Date: 01-25-2018

Case Style:

Case Number: 16-51330

Judge: Per Curiam

Court: United States Court of Appeals for the Fifth Circuit on appeal from the Western District of Texas (Travis County)

Plaintiff's Attorney: Alan M. Buie, Kristy Karen Callahan, Kristy Karen Callahan, Elizabeth Cottingham, Joseph H. Gay, Jr., Steven E. Seward

Defendant's Attorney: John Hunter

Description: Defendant Sean Hager was a long-time salesperson for Velocity Electronics (“Velocity”), a computer parts distributor in Austin, Texas. From 2008 to 2012, he misused Velocity’s confidential information to perpetrate a scheme that netted him $1.16 million. Hager was charged and convicted of mail, wire, and tax fraud, as well as money laundering. He raises numerous legal issues on appeal, but none is persuasive. We affirm his conviction on all charges.
I.
Velocity is essentially a middle-man broker: it buys computer parts on the open market from suppliers and then resells them at a 20% markup to
United States Court of Appeals
Fifth Circuit
FILED
January 5, 2018
Lyle W. Cayce
Clerk
No. 16-51330
2
clients based on their specific needs. Velocity uses an in-house proprietary
software system (“VIS”) to store and organize crucial business information,
including its suppliers, clients, inventory, and past sales. The VIS aggregates
and analyzes information about pricing—both the prices at which it purchases
products, and the prices at which it sells products. The software generates
pricing trends that can be organized by client and product, and it sets
purchasing and selling price quotes that ensure a 20% profit margin. This
quote establishes a “fail point,” meaning employees cannot enter price quotes
resulting in a lower margin unless a manager manually overrides the software.
Velocity considers the information contained within the VIS to be
confidential and makes this clear to its employees: employees sign multiple
confidentiality agreements upon hiring; the employee manual expressly
designates information contained in the VIS as confidential; and the
importance of keeping the information confidential is “discussed frequently.”
The confidentiality of its profit margin is particularly important because the
release of this information would severely compromise its negotiations with
clients.
Hager was a well-respected Velocity employee. He was the salesman
responsible for Dell, one of the company’s most important clients. But Hager
came to believe that Velocity did not have his “long-term interests at heart.” In
2008, he decided to take advantage of his access to the company’s confidential
information for personal gain. Hager formed a company called Echt Electronics
(“Echt”) in his wife’s name. He used Echt to buy parts he knew Velocity needed
because he was aware of which parts Dell was ordering. He would then sell
those parts to himself as a Velocity salesperson at a price that he knew—
thanks again to his access to VIS data—would meet Velocity’s 20% profit
margin. He thereby avoided triggering any “fail points” that would require
managerial override. Velocity then sold the parts purchased from Echt to Dell.
No. 16-51330
3
Hager employed this scheme for four years. During that time, Velocity
purchased about $2.7 million in parts from Echt, and Hager made a profit of
about $1.16 million from the fraud.
While the scheme was ongoing, Hager lied to Velocity to prevent being
caught. He told other Velocity employees, for example, that Echt was run by
two fictional Asian people named “Tim” and “Mary,” who would only do
business with him and did not want to communicate with anyone else. But
Hager’s cover was poor: his scheme was discovered in 2012 when a fellow
employee ran an internet search on Echt and discovered that the company was
listed under Hager’s wife’s name and that its registered address was Hager’s
home. Hager left Velocity soon thereafter.
Over the course of his Echt scheme, Hager filed three federal tax
returns—for 2008, 2009, and 2010. Hager hired a tax preparer to help file the
returns. The tax preparer testified at Hager’s trial that Hager did not inform
her of his income from Echt when she prepared his returns.
Hager was indicted on two counts of mail fraud, two counts of wire fraud,
one count of engaging in monetary transactions in property derived from
specified unlawful activity, and three counts of aiding and assisting the
