The People &c.,
2002 NY Int. 54
In 1983 the Legislature created the felony crimes of
first degree commercial bribing and commercial bribe receiving by
The underlying facts concerning defendant's conduct are not in dispute. Defendant, an attorney, paid kickbacks to insurance company adjusters through intermediaries out of his contingent fees, for expediting the settlement of his clients' personal injury claims. The courts below held that the payment of a kickback alone was sufficient to establish prima facie both the fact and the amount of the economic harm the insurance carrier/employer incurred in each of these cases. The Appellate Division based that conclusion on a simple syllogism and arithmetic calculation:
"[B]y accepting a specified settlement and then turning over a percentage of that settlement to an adjuster, defendant clearly evinced
a willingness to settle the claim, at that point in time, for the amount of the settlement minus the amount paid to the adjuster.
"Thus, the jury could find that each settlement was necessarily inflated by the amount of the bribe."
As will be explained, however, the felony commercial bribery legislation requires proof of concrete economic loss suffered by the bribe receiver's employer, which would not have been incurred in the absence of the corrupt arrangement. Proof that the employer of a bribe receiver paid an amount greater than it would have otherwise paid to consummate a transaction as a result of the bribe would establish the requisite economic harm. But not every kickback, though indicating the payor's "willingness to settle" for a lower amount, will demonstrate that the settlement would have been less costly had there been no venal agreement. To hold otherwise (as did the lower courts in this case) -- that the kickback alone is equivalent to economic harm -- would in effect eliminate the economic harm element the Legislature explicitly added to the statute for first degree felony commercial bribing.
The legislative history of the 1983 felony commercial
bribery statute shows a purpose to require proof of an actual
economic injury exceeding $250, suffered by the employer, that
would not have occurred absent the bribery of its employee, in
Initially, the requirement of economic loss that would not have been incurred but for the bribery was introduced into the proposed statutory scheme as an affirmative defense (see Attorney General's Legislative Program, id. at 17). During the Senate debate on the 1983 amendment, Senator Emanuel Gold asked Senator Lack whether the affirmative defense would be made out by proof that the employer would have paid the very same price in the transaction, irrespective of the bribing of its employee:
"Am I to understand that if there is a situation of Commercial Bribing, but it's a bribing between two competitive interests who may be at the same price and one interest decides that, in order to get the contract, [it] will make a commercial bribe, that since the employer may not suffer economically since it is between competing interests at the same price, that we are creating an affirmative defense?" (Senate debate transcript, at 9759-9760 [emphasis supplied]).
Senator Lack replied, "if it did not cause economic harm, it is
an affirmative defense in a commercial bribery situation" (id.).
Ultimately, the affirmative defense was dropped in favor of
It is thus quite clear that the "economic harm to the employer or principal" (Penal Law § 180.03) required for first degree commercial bribing cannot be established by proof of solely intangible, esoteric, or theoretical harms that would not result in additional costs increasing the price of goods or services to consumers. Therefore, the statute is not satisfied by such proof of harm as a breach of the duty of faithful service by the bribed employee; the loss of the employer's control over dispensing funds caused by the failure of the employee to share information concerning the payor's willingness to bribe; or the failure of the employee to turn over the bribe payments under a constructive trust or similar theory. No such "deprivations" would have resulted in losses to be passed on to customers.
We agree with both the defendant and the People that
the kickback/bribery cases under the Federal mail fraud statute
(18 USC § 1341, et seq.), decided before a later amendment to
that law, are analogous to our first degree commercial bribery
cases, and instructive on the issue before us. Like the economic
harm requirement for first degree commercial bribing, the mail
fraud statute mandated proof of a "scheme * * * for obtaining
money or property by means of false or fraudulent pretenses" (id.
emphasis supplied). Contrary to the People's reading of the
The seminal mail fraud case involving kickbacks was
McNally v United States (483 US 350 ). In that case, the
defendants controlled the granting of State insurance contracts.
They awarded the State's worker's compensation insurance contract
in return for a kickback from the successful broker's earned
commissions. In McNally, the Court rejected the theory that the
mere payment of a kickback showed that a deprivation of money or
property was involved, holding instead that, under the mail fraud
statute, "there are no constructive offenses" (id. at 360
[internal quotations and citations omitted]). The State's loss
of the intangible right to faithful service from the bribed
official/employee was also found insufficient to satisfy the
"money or property" element of section 1341 (id. at 356). The
Court reversed the convictions because there was no proof or even
a charge "that in the absence of the alleged scheme the
Commonwealth would have paid a lower premium or secured better
insurance" (id. at 360 [emphasis supplied]).
Following McNally, the Tenth Circuit sitting en banc in United States v Shelton (848 F2d 1485 ) overturned the mail fraud convictions of defendants for "taking ten percent kickbacks from suppliers who sold goods to their counties [because] * * * the evidence at trial tended to show that the sales were made at a previously established low price and that the kickbacks were paid out of the suppliers' profits" (id. at 1491). Thus, there was a failure of proof that the scheme involved the taking of money or property -- i.e., that "the counties lost money" -- because of the kickbacks (id. [emphasis supplied]).
