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United States v. Saathoff

April 6, 2010

UNITED STATES OF AMERICA, PLAINTIFF,
v.
RONALD SAATHOFF ET AL., DEFENDANTS.



The opinion of the court was delivered by: Hon. Roger T. Benitez United States District Judge

ORDER GRANTING DEFENDANTS' MOTIONS TO DISMISS THE SUPERCEDING INDICTMENT

Now before the Court are several motions to dismiss the superceding indictment and motions for joinder. [Dkt. nos. 467, 468, 471, 473, 474, 475, 481, 484, 486, and 487.] For the reasons that follow, the motions are GRANTED and the case dismissed against each of the five defendants.

I . INTRODUCTION

"[A] statute which either forbids or requires the doing of an act in terms so vague that men of common intelligence must necessarily guess at its meaning and differ as to its application violates the first essential of due process of law." Connally v. General Const. Co., 269 U.S. 385, 391 (1926) (citation omitted).

The genesis of this case is a bad financial plan devised by the San Diego City Council, reviewed by the City Attorney, approved by the City Manager and proposed to the board of trustees of the San Diego City Employees Retirement System ("SDCERS").

The federal crime charged against these defendants is a model of vagueness. It says, "[f]or the purposes of this chapter, the term 'scheme or artifice to defraud' includes a scheme or artifice to deprive another of the intangible right of honest services." Title 18 U.S.C. § 1346. That public officials are to perform their public services honestly, is a reasonable, if not obvious, legal requirement. But without more precision and definition, the commandment that public officials refrain from depriving another of honest services is undeniably vague. So much so that courts constantly struggle to define what constitutes "dishonest services." It is worthy of note that the United States Supreme Court is presently evaluating the statute in three different appeals.*fn1 But statutes should not be written so as to be understood by judges, legislators, lawyers, and law professors, but for the citizens against whom they may one day be applied. Thus, the question here is whether a reasonable person in the position of these defendants would have known that by doing what he was being asked to do would violate the federal honest services statute?

The defendants are city government employees. Three are city employees who were also members of the city's pension fund board of directors. The other two defendants held positions as administrator and general counsel for the city pension fund. The defendants, along with other board members, approved a proposal dreamed up by the city council of the City of San Diego. The proposal came to be known as "MP2" or "manager's proposal 2." The city manager's office fashioned the scheme because with the value of the pension fund sinking, the city would have to pay millions of dollars into the pension fund while struggling under an already cash-strapped city budget. So, the city looked for a way to avoid immediately replenishing the pension fund. It decided to do what it had done before. "Manager's Proposal 1" had been used in 1996 to lower the trigger point for replenishing the pension fund. MP2 proposed to lower the trigger point further. A lower trigger point would give the city much needed time in the hopes that future years would bring healthier budgets Of course, a lower trigger point would also mean a higher risk of pension fund insolvency.

To make MP2 more attractive to the pension fund board, the city also offered an increase in future pension benefits for city employees. The pension benefit increases were conditioned upon the pension fund board approval of MP2. The whole package was then pitched to the pension fund board. In hindsight, it was a bad fiscal idea. Although the indictment alleges MP2 was the defendants' idea, if it was a bad idea, it was the city's bad idea first.

Here, while the effect of a bad decision might be the impetus for prosecuting, it is the manner of making the bad decision that federal prosecutors find criminal. In this case, the defendants are accused of scheming to deliver dishonest municipal government services, by failing to disclose conflicts of interest, while voting as pension fund board members on MP2. In other words, it is not the voting which prosecutors find criminal. Nor is it the substance of the proposal which prosecutors find criminal. It is the failure to disclose some alleged conflict of interest which prosecutors find criminal.

To be clear, when our public officials misuse their positions for pure self-enrichment or to flout the law, they deserve to be prosecuted. However, these defendants are not being charged with accepting a secret bribe, or taking an under-the-table kickback, or extortion, or directing a city contract to a family-run business. Nothing of that sort. The allegedly dishonest services have to do with voting to approve a city proposal which would lead to enhanced retirement benefits for city employees. The retirement benefit enhancements would, in turn, also improve the defendants' own city retirement benefits, since the defendants are city employees (i.e., the conflict of interest).

