrepresentation, chicane or overreaching of those charged with carrying out the governmental intention." Id. at 188, 44 S. Ct. at 512. In dicta, it contrasted that holding with an earlier Court of Appeals decision which had determined that trickery or ...


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