United States v Johns (742 F Supp 196 [ED Pa 1990]) is
especially instructive. In Johns, the defendant was a
In other mail fraud bribery cases, the Federal courts
arrived at the same conclusion -- that the payment and receipt of
a bribe will not in itself establish a governmental or private
employer's loss of money or property. In United States v Slay
In United States v Zauber (857 F2d 137 [3d Cir 1988], cert denied 489 US 1066 ), a mail fraud conviction against the trustees of a union pension fund was reversed based on the absence of proof that the pension fund lost money or property arising out of the defendants' acceptance of bribes for steering a $20 million investment loan to a Florida-based mortgage company. The court explained that "[t]he problem with [the government's] argument is that although the * * * investment may have been unwise, it still returned exactly what the investment agreement called for [and] * * * the record here does not show that a better deal was available when the trustees made the * * * investment" (id. at 146 [emphasis supplied]).
The language and legislative history of our felony
commercial bribing statute, and the decisional law on kickbacks
Judge Leisure perceptively noted this point in Moll v
U.S. Title Ins. Co. of New York (710 F Supp 476 [SDNY 1989]).
Moll was a civil damages suit by real estate purchasers under the
Federal Racketeer Influenced and Corrupt Organization Act (RICO),
against the defendant title insurance company. Commission of
Penal Law § 180.03 first degree commercial bribing was alleged as
the predicate criminal conduct for RICO purposes. It allegedly
consisted of kickbacks paid to real estate lawyers to steer their
clients to the defendant for title insurance. The uncontested
evidence was, however, that while the kickbacks may well have
supported the inference of the defendant's willingness to reduce
title insurance premiums by the equivalent amount, no such
reduction would have occurred even in the absence of any
kickback/referral arrangement, because premiums were uniformly
fixed by law (see 710 F Supp at 481-482). Because the purchasers
With the foregoing in mind, we examine the record to determine whether the People's proof here sufficiently established economic harm of more than $250 to sustain those convictions. The People's theory was that although the settlements were concededly fair, defendant's payment of the kickback evinced his willingness to take less in a bona fide settlement. Thus, the critical question is whether, at the time of the settlement, the corrupt arrangement deprived the insurance companies of the opportunity to take advantage of that willingness.
From our review of the record, we conclude that the
People failed to establish a prima facie case of economic harm to
support the first degree commercial bribing conviction involving
the kickback to the adjuster at Commercial Union. The People's
proof there was that the kickback was paid to expedite settlement
before the completion of the normal investigation and
verification necessary to assess a claim's value and enter into
meaningful settlement discussions, as described by People's
witness Meredith Furel, a Commercial Union Claims Specialist.
Furel testified that any such premature settlement was against
"[W]hen you think of a kickback it's usually to settle a case in a speedy manner and what the adjuster is doing is taking that file which probably should be going through a discovery procedure which takes a while and putting it above the other claimants, putting it actually in front of the other cases" (emphasis supplied).
Under company policy, according to Furel, any attempt by defendant to speed up the settlement process on a legitimate, albeit premature, basis would have been rejected. Asked whether a persistent lawyer could achieve a bona fide settlement on an expedited basis, she replied that "if an adjustor is doing his job correctly that attorney can call ten times a day until that adjustor gets the proper documentation and the proper investigation he is not or should not settle that case." Finally, Furel confirmed that from her review of the file, it did not appear that the investigation and evaluation process had been completed.
The People failed to establish that an expedited
settlement of defendant's cases with Commercial Union would have
occurred had there been no corrupt arrangement with the adjuster.
While the payment of the kickback, as noted by the Appellate
Division, may have suggested defendant's "willingness to settle
the claim, at that point in time, for the amount of the
settlement, minus the amount of the bribe" (emphasis supplied),
Simply put, the People made no showing that Commercial Union would have availed itself of defendant's "willingness" to accept a lesser settlement by cutting his fee in the amount equivalent to the kickback. The People failed to establish, for example, that at the time the case was disposed of, it was ripe for settlement and that settlement would have been considered by an honest adjustor. Nor did the People establish that the insurance company had sufficient information to justify a settlement at the amount actually paid. Such testimony could have supported an inference that the settlement was inflated, but the People conceded that proof of an inflated settlement was absent. Furthermore, the People never asserted that defendant would have reduced his fee by an amount equivalent to the bribe if the claims had awaited their normal, protracted course for settlement purposes, without a corrupt arrangement.