Failing to disclose a material conflict of interest has been held to be a violation of the honest services statute. United States v. Kincaid-Chauncey, 556 F.3d 923, 942 (9th Cir. 2009) (county commissioner failed to disclose she was receiving secret payments of $3,800, $5,000, $5,000, and $4,000 from strip club operator while voting favorably on ordinances affecting club operations). Here, the conflict of interest was hardly undisclosed. Other members of the pension fund board knew it. The city council knew it, and therefore, the public knew it. Worse, the alleged conflict of interest, such as it is, was thrust upon these defendants by virtue of their positions on the city payroll and the city charter which controlled the makeup of the board. The actual text of the honest services fraud statute which defendants are accused of violating, mentions nothing about disclosures of conflicts, what qualifies as a conflict, or how to be sure a conflict is properly disclosed.*fn2

For their part, the defendants are charged with violating Title 18 U.S.C. §§ 2, 371, 1341, 1343 and 1346. For the most part, these are familiar and common crimes. Section 1341 is the federal mail fraud criminal statute. Section 1343 is the familiar federal wire fraud criminal statute. Section 371 is the federal criminal conspiracy statute while section 2 is the aiding and abetting criminal statute. The "honest services" statute (§ 1346), however, is not commonly charged and is relatively unknown to the public at large. The meaning and reach of § 1346 lies at the center of a trifarium of cases currently pending before the United States Supreme Court.*fn3

Section 1346 is invoked together with the mail*fn4 and wire*fn5 fraud statutes because it provides further definition for the phrase "scheme or artifice to defraud," as used in those sections. Section 1346 defines the phrase "scheme or artifice to defraud" to include a deprivation of the intangible right of honest services. Specifically, § 1346 provides:

For the purposes of this chapter, the term "scheme or artifice to defraud" includes a scheme or artifice to deprive another of the intangible right of honest services. Title 18 U.S.C. § 1346.

In its brevity lies ambiguity. In its ambiguity lies the potential for well meaning public officials to run afoul of the statute. As Justice Scalia aptly observed,

Though it consists of only 28 words, the statute has been invoked to impose criminal penalties upon a staggeringly broad swath of behavior, including misconduct not only by public officials and employees but also by private employees and corporate fiduciaries.

Sorich v. U.S., 129 S.Ct. 1308, 1309 (2009) (Scalia, J., dissenting from denial of certiorari) (emphasis added). Moreover, the potential breadth of the undefined honest services provision leaves open the potential for ad hoc and after-the-fact definitions of crime which do not give fair notice or guidance to citizens employed in government service. This is especially true for the conflict of interest-type prosecutions. As Judge Berzon points out,

...ascertaining what constitutes a conflict of interest -- or whether a particular interest is sufficiently material to warrant disclosure -- is not necessarily a self-evident determination. ...Without a reference to external disclosure standards, the conflict of interest theory of honest services fraud risks imposing a dangerously amorphous standard of criminal liability. Courts have long been concerned that the mail fraud statute's potentially broad scope could give insufficient notice of criminal liability and lead to the creation of federal common law crimes.

The stakes are considerably higher in the case of public officials. Kincaid-Chauncey, 556 F.3d. at 947, 950 (Berzon, J., concurring) (citations omitted) (emphasis added). It is the meaning and reach of § 1346 that lies at the center of this criminal prosecution and it is its ambiguity that impels defendants' motions to dismiss. It is its vagueness as applied to these defendants which compels dismissal of the indictment.

II. HISTORICAL BACKGROUND

The historical context of the underfunding of the City of San Diego pension fund is described in San Diego Police Officers' Association v. San Diego City Employees' Retirement System:

Pursuant to the San Diego City Charter, the San Diego City Council is empowered to set benefits and establish a retirement plan for its employees. That City Charter vests the Board of the Retirement System ("Board") with the power to determine eligibility for receipt of retirement benefits under the system, which establishes a defined benefit pension plan. In that role the Board administers the retirement system and performs various functions related to the plan, including the calculation of annual employer and employee contributions, the management and investment of the plan's funds and the distribution of pension benefits to retired City employees. Membership in the Retirement System is compulsory and a condition of employment for City employees. Retirement benefits under the plan are funded by contributions from both the pension system's members and City, which contributions are in turn invested for the benefit of the Retirement System members. Before 1996 City's annual contribution to the Retirement System was determined by a Retirement System actuary, who set the contribution rate based on actuarial calculations. In its collective bargaining agreement City agreed to subsidize or "pick up" a portion of the employee contribution, in addition to making its employer contribution. Determination of the Retirement System's funded ratio is based upon the current value of the system's assets compared to its future liabilities as calculated by the actuary -- any difference between the two constitutes the "unfunded accrued actuarial liability."

