The issue in United States v. McGeehan, Nos. 05-1954 & 05-2446 (3d Cir.,10/22/2009) , was whether the defendants, the President/CEO and Vice-President/COO of a publicly-funded, non-profit corporation, could be prosecuted for “honest services” fraud under 18 U.S.C. §§ 1341, 1343 and 1346. The defendants ran the Ben Franklin Technology Center (hereinafter “BFTC”). The purpose of BFTC was to administer funds provided by the Commonwealth of Pennsylvania for other organizations in an effort to foster the development and commercialization of new technology. One of BFTC’s clients during the course of this fraudulent scheme was the U.S. Navy. The government indicted the defendants for defrauding BFTC of their honest services by misusing BFTC funds for personal expenditures and thwarting the efforts of subordinate employees to investigate their actions. The indictment also charged the defendants with depriving the U.S. Navy of the honest services of BFTC. In essence, the government sought to extend the honest services fraud theory to non-public officials. The court ultimately concluded that both public and private officials owe a fiduciary duty to the public. Specifically, the court determined that, as public officials owe a duty to protect the common good, private officials have a duty of protection as well, albeit a duty that is based primarily upon economic concerns. The court concluded that the defendants owed a fiduciary duty to BFTC by virtue of their status as corporate officers. The court ultimately ruled that this fiduciary duty could serve as the basis for the charge of honest services fraud under 18 U.S.C. §§ 1341, 1343 and 1346, where the defendants were charged with executing a fraudulent scheme which breached this fiduciary duty and deprived BFTC of their honest services.
However, the court ruled that, while the indictment sufficiently alleged that the defendants committed honest services fraud against BFTC, the indictment did not sufficiently charge that the defendants committed honest services fraud against the U.S. Navy. Unlike BFTC, the defendants’ relationship with the Navy did not create a fiduciary duty. To the contrary, the relationship between the defendants and the Navy was merely contractual. The court ruled that the government must allege more than a breach of contractual obligations in order to charge a non-public official with honest services fraud.