Thus, as to the Commercial Union count, there was a
failure of proof that, without the payment of the kickback to
Commercial Union's adjuster, defendant's cases in fact would have
been disposed of for less than the actual settlement amount--
i.e., that Commercial Union would have accepted an honest offer
by defendant to settle the cases at a reduced rate in an
expedited manner. The absence of proof to support an inference
that, had there been no corrupt arrangement to expedite
We reach a different conclusion with respect to the first degree commercial bribing count involving an Aetna adjuster. There, the proof was that the file was assigned originally to an adjuster who was not party to the kickback scheme. In exchange for a promised kickback, however, a more senior adjuster "pulled" the file and entered into negotiations with defendant's accomplice. Despite that corrupt arrangement, those negotiations became protracted before a settlement agreeable to both sides was achieved. Significantly, the evidence established that the file had remained the responsibility of the honest adjuster to whom the case had originally been assigned, and no settlement could be effected without her consent and that of her supervisor. Ultimately, they reviewed the file and then approved the proposed settlement without any knowledge of the kickback.
Affording, as we must, every favorable inference to the
People's evidence, and viewing it in its most favorable light, we
conclude that a trier of fact could reasonably find that absent
the corrupt arrangement, at the moment defendant's case with
Our conclusion that the evidence was sufficient to show
that Aetna incurred economic harm as a result of the kickback to
its adjustor similarly supports defendant's conviction for first
degree scheme to defraud. Penal Law § 190.65, in pertinent part,
provides that "[a] person is guilty of a scheme to defraud in the
first degree when he * * * engages in a scheme constituting a
systematic ongoing course of conduct with intent to defraud more
than one person or to obtain property from more than one person
by false or fraudulent pretenses, representations or promises,
Two remaining issues merit discussion. First, defendant asserts that the trial court abused its discretion by admitting various out-of-court statements -- written notes and taped conversations -- made by Joel Cohen, an unavailable, fugitive codefendant, under the co-conspirator exception to the hearsay rule. Defendant argues that the court should have excluded the statements because the People failed to establish "the requisite conspiratorial connection" between Cohen and defendant.
"A declaration by a co-conspirator during the course
and in furtherance of the conspiracy is admissible against
another co-conspirator as an exception to the hearsay rule"
(People v Bac Tran, , 80 NY2d 170, 179 ). However, such
"evidence may be admitted only upon a showing that a prima facie
case of conspiracy has been established" (id.). While this
"determination must be made without recourse to the declarations
sought to be introduced" (id.), the testimony of other witnesses
or participants may establish a prima facie case (see People v
Here, the proof of conspiracy was overwhelming, clearly satisfying the prima facie requirement for the statements' admissibility. Three co-conspirators admitted their involvement in the kickback scheme and identified Cohen and defendant as also participating. Moreover, ample evidence in the form of the other co-conspirators' business records, such as ledgers reflecting settlement payments from defendant, notes concerning his and Cohen's participation in settlement of cases where kickbacks were made, computer printouts and checks, further supports the Trial Court's determination that the prima facie case of conspiracy had been established.
Also unpersuasive is defendant's contention that
reversal is required because of the People's violation of People
v Rosario (, 9 NY2d 286, cert denied 368 US 866 ) by not
disclosing the minutes of the grand jury testimony of the
People's key witness, co-conspirator Edward Quigley, in an
unrelated case. Assuming without deciding that this was Rosario
material, reversal is not warranted. The Rosario objection was
raised for the first time in a motion to set aside the verdict
Accordingly, the order of the Appellate Division should be modified by reducing defendant's conviction of commercial bribing in the first degree on count 113 of the indictment to commercial bribing in the second degree and remitting to Supreme Court for resentencing and, as so modified, affirmed.
1 Recently, the Second Circuit explained that the 1988 amendment adding 18 USC § 1346 was intended "to expand the definition of 'scheme or artifice to defraud' in response to McNally v United States, [483 US 350, 360 " (United States v Rybicki, No. 00-1043[L], Slip Opn, *3 [April 22, 2002]). The 1988 amendment to the statute added that "a scheme * * * to deprive another of the intangible right to honest services" could constitute the crime (see 18 USC § 1346). Under nearly identical facts to those presented here, the court -- after emphasizing the distinction between the concept of actual (or intended) harm and the reasonably foreseeable harm required to be shown under the mail fraud statute -- held in Rybicki that the government need only prove "that it was reasonably foreseeable that the fraudulent scheme could result in some economic consequence that was more than de minimis" (id. at *27-28). Thus, the court concluded that the jury could find reasonably foreseeable harm if it determined that by the payment of the kickback, the defendant attorneys "intended to obtain favorable treatment from the adjusters at the expense of the insurance companies' intangible right to the adjuster's undivided loyalty and services" (id. at 26). Alternatively, the jury could have found that it was reasonably foreseeable that the kickback would provide the adjusters with an incentive not to seek the lowest settlement or to delay settlement, depriving the insurance company of the time value of money (id.).
2 While defendant adequately preserved his challenge to the sufficiency of the proof in his motion to dismiss, he failed to do so with respect to the Court's jury instruction on first degree commercial bribing.