In 1996 the Board and City Council approved an Employer Contribution Rate Stabilization Plan, known as "MP1," that changed the way in which City's employer contributions were calculated. According to the terms of MP1, City's annual contribution to the Retirement System was set at an agreed-upon rate that was lower than its actuarially determined contribution rate. In the event the Retirement System's funded ratio fell below a 82.3% "trigger percentage," MP1 required City's contribution rate to be "increased on July 1 of the year following the date of the actuarial valuation in which the shortfall in funded ratio is calculated ... to restore a funded ratio" back to the 82.3% trigger level.

As a result of declining financial conditions and losses to the Retirement System fund in 2001, the system's funded ratio dropped and began to approach the 82.3% trigger percentage. To avoid having to pay the full amount to restore the funded ratio to the trigger level by the following year, City sought relief from its contribution obligations as part of the 2002 labor negotiations between City and Association. It sought to condition any increase in benefits and compensation to Association's members on the Board's approval of a proposal easing City's contribution burden under MP1. That new proposal, aptly named MP2, retained the 82.3% trigger percentage but extended City's fixed contribution rate for another five years, during which time City would increase its payment 1% per year. Despite opposition from Association's representative on the Board, MP2 was approved by the Board on November 15, 2002, and three days later City Council adopted an ordinance specifying that City's contributions were to be made at the agreed-upon rate. 568 F.3d 725, 730-31 (9th Cir. 2009).

While established by the City, the pension fund board is a separate entity. Lexin v. Superior Court of San Diego, 47 Cal. 4th 1050, 1063 (2010). During the time relevant to the indictment, the composition of the board was fixed by the city charter. In 2002, article IX, section 144 of the City Charter required that the board consist of 13 members. Three members were by designation ex officio positions for the City manager, the City treasurer, and the City auditor. Id. at 1064. Three positions were designated to represent the fire safety members, the police members, and the retired employees. Id. Three more positions were to be elected from the pension fund's active membership. Id. The remaining four board members were drawn from the community and appointed by the City council. Id. By design, then, the majority of the board members had a personal stake in the health of the pension fund and the city.

This is an example of an "interested model of decisionmaking." Id. at 1096. In this model, the board is composed of a "blend of individuals, each with a clear stake in many decisions," founded on a "belief that through the representation of all stakeholders, fair and wise decisions will again emerge." Id. The city and state could have chosen to create pension fund boards according to the "disinterested model of decisionmaking." In that form, competence is sought "through a decisional body composed entirely of individuals cleansed of any direct stake in the outcome." Id. In California, "the Legislature intended for retirement board trustees to share interests with their memberships." Id. (emphasis in original). Defendants Lexin and Webster, by virtue of their jobs with the city, were ex officio board members designees, while Saathoff represented the city's fire safety members.

The city union president's leave benefit which Saathoff eventually received is mentioned repeatedly in the indictment. The California Supreme Court described what it is and how it came to be, as follows:

[In early 2002,] negotiations with the Firefighters and its president and lead negotiator, defendant Ronald Saathoff, involved a unique issue. Union presidents received a salary from the City and were also paid by the unions for serving as their presidents. Beginning in approximately 1989, the POA [Police Officers Association] president began contributing to his pension based on both the president's salary paid him by his union and his salary as a police officer, in exchange for having his pension calculated based on his combined salary. In 1997, the MEA [Municipal Employees Association] president secured the same right.

During the 2002 negotiations, Saathoff sought the same treatment. ...Ultimately, the city council...decided to provide equivalent rights to the union presidents of POA, MEA, and Firefighters.

...On October 21, ...the city council...enacted the incumbent union president benefit without any reference to contingencies or action by the [pension fund] board.

Lexin v. Superior Court, 47 Cal. 4th at 1066-69.

III. LEGAL STANDARDS FOR A MOTION TO DISMISS

Against this backdrop, the Defendants move to dismiss the superceding indictment arguing that the indictment lacks an essential element of the honest services crime or that the honest services statute is unconstitutionally vague, both facially and as applied to them.

Federal Rule of Criminal Procedure 12(b) allows consideration at the pretrial stage of any defense "which is capable of determination without the trial of the general issue." United States v. Nukida, 8 F.3d 665, 669 (9th Cir. 1993). "On a motion to dismiss an indictment for failure to state an offense, the court must accept the truth of the allegations in the indictment in analyzing whether a cognizable offense has been charged." United States v. Boren, 278 F.3d 911, 914 (9th Cir. 2002). An indictment should be a ...


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