United States of America, Plaintiff-appellee, v. Walter L. Ballard, James R. Clark, Ronald B. Pruitt and Johnl. Burns, Defendants-appellants.united States of America, Plaintiff-appellee, v. Walter Ballard, Defendant-appellant, 680 F.2d 352 (5th Cir. 1982)

The United States has filed a petition for rehearing asserting that we misunderstood certain facts which were crucial to our disposition of this case. We deny the petition, but we modify our opinion (reported at 5th Cir., 663 F.2d 534) as explained below in order to clarify the grounds upon which we reversed the appellants' convictions.

The appellants¹  were convicted on charges of conspiracy and mail fraud in violation of 18 U.S.C. §§ 371 and 1341. The charges were based on their involvement in a scheme in which corporate employers were allegedly defrauded when their employees failed to disclose the existence of a manipulative system of reselling oil (a "daisy-chain") and the participation of the employees in the system of payoffs that resulted from the daisy-chain.²  We held that a breach of fiduciary duty of honesty or loyalty involving a violation of the duty to disclose could only result in a criminal mail fraud where the information withheld from the employer was material and that, where the employer was in the private sector, information should be deemed material if the employee had reason to believe the information would lead a reasonable employer to change its business conduct. 663 F.2d at 540-41. We found that Ballard and Burns could not have failed to disclose material information to their employers even if they had withheld their knowledge of the daisy-chaining scheme since the companies could not have used the information to alter their conduct. Pruitt and Clark, in turn, could not have been guilty of aiding and abetting. Underlying these conclusions was our understanding that the evidence showed that the regulatory scheme effected through the Federal Emergency Petroleum Act ("the Act") would have prevented Charter and Signal-the oil companies for which Ballard and Burns worked-from obtaining a higher market price for their oil.³ 

In its petition for rehearing, the government argues that Charter and Signal suffered actual monetary loss as a result of the appellants' alleged misconduct. The government contends that we overlooked the detriment suffered by Charter and Signal because we did not understand (1) that the appellants' scheme was in operation before the regulatory scheme imposed by the Act became effective or (2) that the evidence was inconclusive that Charter and Signal received their maximum price for oil under the regulatory scheme.

After reviewing the record and the original briefs submitted on appeal, we conclude that these arguments are being presented for the first time in the petition for rehearing. The government, from the beginning of the trial to its end, pursued the broad theory that the mail fraud statute is violated whenever the mail is used to further a scheme in which an employee accepts unauthorized compensation. The trial court instructed the jury that a deliberate breach of fiduciary duty constitutes a "scheme to defraud" under the mail fraud statute and that an employee's fiduciary obligation includes "a duty to make a full and fair disclosure to the employer of any personal interest or profit which the employee expects to derive or has derived from any transaction in which he participates in the course of his employment." Transcript vol. XXI at 224-25. In arguments to the jury the government emphasized that any acceptance of unauthorized compensation would constitute fraud under these instructions.⁴  E.g., id., vol. XX at 54; id., vol. XXI at 182-85. There was no attempt to show at trial the type of detriment which we have held is necessary for a breach of fiduciary duty to work a criminal fraud. For that reason, the argument that actual detriment existed is not sufficiently supported by the evidence adduced at trial.⁵ 

First, the record does not establish that the scheme alleged by the government antedated both the Act and the regulations pursuant to the Act. The trial judge was never asked to take judicial notice of the time the Act and regulations became effective, nor did the government bring the correct date of price controls to the attention of the jury. During most of the trial the testimony simply refers to the government controls as being in effect at the time of the daisy-chaining transactions. Where specific times are indicated, they tend to support the idea that all the transactions took place after the price controls were in effect. For example, one government witness testified on cross-examination: "I believe there was some type of pricing regulations in effect during '73. I do not know whether it was Phase 1, Phase 2, Phase 4, or the existing regulations that occurred after the Arab embargo." Transcript, vol. X, Testimony of Dudley K. Parker at 73. Another government witness testified on cross-examination that "price ceilings started back on March 15, along with the allocation program." Id., vol. IX, Testimony of O. J. Tauber at 208. Since the government contends that the appellants' scheme began in April of 1973, such testimony indicates that no oil transactions occurred before price controls went into effect.

The government's second contention-that the convictions can be upheld because maximum profits were not being received by Signal or Charter-must also be rejected. The government cites testimony indicating that Charter and Signal were not able to determine, after price controls went into effect, whether they had received the best prices for their products on each transaction on which the appellants were receiving profits. Standing alone, though, such testimony does not permit the conclusion that each corporate employer did not receive its maximum profit. Moreover, the government conceded in its brief on appeal that the selling corporations were receiving maximum prices. The government's own brief described the appellants' scheme as follows:

In order to increase the amount of profits gained by the selling corporations (and thus increase the amount of his own commissions), Granlund arranged for the oil to be "daisy-chained" from one selling corporation to another before it reached FPC. Each seller charged its legal limit by adding its profit margin to its purchase price, the price became increasingly higher and the defendants split the profits and commissions paid to Granlund.

Brief for Appellee at 13-14 (emphasis added).

It will not do that on motion for rehearing the government for the first time questions its own prior concessions and shores up its own trial strategy by arguing here that the corporate employers suffered an actual loss of profits because there might have been a short period of time at the commencement of the activities of the appellants when price controls and allocation programs had not come into effect or because the corporate employers were not receiving maximum profits on the transactions in question during the regulatory scheme. Clearly, from the record, the prosecution did not undertake to urge or prove at trial the theories offered here. It cannot be concluded, from what was offered in evidence by the government, that the jury could have found beyond a reasonable doubt that the appellants had deprived corporate employers of their employees' faithful services in a manner that would have constituted mail fraud under § 1341. The conduct as proven did not, as explained in our opinion, constitute the crime charged, and the convictions cannot stand on the state of this record. Under the unusual circumstances of this case, fraud resulting from the alleged breaches of fiduciary duty was not demonstrated; absent such proof, the government's evidence set forth only what some would characterize as distasteful business manipulations and transactions which ought not be acceptable in commerce.

We modify our opinion to clarify that the convictions were based (impermissibly) on mail fraud and that no regulatory violation was submitted to the jury as a theory for prosecution. We make no judgment as to the regulatory proscriptions regarding daisy-chaining under the Act or any other price or allocation controls which were promulgated by Congress or the Department of Energy.⁶  Accordingly, we eliminate that paragraph of our opinion at 663 F.2d 544 which begins with the sentence: "Our disposition of these cases is in no way a condonation of the appellants' behavior." At 663 F.2d 536, we modify our language to read: "In the complex laws and regulations then controlling the marketing of oil, none (was shown at trial to have) prohibited this practice."

With these observations and modifications, the Petition for Rehearing is DENIED.