preparation of false tax returns. After an eight-day trial, the jury found Hager
guilty on all counts. He was sentenced to 42 months’ imprisonment for the
fraud and money laundering counts and 36 months’ imprisonment for the tax
counts, all to run concurrently.
II.
The focus of Hager’s appeal contests his mail and wire fraud charges. He
raises two legal challenges: First, he argues that the applicable provisions of
the mail and wire fraud statutes, 18 U.S.C. §§ 1341 and 1343, no longer protect
confidential business information after the Supreme Court’s opinion in
No. 16-51330
4
Skilling v. United States, 561 U.S. 358 (2010). Second, he argues that, even if
they still protect confidential business information, they only protect a narrow
subset—namely, trade secrets as defined by state law. Relying on these
arguments, Hager contends that the mail and wire fraud counts of the
indictment failed to allege an offense, and, in the alternative, that the evidence
was legally insufficient to support his conviction on those counts. But, as
explained below, the charges are supported by binding Supreme Court
precedent, Carpenter v. United States, 484 U.S. 19 (1987), and his conviction
under these charges was adequately supported by record evidence.
This court “review[s] de novo questions of statutory interpretation, as
well as whether an indictment sufficiently alleges the elements of an offense.”
United States v. Kay, 359 F.3d 738, 742 (5th Cir. 2004) (internal quotation
marks and footnote omitted). Our review of the sufficiency of the evidence to
support a criminal conviction is, by contrast, highly deferential. “[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 (1979).
To sufficiently allege a violation of the mail and wire fraud statutes, an
indictment must charge the defendant with “devis[ing] or intending to devise
any scheme or artifice to defraud, or for obtaining money or property by means
of false or fraudulent pretenses.” 18 U.S.C. §§ 1341, 1343. Hager’s indictment
alleged that he had defrauded Velocity “by depriving it of the exclusive use of
its confidential and proprietary business information”—specifically,
information stored on the VIS regarding the company’s relationship with Dell.
The wire and mail fraud charges here are directly supported by the
Supreme Court’s Carpenter opinion. In Carpenter, a business reporter for the
Wall Street Journal was charged with mail and wire fraud under §§ 1341 and
No. 16-51330
5
1343 for divulging the contents of his regular column to stockbrokers before it
was published. 484 U.S. at 22–23. Challenging the charge, he contended that
the Journal’s interest in the column was an “intangible right” not covered by
the statute. Id. at 25 (quoting McNally v. United States, 483 U.S. 350 (1987),
superseded by 18 U.S.C. § 1346).
Rejecting this argument, the Court found that the content of the
defendant’s column (prior to its publication) was the Journal’s confidential
business information, which “ha[d] long been recognized as property.” Id. at 26
(citing Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1001–04 (1984)). The
information at issue was “acquired or compiled [by the Journal] in the course
and conduct of its business,” which gave the Journal “the exclusive right and
benefit” to use or withhold the information as it chose. Id. (quoting 3 W.
Fletcher, Cyclopedia of Law of Private Corporations § 857.1, p. 260 (rev. ed.
1986)). Notably, the fact that the information had an “intangible nature” did
not “make [the information] any less ‘property’ protected by” §§ 1341 and 1343.
Id. at 25.
Carpenter applies directly here. Hager deprived Velocity of the exclusive
use of its confidential business information when he misused the information
regarding its clients and pricing for his personal enrichment. The information
was stored, aggregated, and analyzed by the VIS, Velocity’s proprietary, inhouse
software. The information is crucial for Velocity’s business: It allows
Velocity to track pricing trends both for suppliers and for buyers, and offers
employees guidelines regarding proper pricing. It also allows Velocity to
maintain a specific profit margin, which is itself confidential. Moreover,
Velocity has made its desire to keep this information private known to all of its
employees, requiring them to sign numerous confidentiality agreements. The
information qualifies as confidential business information creating a property
