The opinion of the court was delivered by: MUIR
On November 20, 1980, a grand jury for the Middle District of Pennsylvania returned a 25-count indictment charging three individuals and three corporations with conspiracy, mail fraud, and the filing of false statements in connection with an alleged scheme to defraud the United States Postal Service by claiming contract adjustments based on fraudulently inflated fuel costs. On December 22, 1980, the Defendants filed a motion to dismiss the indictment accompanied by a brief and numerous exhibits. The Government filed a brief in opposition to the motion and supporting exhibits on January 12, 1981. The Defendants filed a reply brief on January 19, 1981. The Defendants raise 11 reasons why some or all of the counts of the indictment should be dismissed. Because the Court concludes none of the Defendants' contentions has merit, the motion to dismiss will be denied.
The Defendants claim they are victims of selective prosecution in violation of equal protection standards guaranteed by the Fifth Amendment. Selective prosecution is ground for the dismissal of an indictment if the Defendants are able to prove that others similarly situated were not similarly prosecuted and that the Defendants were selected for prosecution for improper reasons such as to punish them for the exercise of their constitutional rights or to deter them from exercising such rights. See United States v. Torquato, 602 F.2d 564 (3d Cir.), cert. denied, 444 U.S. 941, 100 S. Ct. 295, 62 L. Ed. 2d 307 (1979). Because of the reluctance of the courts to interfere with legitimate prosecutorial discretion a defendant must adduce "some credible evidence ... indicating that the government intentionally and purposefully discriminated against the defendant by failing to prosecute other similarly situated persons" before he is entitled to an evidentiary hearing on a claim of selective prosecution. United States v. Torquato, 602 F.2d at 570. At the outset, it is important to describe the acts that the Defendants are alleged to have committed in order to compare that conduct to that of others who the Defendants claim are similarly situated. Defendant LaBar Transportation Corporation held as many as 26 mail hauling contracts from the United States Postal Service. The indictment charges that the Defendants created Petroleum Suppliers, Inc. and that Petroleum Suppliers had no legitimate business purpose. According to the indictment, fuel oil purchases for LaBar Transportation were invoiced by various suppliers to Petroleum Suppliers which then in turn re-invoiced the fuel oil to LaBar Transportation at fraudulently inflated prices. LaBar Transportation then sought price adjustments on its contracts from the Postal Service which were granted. It is also alleged that the Defendants concealed from the Postal Service the alleged interrelationship of the other Defendants to Petroleum Suppliers and the fact that the other Defendants controlled Petroleum Suppliers. In effect, the Government charges that Petroleum Suppliers was utilized by the Defendants as a means to provide documentation for fuel price increases when in fact LaBar Transportation purchased or could have purchased the same fuel for lower prices.
The Defendants seek to identify the class of persons similarly situated as those mail haulers that purchased fuel from fuel oil companies owned by the mail hauler. In support of their contention that such contractors exist and have not been prosecuted, the Defendants submit transcripts of interviews with mail haulers that were conducted by the United States Attorney. These transcripts, exhibits A through D, show that other mail haulers buy their fuel from fuel supply companies that are owned by the hauler, operate out of the same offices and with the same personnel as the hauler, mark-up the price of the fuel so as to include not only overhead but profit and pass the mark-up along to the Government. The transcripts of interviews reveal that surface similarities between those business activities and what the Defendants are alleged to have done are outweighed by significant differences. None of the four other haulers attempted to hide from the Postal Service the relationship each had with its fuel supply company. At least three of the fuel supply companies had significant expenses such as fuel storage tanks, fuel pumps, trucks, and buildings. Finally, three of the four fuel supply companies sold to other customers and charged competitive prices on all fuel sold. Because of these differences between the other haulers and the Defendants, the Court concludes that the Defendants are not similarly situated to other haulers who have not been prosecuted.
The affidavit of Travis Henry, a former General Manager of the Transportation Division, Bulk Mail Department of the Postal Service, relied on by the Defendants, is not either alone or taken together with exhibits A-D evidence of selective prosecution. Mr. Henry's affidavit states that in 1977, two years after he retired from the Postal Service, he advised Mr. LaBar that it was permissible under Postal Service policy for postal contractors to purchase fuel from subsidiary companies. He also told Mr. LaBar of four companies who conducted their businesses in that way. This affidavit adds nothing to the Defendants' position. The Government does not take the position that it is illegal for contractors to purchase fuel from subsidiary corporations. It is the Government's position, however, that such transactions present special dangers of costs being passed on to the Government which are inflated either unintentionally, or, as alleged in the indictment, fraudulently and that the Postal Service is more vigilant in its examination of such relationships than it is when contractors purchase fuel from independent suppliers. It bears emphasizing that Defendants are not being charged with purchasing fuel from a controlled fuel supplier; rather, they are being charged with fraudulently inflating the price of fuel and obtaining reimbursement from the Postal Service by reason of such fraudulent representations and concealing their relationship with the fuel supplier.