right that is protected by the mail and wire fraud statutes. Hager’s misuse of
No. 16-51330
6
that information violated Velocity’s “exclusive right and benefit” to it. See Id.
at 26. In short, the mail and wire fraud counts of the indictment were proper.
And, as the foregoing demonstrates, a rational trier of fact could have convicted
him on those counts.
Hager’s two legal challenges seek to block our application of Carpenter.
First, Hager argues that Carpenter’s conclusion that “confidential business
information” is protected under §§ 1341 and 1343 was severely curtailed by the
Supreme Court in Skilling. This argument fails because the two cases concern
entirely different interests. Whereas Carpenter sought to apply the mail and
wire fraud statutes to property interests, the Court’s opinion in Skilling
referred to a separate interest: an “intangible right of honest services.”
Skilling, 561 U.S. at 368.
The distinction between property rights and the right to honest services
was acknowledged by the Supreme Court in McNally. There, the Government
prosecuted a private citizen under § 1341 who aided and abetted in a kickback
scheme devised by government officials. McNally, 483 U.S. at 352–53. The
Government argued that § 1341’s prohibition against “any scheme or artifice
to defraud, or for obtaining money or property” protected not only property
interests, but other intangible rights such as the “right of citizenry to good
government.” Id. at 356. The Court found this to be an inappropriate extension
of the statute. Instead, it interpreted Ҥ 1341 as limited in scope to the
protection of property rights.” Id. at 360.
Congress responded to McNally by enacting 18 U.S.C. § 1346. This
section clarifies that “the term ‘scheme or artifice to defraud’ [in §§ 1341 and
1343] includes a scheme or artifice to deprive another of the intangible right of
honest services.” 18 U.S.C. § 1346. Cf. Skilling, 561 U.S. at 403. In other words,
Congress expanded the breadth of the mail and wire fraud statutes to protect
“an intangible right of honest services” in addition to property rights.
No. 16-51330
7
Skilling, a case which concerned the Government’s prosecution of an
Enron executive for his “wide-ranging scheme to deceive the investing public,”
examined the scope of § 1346. Id. at 368–69. The Court found that the phrase
“intangible right of honest services” would be unconstitutionally vague unless
interpreted narrowly. Id. at 404–08. In order to avoid that result, it
purposefully interpreted the provision to apply only to “bribery and kickback
schemes.” Id. at 412–14.
In light of this review, we see no basis for Hager’s assertion that Skilling
abrogates Carpenter’s holding. As a preliminary note, Skilling never mentions
Carpenter, and we doubt the Supreme Court would overrule a prior holding
without explicitly doing so. Cf. Wilkerson v. Whitley, 28 F.3d 498, 504 (5th Cir.
1994) (noting that “absent clear indications from the Supreme Court itself,
lower courts should not lightly assume that a prior decision has been overruled
sub silentio merely because its reasoning and result appear inconsistent with
later cases” (internal citation omitted)). More importantly, Skilling and
Carpenter involve distinct rights protected by the mail and wire fraud statutes:
Skilling, the “intangible right of honest services,” Carpenter, property rights—
whether tangible or intangible. Indeed, the opinions are complementary
insofar as they both establish the same, fundamental distinction between
property rights and the right of honest services. See Carpenter, 484 U.S. at 359
(contrasting the intangible property interest at issue with the right to honest
services, which the McNally Court had found “too ethereal in itself to fall
within the protection of the mail fraud statute” (citing McNally, 483 U.S. at
359 n.8)).
We conclude that Carpenter’s holding is unaffected by Skilling and,
accordingly, that confidential business information remains a cognizable
property right protected by §§ 1341 and 1343. We are not alone in this
conclusion. See, e.g., ReBrook v. United States, 589 F. App’x 130, 131 (4th Cir.
No. 16-51330
8
2014), affirming No. 2:10-CV-01009, 2014 WL 555283, at *4–5 (S.D. W. Va.
Feb. 11, 2014) (noting the distinction between intangible rights no longer
covered by §§ 1341 and 1343 after Skilling and intangible property, which
remains covered); see United States v. Mahaffy, 693 F.3d 113, 126 (2d Cir.
2012) (noting that “[a]fter Skilling, it is clear that to convict a defendant of
honest services fraud, the government must prove paradigmatic kickbacks . . .
or bribery”).
We also reject Hager’s argument in the alternative that, even if
intangible property interests are protected under §§ 1341 and 1343, those
interests are limited solely to trade secrets as defined by state law. Although
state law is a valid source for defining the scope of property rights protected by
federal laws, it is not the sole source. See Ruckelshaus, 467 U.S. at 1001 (noting
that “property interests . . . . are created and their dimensions defined by
existing rules or understandings that stem from an independent source such
as state law” (emphasis added) (quoting Webb’s Fabulous Pharmacies, Inc. v.
Beckwith, 449 U.S. 155, 161 (1972))); see also Dennis Melancon, Inc. v. City of
New Orleans, 703 F.3d 262, 269 (5th Cir. 2012). Indeed, the Supreme Court in
Carpenter relied on its own precedent, another federal statute, and a law
treatise in concluding that confidential business information was a protected
property interest. Carpenter, 484 U.S. at 26. There is a similar lack of authority
to support Hager’s assertion that §§ 1341 and 1343 protect only trade secrets.
Cf. Mahaffy, 693 F.3d at 135 (“Information may qualify as confidential under
Carpenter even if it does not constitute a trade secret.”).
No. 16-51330
9
In sum, neither of Hager’s arguments precludes the straightforward
application of Carpenter to this case. The charges under §§ 1341 and 1343 were
proper, and his conviction based on sufficient evidence.1
III.
Hager raises additional challenges to the proceedings below. For the
reasons provided, none provides a basis for reversal.
A. Granting Immunity
We reject Hager’s argument that the district court should have granted
his motion to order the Government to grant his wife immunity.2 This court
has repeatedly held that “district courts have no inherent power to grant
immunity.” United States v. Brooks, 681 F.3d 678, 711 (5th Cir. 2012)
(alterations omitted) (quoting United States v. Follin, 979 F.2d 369, 374 (5th
Cir. 1992)). “A district court may not grant immunity simply because a witness
has essential exculpatory evidence unavailable from other sources. At most
this Court has left open the possibility that immunity may be necessary to stem
government abuse.” Id. (internal citation omitted). The exercise of this
authority requires “extraordinary circumstances.” United States v. Chagra,
669 F.2d 241, 258 (5th Cir. 1982), overruled on other grounds by Garrett v.
United States, 471 U.S. 773 (1985).
Since Hager did not preserve this argument below, we review only for
plain error, United States v. Comrie, 842 F.3d 348, 350 (5th Cir. 2016). Here,
the only evidence of government misconduct Hager submitted is the
Government’s response to his motion. Specifically, the Government stated that
1 Because we conclude that Hagar was properly convicted under the mail and wire
fraud statutes, we need not address the Government’s argument that he could still be
convicted under the money laundering charge if he were improperly convicted on the fraud
charges.
2 Hager’s wife instead invoked her Fifth Amendment privilege and declined to testify
at trial.
No. 16-51330
10
his wife might have participated in the wrongdoing, so she was “not the kind
of witness that would be granted immunity.” We discern no evidence of
government abuse from this exchange, nor does it present the sort of
extraordinary circumstances that might justify the exercise of the court’s
power to grant immunity.
B. Evidentiary Rulings
We also reject Hager’s challenge to the district court’s rulings blocking
the admission of certain evidence. This court reviews a district court’s
evidentiary rulings for abuse of discretion, subject also to harmless error
analysis. United States v. Skipper, 74 F.3d 608, 612 (5th Cir. 1996).
Hager sought to introduce evidence from a prior lawsuit between
Velocity’s owners and their employers prior to forming Velocity. The former
employers sued Velocity’s owners for having allegedly stolen proprietary
information after leaving the company. Velocity’s owners defended their
actions in part by arguing the data they took were neither trade secrets nor
otherwise proprietary. Hager sought to introduce this information by two