Not only have the Defendants failed to adduce "credible evidence" that others similarly situated have not been prosecuted, they have also failed to adduce evidence that the Government is proceeding against them for improper reasons. The Defendants accurately state that the second element for selective prosecution is that the "selection of (the defendant) for prosecution has been invidious or in bad faith, i. e., based upon such impermissible considerations as race, religion, or the desire to prevent his exercise of constitutional rights." United States v. Berrios, 501 F.2d 1207, 1211 (2d Cir., 1974). See United States v. Berrigan, 482 F.2d 171 (3d Cir., 1973). The Defendants claim they have been prosecuted because of administrative appeals filed by the Defendants. It is the Defendants' position that the Postal Service, having become annoyed with these appeals, decided to seek criminal prosecution of the Defendants.
The Defendants support their theory of alleged bad faith by affidavits and exhibits detailing appeals taken by LaBar since 1978. The Government does not dispute the fact that LaBar has filed numerous appeals of decisions relating to his contracts. The Defendants' showing, however, is not sufficient to warrant an evidentiary hearing.
LaBar's administrative appeals were from decisions by the Transportation Management Office of the Mail Processing Department. That office, however, has no control or influence over the Postal Inspection Service and it is the latter that conducts investigations. The Mail Processing Department, when it became suspicious of the fuel increases sought by the Defendants, referred the matter to the Postal Inspection Service for investigation, consistent with the separation of functions in the Postal Service. See 39 CFR §§ 224.4 and 224.7; affidavit of James V. Jellison, Government Exhibit 10.
The affidavit of C. Neal Benson, Deputy Postmaster General of the United States Postal Service, who served as Chief Postal Inspector during the period of the investigation, states that in March, 1978 Mr. Benson received two memoranda from Mr. Jellison mentioning possible fraud by LaBar, including the fact that three firms affiliated with LaBar as well as Petroleum Suppliers, Inc. had the same mailing address. On May 11, 1978 Mr. Benson sent a memorandum to the Regional Chief Inspector for the Eastern Region directing that all 26 of LaBar Transportation's contracts be audited. Mr. Benson's affidavit further states that referral of information such as was done by Mr. Jellison is routine and that it is up to the Postal Inspection Service to determine whether to investigate and how to investigate. Further, the individual postal inspector to whom an investigation is assigned decides how to proceed and also decides whether to present the case to the United States Attorney for his consideration, and it is the United States Attorney's decision alone whether to seek an indictment from a grand jury.
The Government has also presented an affidavit of Robert A. Scherr, Assistant General Counsel, Transportation Division, Law Department, United States Postal Service. Mr. Scherr's affidavit sets forth a summary of contract disputes between the Postal Service and LaBar and appeals taken by LaBar. The affidavit also states that the Postal Service has since 1970 a Postal Service Board of Contract Appeals and that the Postal Service's dispute resolution procedures are similar to those of other Government agencies. The affidavit also discloses that disputes with contractors and appeals by contractors from adverse decisions by the Transportation Office are routine.
Finally, Government Exhibit 15 in opposition to the motion is the affidavit of Jack R. Stedman, Senior Postal Inspector for Contract Audits. The affidavit discloses that beginning in 1976 comprehensive investigations were undertaken of major highway mail contractors. The Inspection Service's policy was to devote primary attention to large contractors who received major expenditures of postal funds. The LaBar companies first came to Mr. Stedman's attention in 1977 when a Regional Postmaster General requested a review to determine the reasonableness of cost increases for insurance claimed by Mr. LaBar. As a result of that audit, a decision was made to continue the inquiry into Mr. LaBar's cost claims. This work was underway when Mr. Jellison wrote his memoranda to the Postal Inspection Service in March, 1978 concerning possible fraud relating to increased costs for fuel.
Although Defendants maintain in their reply brief that a hearing is needed to question the handling of the investigation, they have produced no evidence to contradict the affidavits detailing the lack of involvement by the Mail Processing Department in the investigation. The Defendants have failed to present any credible evidence to show that the decision to investigate the Defendants by the Postal Service or more importantly that the decision by the United States Attorney to seek an indictment was motivated by any impermissible considerations. The evidence of record discloses only a routine investigation handled in the usual manner. Because the Defendants have failed to "adduce credible evidence" in support of their claim of selective prosecution, the motion to dismiss for that reason will be denied without a hearing.
The Defendants' second claim is that the conduct described in the indictment is legal and that, consequently, the indictment fails to allege an offense. This contention is without merit. The Defendants would have the Court believe that the indictment alleges only that the Defendants purchased fuel from a controlled fuel supply company and passed along the increased cost to the Government. The indictment clearly charges that the fuel prices passed along were fraudulently inflated and that that fraudulent conduct was engaged in knowingly by the Defendants for the purpose of defrauding the Government, that the Defendants knowingly filed false statements with the Government, and the Defendants used the mails to execute ...