means: having an expert witness discuss the prior lawsuit to compare it with
the Government’s present one, and submitting documents from the prior
lawsuit. The court denied the admission of the former on relevance grounds,
and the latter on hearsay grounds.
We discern no reversible error. The relevance of this evidence to the
Government’s criminal prosecution of Hager is, at best, tangential. There is
little insight to be gleaned from a defensive position taken by Velocity’s owners
in a civil suit that concerns different data. But even if we were to find the
court’s evidentiary rulings erroneous, they were harmless. The district court
expressly gave Hager permission to discuss the prior lawsuit as it related to
confidentiality on cross-examination of witnesses, and even offer the same
documents as impeachment evidence at that time. But Hager failed to question
No. 16-51330
11
any of Velocity’s employees about the previous lawsuit. Failing to present this
information to the jury may well have been a strategic blunder, but it was not
due to an error by the district court.
C. Motion to Sever Tax Fraud Counts
At trial, Hager moved to sever the tax fraud counts pursuant to Federal
Rule of Criminal Procedure 14. The district court denied Hager’s motion. We
affirm.
“The denial of a motion to sever is reviewed under an ‘exceedingly
deferential’ abuse of discretion standard.” United States v. Whitfield, 590 F.3d
325, 355 (5th Cir. 2009) (quoting United States v. Tarango, 396 F.3d 666, 673
(5th Cir. 2005)). This court “will not reverse a conviction based upon denial of
a motion to sever ‘unless the defendant can demonstrate compelling prejudice
against which the trial court was unable to afford protection, and that he was
unable to obtain a fair trial.’” Id. at 356 (quoting United States v. Massey, 827
F.2d 995, 1004 (5th Cir. 1987)). The showing of prejudice must be “specific and
compelling.” United States v. Ballis, 28 F.3d 1399, 1408 (5th Cir. 1994).
Notably, this court has repeatedly held that severance “is not mandatory
simply because a defendant indicates that he wishes to testify on some counts
but not on others. . . . [S]everance for this reason, as for any other, remains in
the sound discretion of the trial court.” Id. (alteration and internal quotation
marks omitted) (quoting Alvarez v. Wainwright, 607 F.2d 683, 685 (5th Cir.
1979)). “Consequently, a defendant seeking severance of charges because he
wishes to testify as to some counts but not as to others has the burden of
demonstrating ‘that he has both important testimony to give concerning one
count and a strong need to refrain from testifying on the other.’” Id. (quoting
United States v. Davis, 752 F.2d 963, 972 (5th Cir. 1985)).
Hager argues that the court should have severed his tax counts because
he wished to testify that that he had “specifically asked” his tax preparer about
No. 16-51330
12
the proper way to report his income from Echt, and that she had instructed
him “that it would be easier to file an amended return.” The court’s denial of
his motion precluded him from testifying, however, because he did not want to
expose himself to cross-examination relating to the details surrounding the
mail and wire fraud counts. He feared this testimony would hurt his credibility.
Hager has not met his high burden. His reason for refraining from
testifying—fear that cross-examination would elicit compromising evidence—
is the same reason that many defendants refuse to testify: It is, after all, the
nature of cross-examination to impeach witnesses and make them seem less
credible. There is nothing extraordinary about this prejudice. Moreover,
because his tax fraud charge and the mail and wire fraud charges are
intertwined, severing the claims would not provide Hager effective relief from
his concern. Cf. United States v. McRae, 702 F.3d 806, 823 (5th Cir. 2012)
(severing claims where the two charges were “only tangentially relevant” to
each other). After all, the Government alleged that his tax fraud was
perpetuated to cover up the broader fraud. Accordingly, even if the tax counts
had been severed, it is still likely that the same sort of questions would arise
on cross-examination. The district court’s denial of this motion to sever was
not an abuse of its discretion.

Outcome: For the foregoing reasons, we AFFIRM.

Plaintiff's Experts:

Defendant's Experts:

Comments: