United States v. Panarella Jr.

Opinions of the United

2002 Decisions States Court of Appeals

for the Third Circuit

1-11-2002

USA v. Panarella Jr.

Precedential or Non-Precedential:

Docket 01-1739

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Filed January 11, 2002

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 01-1739

UNITED STATES OF AMERICA

v.

NICHOLAS PANARELLA, JR., Appellant

On Appeal From the United States District Court

For the Eastern District of Pennsylvania

(D.C. Crim. No. 00-cr-00655)

District Judge: Honorable Marvin Katz

Argued: July 31, 2001

Before: BECKER, Chief Judge, AMBRO, and

WEIS, Circuit Judges.

(Filed January 11, 2002)

RICHARD L. SCHEFF, ESQUIRE

(ARGUED)

JILL BAISINGER, ESQUIRE

Montgomery, McCracken, Walker

& Rhoads, LLP

123 South Broad Street

Philadelphia, PA 19109

Counsel for Appellant

PATRICK L. MEEHAN, ESQUIRE

United States Attorney

ROBERT A. ZAUZMER, ESQUIRE

Assistant United States Attorney

Chief of Appeals

CATHERINE L. VOTAW, ESQUIRE

GREGORY A. PAW, ESQUIRE

(ARGUED)

Assistant United States Attorneys

615 Chestnut Street, Suite 1250

Philadelphia, PA 19106

Counsel for Appellee

OPINION OF THE COURT

BECKER, Chief Judge.

Defendant Nicholas Panarella, Jr. appeals from a

judgment of the District Court convicting him of being an

accessory after the fact to a wire fraud scheme by F. Joseph

Loeper, Jr., then a Pennsylvania State Senator, to deprive

the public of his "honest services" as a legislator. See 18

U.S.C. SS 3, 1343 & 1346. Panarella contends that the

superseding information to which he unconditionally

pleaded guilty failed to charge an offense, and alternatively,

that his guilty plea lacked an adequate factual basis under

Federal Rule of Criminal Procedure 11(f). Panarella does not

dispute that the facts alleged in the superseding

information are sufficient to charge him with being an

accessory after the fact to Loeper's scheme to deprive the

public of his "honest services" if, under the applicable law,

such a scheme existed. Instead, Panarella contends that

the facts alleged in the superseding information do not

establish that Loeper committed "honest services" wire

fraud in violation of 18 U.S.C. SS 1343 & 1346, and that

Panarella therefore cannot be charged as an accessory.

Section 1343 provides, in relevant part, that

[w]hoever, having devised . . . any scheme . .. to

defraud, . . . transmits . . . by means of wire . . . in

2

interstate or foreign commerce, any writings, signs,

signals, pictures, or sounds for the purpose of

executing such scheme or artifice, shall be fined under

this title or imprisoned not more than five years, or

both.

Section 1346 elaborates on the meaning of "scheme to

defraud," stating that "[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." We will refer to this type of fraud as

"honest services fraud."

Panarella argues that because the superseding

information does not allege that Panarella's payments to

Loeper were bribes, or that Loeper's actions as Senator

were improperly influenced by the payments he received

from Panarella, Loeper did not deprive the public of his

honest services. According to Panarella, in the absence of

such allegations, the mere fact that Loeper failed to disclose

his income from Panarella's business while speaking and

voting against proposed legislation that would have

significantly harmed Panarella's business does not amount

to honest services fraud. The government responds that to

establish that Loeper engaged in honest services wire fraud,

it is not necessary to show that his actions as Senator were

influenced by his financial relationship with Panarella, but

only that Loeper unlawfully concealed a financial interest

while taking discretionary action that directly benefitted

that interest.

As a threshold matter, the parties dispute whether

Panarella's challenge to the sufficiency of the superseding

information is waived by his unconditional guilty plea.

Panarella relies on our decisions in United States v.

Cefaratti, 221 F.3d 502, 507 (3d Cir. 2000), and United

States v. Spinner, 180 F.3d 514, 516 (3d Cir. 1999), and

Federal Rule of Criminal Procedure 12(b)(2), which provides

that "objections . . . that [the indictment or information]

fails . . . to charge an offense . . . shall be noticed by the

court at any time during the pendency of the proceedings."

Maintaining that the fact that the charging language in the

superseding information tracks the language of the relevant

criminal statute is sufficient to conclude that it charges an

3

offense, the government attempts to distinguish challenges

that an indictment or information fails to allege a necessary

element of an offense, which the government concedes

survive a guilty plea, from challenges that the specific facts

alleged in an indictment or information are beyond the

reach of the relevant criminal statute, which is what it

submits is at issue in this case. Disagreeing with the

government's position, we hold that Rule 12(b)(2) and our

cases applying this Rule permit a defendant who enters an

unconditional guilty plea to argue on appeal that the

specific facts alleged in the charging document do not

amount to a criminal offense.

Turning to the merits, we reject Panarella's claim that,

because the superseding information contains no allegation

that Panarella's payments to Loeper improperly influenced

Loeper's actions as State Senator, the specific facts alleged

in the superseding information fail to establish that Loeper

deprived the public of his honest services. Rather, we hold

that where a public official conceals a financial interest in

violation of state criminal law and takes discretionary

action in his official capacity that the official knows will

directly benefit the concealed interest, the official has

deprived the public of his honest services, regardless

whether the concealed financial interest improperly

influenced the official's actions. Moreover, because

Panarella's challenge to his guilty plea under Rule 11(f)

rests on the same legal theory as his challenge to the

sufficiency of the superseding information -- namely, that

there was an inadequate factual basis for concluding that

Loeper's official conduct was improperly influenced by his

income from Panarella -- we reject his Rule 11(f) challenge.

Accordingly, we will affirm the judgment of the District

Court.

I.

For purposes of determining the sufficiency of the

superseding information, we assume the truth of the

following facts alleged in the superseding information.

Panarella operated a tax collection business that entered

into contracts with various state and local government

bodies to collect taxes owed to them under state and local

4

tax laws. In particular, Panarella's business received

significant revenue from enforcement of Pennsylvania's

"business privilege tax." Panarella developed special

expertise and secured marketing advantages in enforcing

the business privilege tax against non-resident businesses

operating in the taxing jurisdiction but not having a

physical place of business within the jurisdiction. His tax

collection business depended largely on his ability to

produce revenue for local governments by collecting

Pennsylvania's business privilege tax from non-resident

business. Beginning in 1993, he engaged Senator Loeper as

a business consultant. Between 1993 and 1997, Panarella

paid Loeper more than $330,000 for his consulting

services.

Beginning in 1994, while Majority Leader of the

Pennsylvania Senate, Loeper supported Panarella's

business development efforts by appearing with him before

local governments in Pennsylvania and attending meetings

with him and the Secretaries of two Pennsylvania state

agencies, the Department of Revenue and the Pennsylvania

Higher Education Assistance Authority, in an attempt to

obtain state collection contracts for Panarella. Moreover, in

1994 and 1995, Loeper spoke and voted against proposed

legislation that would have restricted the enforcement of

the business privilege tax against non-resident businesses

and significantly harmed Panarella's business. These

restrictions were eventually defeated.

While he was a Senator, Loeper failed to disclose his

income from Panarella as required by 65 Pa. C.S.A.

SS 1104(a) & 1105, filing false Statements of Financial

Interest with the Pennsylvania Ethics Commission for the

calendar years 1993 through 1997. To conceal his financial

relationship with Loeper, Panarella directed third parties to

make payments to Loeper on Panarella's behalf, although

the government does not specifically allege that Panarella

reimbursed these third parties. Then, in August of 1997,

Loeper lied to a reporter about the sources of his income,

and Loeper and Panarella asked a third party who paid

Loeper on Panarella's behalf to lie to the reporter about the

nature of the payments. In addition, Panarella edited the

third party's response to a letter from the reporter inquiring

into the basis for the third party's payments to Loeper.

5

A grand jury returned an indictment charging Panarella

with seven counts of aiding and abetting mail fraud and

wire fraud in violation of 18 U.S.C. SS 2, 1341, 1343 &

1346. Panarella moved to dismiss the indictment for failure

to state a federal crime, but the District Court denied the

motion. Represented by experienced counsel, Panarella

subsequently signed a plea agreement in which he agreed

to plead guilty to a superseding information charging him

with one count of being an accessory after the fact to a wire

fraud scheme to deprive the public of Loeper's honest

services. The superseding information alleged that Loeper

had engaged in an honest services wire fraud scheme in

violation of 18 U.S.C. SS 1343 & 1346 and charged

Panarella with being an accessory after the fact in violation

of 18 U.S.C. S 3. Eschewing the benefit of Rule 11(a)(2),

which permits the entry of a conditional plea of guilty

under which the point reserved can be raised on appeal,

Panarella entered an unconditional plea of guilty to the

superseding information and was sentenced to six months

imprisonment, one year of supervised release, and a fine of

$20,000. As noted above, Panarella now challenges the

sufficiency of the superseding information, and also the

trial judge's determination under Rule 11(f) of the Federal

Rules of Criminal Procedure that a sufficient factual basis

existed to accept the guilty plea.

II.

Before reaching the merits of Panarella's claim that the

facts alleged in the superseding information do not amount

to honest services wire fraud, we must first decide whether

Panarella's appeal is foreclosed by his unconditional guilty

plea.

A.

Panarella submits that a challenge to the sufficiency of a

charging document may be raised at any time, including on

appeal after an unconditional guilty plea. He first invokes

the rubric "jurisdictional," arguing that a"jurisdictional

defense" survives an unconditional guilty plea, jurisdiction

being a matter that can be raised at any time. He also relies

6

on the text of Federal Rule of Criminal Procedure 12(b)(2),

which provides that an objection that "the indictment or

information fails . . . to charge an offense . . . shall be

noticed by the court at any time during the pendency of the

proceedings." In Panarella's submission, the plain text of

Federal Rule of Criminal Procedure 12(b)(2), together with

our cases applying this rule, require us to reach the merits

of his argument notwithstanding his unconditional guilty

plea. The government counters that because Panarella did

not enter, pursuant to Federal Rule of Criminal Procedure

11(a)(2), a conditional guilty plea reserving his right to

challenge the sufficiency of the superseding information on

appeal, he is precluded from now raising the issue. Because

we hold that Rule 12(b)(2) requires us to entertain this

appeal notwithstanding Panarella's unconditional guilty

plea, we need not reach Panarella's alternative

"jurisdictional" argument for why this appeal survives his

guilty plea.1

We have squarely held that Rule 12(b)(2) applies equally

to both objections raised before a District Court and

objections raised for the first time before a Court of

Appeals. See Gov. of the Virgin Islands v. Pemberton, 813

F.2d 626, 631 (3d Cir. 1987) ("This court has interpreted

Fed. R. Crim. P. 12(b)(2) to mean that an objection to an

information on the ground that it fails to charge an offense

may be raised for the first time on appeal."); United States

_________________________________________________________________

1. Apart from Rule 12(b)(2), the source of law on which Panarella's

"jurisdictional" argument rests remains murky; it is unclear to us

whether the argument relies on the Fifth Amendment's Grand Jury

Clause, putative statutory or Article III limits on federal courts'

subject

matter jurisdiction, or some rule of federal common law. Indeed, we are

unsure whether use of the term "jurisdictional" to refer to challenges to

the sufficiency of an indictment is anything more than simply a label

used to announce the conclusion that a particular defense survives a

guilty plea. See Peter Westen, Away from Waiver: A Rationale for the

Forfeiture of Constitutional Rights in Criminal Procedure, 75 Mich. L.

Rev.

1214, 1232 n.36 (1977) ("[O]nce we have explained why a certain

category of defenses survives a plea of guilty, we may find it useful to

describe the category as `jurisdictional' defenses. But calling a defense

`jurisdictional' is a conclusion, not an explanation: it does nothing to

explain why the defense should be deemed to survive a guilty plea."

(internal citation omitted)).

7

v. Wander, 601 F.2d 1251, 1259 (3d Cir. 1979); United

States v. Manuszak, 234 F.2d 421, 422 (3d Cir. 1956). See

generally Fed. R. Crim. P. 1 ("These rules govern the

procedure in all criminal proceedings in the courts of the

United States, as provided in Rule 54(a) . . . ."); Fed R.

Crim. P. 54(a) ("These rules apply to all criminal

proceedings . . . in the United States Courts of Appeals

. . . ."). We have also held that Rule 12(b)(2) applies even

after a defendant has entered an unconditional guilty plea.

See United States v. Cefaratti, 221 F.3d 502, 507 (3d Cir.

2000); United States v. Spinner, 180 F.3d 514, 516 (3d Cir.

1999).2

The government submits, however, that Rule 12(b)(2)

does not apply in this case, because the superseding

information does not "fail[ ] . . . to charge an offense." The

government argues that, in interpreting Rule 12(b)(2), we

should construe the phrase "fails . . . to charge an offense"

narrowly, to cover only those cases where the charging

instrument completely neglects to mention, even in general

_________________________________________________________________

2. Both Cefaratti and Spinner permitted a defendant who had pleaded

guilty to challenge the sufficiency of the charging document for the first

time on appeal. While the positive law that Cefaratti and Spinner relied

on is somewhat unclear, we read Spinner and Cefaratti as resting, at

least in part, on Rule 12(b)(2). Cefaratti, in entertaining the

defendant's

challenge, did not cite Rule 12(b)(2), but rather, cited only Spinner. See

Cefaratti, 221 F.3d at 507 ("Although [defendant] did not raise this

argument before the District Court, we will consider it in light of our

prior holding that a defendant may challenge an indictment for failure to

charge an offense for the first time on appeal."). Spinner, in turn,

suggested that the rule that an unconditional guilty plea does not

preclude an objection that an indictment fails to charge an offense has

a constitutional basis. See Spinner, 180 F.3d at 515 ("The inclusion of

all

elements . . . derives from the Fifth Amendment, which requires that the

grand jury have considered and found all elements to be present.")

(quoting United States v. Hooker, 841 F.2d 1225, 1230 (4th Cir. 1988)

(en banc)). In addition to suggesting a constitutional basis for its

holding,

however, Spinner also cited Rule 12(b)(2) as support for its statement

that "[f]ailure of an indictment sufficiently to state an offense is a

fundamental defect . . . and it can be raised at any time." 180 F.3d at

516. Moreover, the cases Spinner cited themselves squarely rested on

Rule 12(b)(2). See United States v. Wander, 601 F.2d 1251, 1259 (3d Cir.

1979); United States v. Manuszak, 234 F.2d 421, 422 (3d Cir. 1956).

8

terms, an element of the offense. Thus, the government

attempts to distinguish our decisions in Spinner and

Cefaratti on the grounds that defendants in those cases

argued on appeal that the charging instrument failed even

to mention an essential element of the offense charged.

In Spinner, the statutory provision under which the

defendant was convicted specifically required that"the

offense affect[ ] interstate or foreign commerce." 18 U.S.C.

S 1029(a). The indictment in Spinner, however, failed to

mention interstate commerce. Spinner, 180 F.3d at 515.

Similarly, in Cefaratti, the defendant, who was charged with

engaging in monetary transactions in property derived from

specified unlawful activity in violation of 18 U.S.C. S 1957,

argued that the information failed to allege an essential

element of the offense -- that the criminally derived

property was "proceeds obtained from a criminal offense,"

as required by 18 U.S.C. S 1957(f)(2). See Cefaratti, 221

F.3d at 507. Thus, in both Spinner and Cefaratti, the

defendants pointed to specific statutory language that was

an essential element of the crime charged and claimed that

the charging instrument was deficient because it failed to

allege that element.

The superseding information in this case charges that:

On or about September 8, 1997, in the Eastern District

of Pennsylvania, defendant Nicholas Panarella, Jr.,

knowing that an offense against the United States had

been committed, namely, wire fraud in violation of Title

18, United States Code, Sections 1343 and 1346,

knowingly and willfully assisted F. Joseph Loeper, Jr.

in order to hinder and prevent Loeper's apprehension,

trial and punishment by editing the response from S.R.

to the reporter so as to continue to conceal the

financial relationship between Panarella and Loeper, in

violation of Loeper's duty to provide honest services.

Unlike in Spinner and Cefaratti, Panarella does not point to

any specific statutory language that the charging

instrument omitted. Indeed, the superseding information in

this case tracks the language of the relevant statutory

provisions nearly word for word. Rather, Panarella's claim

is that the specific facts alleged in the superseding

9

information do not, as a matter of law, satisfy the elements

of honest services wire fraud that the superseding

information alleges.

More particularly, unlike the defendants' challenges in

Spinner and Cefaratti, Panarella's challenge asks this Court

to decide a question of statutory interpretation-- whether

the federal wire fraud and honest services fraud statutes

apply to the particular facts alleged in the superseding

information. In Cefaratti, the defendant argued that the

relevant criminal offense, as a matter of statutory

interpretation, did not subsume the specific facts alleged.

The court considered this argument not in the context of

the indictment's sufficiency but in the context of

defendant's challenge under Rule 11(f) that his guilty plea

lacked a sufficient factual basis. See Cefaratti , 221 F.3d at

509-11. We thus believe the government's argument offers

a plausible ground for distinguishing Spinner and Cefaratti

and for reading narrowly the language "fails . . . to charge

an offense" in Rule 12(b)(2).

This interpretation of Rule 12(b)(2), however, is foreclosed

by our decision in Government of the Virgin Islands v.

Greenidge, 600 F.2d 437 (3d Cir. 1979). In Greenidge, the

criminal statute under which the defendant was charged

provided that "[w]hoever . . . with intent to commit rape . . .

assaults another . . . shall be imprisoned not more than 15

years." 14 V.I. Code Ann. S 295(3) (1964). The information

in Greenidge tracked this statutory language, alleging that

"On or about the 11th day of February, 1978, in the Virgin

Islands of the United States, . . . Rafael Greenidge. . . did,

with the intent to commit rape, assault one Joseph

Lekarzyk, in violation of Title 14 V.I.C., S 295(3)."

Greenidge, 600 F.2d at 438. We nonetheless sustained

Greenidge's argument, raised for the first time on appeal,

that the information failed to charge an offense, holding

that S 295(3) reaches only those cases in which the person

assaulted is the same as the person whom the defendant

intended to rape. Id. at 438-40. Since on the specific facts

alleged in the information the person Greenidge assaulted

was different from the person he attempted to rape, we

found that the information failed to charge an offense. Id.

Citing Rule 12(b)(2), we held that this objection to the

10

charging document may be raised for the first time on

appeal. Id. at 439 n.2.

Greenidge is thus like this case, for the charging

document tracked the relevant statutory language nearly

word for word. And in both this case and Greenidge, the

defendant argued that as a matter of statutory

interpretation, the specific facts alleged in the charging

document fall outside the reach of the relevant criminal

statute. See Greenidge, 600 F.2d at 439 ("Greenidge

contends that the Information . . . reflect[s] an improper

interpretation of the statute."). Panarella argues that

because the superseding information fails to allege that

Panarella's payments to Loeper improperly influenced

Loeper's actions as State Senator (and Majority Leader), the

facts alleged in the superseding information fail to

constitute the offense of honest services wire fraud. If, as

the Court held in Greenidge, an indictment whose charging

language tracks the relevant criminal statute nonetheless

"fails . . . to charge an offense," for purposes of Rule

12(b)(2), when the specific facts alleged fall beyond the

reach of the statute, Panarella's argument that the specific

facts alleged in the superseding information do not amount

to honest services wire fraud must also be an argument

that the information "fails . . . to charge an offense."

To be sure, the defendant in Greenidge never pleaded

guilty, but was tried and convicted. Nonetheless,

Greenidge's interpretation of the phrase "fails . . . to charge

an offense" in Rule 12(b)(2) is binding on us in this case,

since Rule 12(b)(2) does not distinguish on its face between

defendants who have pleaded guilty and those who have

not. As long as Rule 12(b)(2) applies notwithstanding an

unconditional guilty plea (and we held in Spinner and

Cefaratti that it does), then we must construe it

consistently both in cases where the defendant has pleaded

guilty and in cases where the defendant has not.

We are thus constrained to reject the government's

contention that an indictment or information charges an

offense, for purposes of Rule 12(b)(2), as long as it recites

in general terms the essential elements of the offense, even

if the specific facts alleged in the charging instrument fail

to satisfy those elements. Instead, we hold that, for

11

purposes of Rule 12(b)(2), a charging document fails to

state an offense if the specific facts alleged in the charging

document fall beyond the scope of the relevant criminal

statute, as a matter of statutory interpretation. Therefore,

notwithstanding Panarella's unconditional guilty plea, Rule

12(b)(2) permits Panarella to argue for the first time on

appeal that the specific facts alleged in the superseding

information do not amount to honest services wire fraud.

In reaching the merits of Panarella's argument

notwithstanding his unconditional guilty plea, we join the

Fifth, Ninth, and Eleventh Circuits, which have held that

an objection that the relevant criminal statute does not

reach the specific facts alleged in the charging document

shall be noticed for the first time on appeal, even after

defendant has pleaded guilty. See United States v. Tomeny,

144 F.3d 749, 751 (11th Cir. 1998) (permitting defendants

who pleaded guilty to argue on appeal that the indictment

failed to charge an offense because the general federal

criminal false statement provision under which defendants

were convicted, 18 U.S.C. S 1001, was "preempted" by the

criminal false statement provision of the Magnuson-Stevens

Fishery Conservation and Management Act, 16 U.S.C.

S 1857(1)(I)); United States v. Osiemi, 980 F.2d 344, 345

(5th Cir. 1993) (permitting a defendant who pleaded guilty

to possession of a counterfeit passport in violation of 18

U.S.C. S 1546(a) to argue on appeal that S 1546(a) does not

apply to possession of a counterfeit passport issued by a

foreign government and that the indictment therefore fails

to state an offense); United States v. Caperell , 938 F.2d 975,

977-78 (9th Cir. 1991) (holding that a defendant who

pleaded guilty to charges related to the manufacture,

distribution, and possession of a controlled substance may

challenge the sufficiency of the indictment on the ground

that the particular substance involved in the case--

methamphetamine -- had been approved by the FDA for

use in non-prescription drugs and therefore was not a

controlled substance); see also United States v. DiFonzo,

603 F.2d 1260, 1263 (7th Cir. 1979) (holding that a guilty

plea does not preclude a defendant from arguing that"the

indictment contradicts itself, and, more importantly, that

the preliminary factual allegations of the indictment negate

one of the elements of the offense charged").

12

We note that the Fourth Circuit reached a different

conclusion in United States v. Borden, 10 F.3d 1058 (4th

Cir. 1993), which held that as long as a charging document

recites in general terms all the elements of the relevant

offense, a defendant who pleads guilty is barred from

arguing on appeal that the specific facts alleged fail to

establish a predicate offense. See id. at 1063. Borden,

however, contains no citation of Rule 12(b)(2), and therefore

failed to reconcile its holding with Rule 12(b)(2)'s

instruction that an objection that an indictment or

information fails to charge an offense shall be noticed at

any time during the pendency of the proceedings.

B.

Although for the reasons set forth above, our

jurisprudence requires us to take up Panarella's

contentions on the merits, in the interest of law reform, we

explicate our belief that a rule permitting a defendant who

enters an unconditional plea of guilty to challenge his

conviction on the ground that the specific facts alleged in

the charging instrument fail to constitute an offense has a

number of harmful consequences. First, this rule reduces

criminal defendants' incentives to raise defenses in a timely

fashion in district court. Commentators have noted that the

rule permitting defendants to challenge an indictment's

failure to charge an offense at any time has led to strategic

decisions by defendants to delay raising the defense. See 4

Wayne R. LaFave et al., Criminal ProcedureS 19.1(d), at 741

n.50 (2d ed. 1999) ("The facts of various cases indicate that

the practice of sandbagging, by deliberately postponing the

objection, continues as to these defects, particularly the

failure to charge an offense.").

Allowing appeals such as this also undermines judicial

economy and finality in criminal adjudication. Defendants

convicted after pleading guilty have little to lose by arguing,

either on direct or collateral review, that the statute under

which they were convicted does not reach the conduct

alleged in the charging instrument. Requiring a defendant

to raise this defense before pleading guilty respects the

proper relationship between trial and appellate courts and

prevents the waste of judicial resources caused when a

13

defendant deliberately delays raising a defense that, if

successful, requires reversal of the defendant's conviction

and possibly reindictment.

Finally, by reaching the merits of Panarella's appeal, we

interfere with the ability of defendants (within the Third

Circuit) to waive their right to challenge the sufficiency of

the charging document in exchange for concessions from

the prosecution, thereby making it more difficult for

defendants and prosecutors to enter plea agreements that

benefit both the parties and society as a whole. 3 To

illustrate, consider, for example, a defendant whose defense

is that, as a matter of law, the relevant criminal statute

should be interpreted in a way that would not reach the

particular conduct that the defendant engaged in. Such a

defense might present a close call as a legal matter, and

after consultation with counsel, a defendant might decide

that he would prefer to plead guilty in exchange for

prosecutorial concessions rather than run the risk that his

legal argument will be rejected by the court and that he will

_________________________________________________________________

3. The Supreme Court recognized this point as early as Brady v. United

States, 397 U.S. 742 (1970), where it observed that plea agreements

benefit both prosecutors and defendants and play a fundamental role in

our criminal justice system:

For a defendant who sees slight possibility of acquittal, the

advantages of pleading guilty and limiting the probable penalty are

obvious -- his exposure is reduced, the correctional processes can

begin immediately, and the practical burdens of a trial are

eliminated. For the State there are also advantages-- the more

promptly imposed punishment after an admission of guilt may more

effectively attain the objectives of punishment; and with the

avoidance of trial, scarce judicial and prosecutorial resources are

conserved for those cases in which there is a substantial issue of

the defendant's guilt or in which there is substantial doubt that

the

State can sustain its burden of proof. It is this mutuality of

advantage that perhaps explains the fact that at present well over

three-fourths of the criminal convictions in this country rest on

pleas of guilty . . . .

Id. at 752 (footnotes omitted); see also Mabry v. Johnson, 467 U.S. 504,

508 (1984) ("[B]ecause each side may obtain advantages when a guilty

plea is exchanged for sentencing concessions, the agreement is no less

voluntary than any other bargained-for exchange." (footnote omitted)).

14

therefore be exposed to a greater sentence than he would

have been had he pled guilty. However, at least in some

cases, a prosecutor may be unwilling to allow the defendant

to plead guilty to a lesser offense unless the defendant

enters an enforceable agreement to forgo a subsequent

challenge to the sufficiency of the specific facts alleged in

the charging document.

Put differently, our holding potentially transforms every

guilty plea into a conditional guilty plea with respect to the

defense that the charging document fails to state an

offense. Prosecutors may simply decline to enter plea

bargains agreeing to conditional guilty pleas (at oral

argument the Prosecutor represented that that is what

happened in this case) or at least may not offer the

defendant as good a "deal" for a conditional guilty plea. If

a defendant may raise a particular defense on appeal

notwithstanding an unconditional guilty plea, then there is

no reason why a prosecutor would offer a concession in

exchange for the defendant surrendering that defense. By

reaching the merits of Panarella's claim, we thus establish

a precedent that impedes the ability of a criminal defendant

to enter an enforceable plea agreement whereby he

surrenders the defense that, as a matter of statutory

interpretation, the facts alleged in the charging document

do not amount to a criminal offense, even when the

defendant believes that surrendering such a defense is in

his best interests. Cf. United States v. Mezzanatto, 513 U.S.

196, 208 (1995) ("A sounder way to encourage settlement is

to permit the interested parties to enter into knowing and

voluntary negotiations without any arbitrary limits on their

bargaining chips.").4

_________________________________________________________________

4. We have noted that the law governing enforceability of commercial

contracts provides guidance in resolving questions arising from plea

agreements. See United States v. Baird, 218 F.3d 221, 229 (3d Cir. 2000)

("Although a cooperative plea agreement is not altogether the same as a

commercial arrangement, civil contract law is nevertheless an important

and useful aid in interpretation."); United States v. Nolan-Cooper, 155

F.3d 221, 236 (3d Cir. 1998) ("Plea agreements, although arising in a

criminal context, are analyzed under contract law standards."); see also

Robert E. Scott & William J. Stuntz, Plea Bargaining as Contract, 101

Yale L.J. 1909, 1910 (1992) ("Properly understood, classical contract

15

It is highly doubtful that in this case, Panarella's trial

counsel, Edward S.G. Dennis, Jr., who was an experienced

_________________________________________________________________

theory supports the freedom to bargain over criminal punishment."). For

the same reasons that voluntary commercial agreements generally make

both parties to the agreement better off ex ante, counseled, voluntary

plea agreements generally inure to the mutual benefit of both the

prosecution and the defense. As Professors Scott and Stuntz have

argued, a presumption that plea agreements are enforceable expands the

range of choices available to criminal defendants:

[P]lea bargains deserve a presumption of enforceability . . . .

Parties

who are denied either freedom to contract or freedom to exchange

entitlements suffer unnecessary constraints on their choices . . .

.

[V]oluntary exchange offers people more choices than they would

otherwise enjoy and, other things being equal, more choice is

better

than less.

Scott & Stuntz, supra, at 1913, 1918. A rule that a guilty plea forecloses

a defendant's right to contest the legal sufficiency of the specific facts

alleged in an indictment preserves the range of choice available to

defendants, since a defendant could choose either to: (1) plead guilty and

thereby waive any legal challenges that the relevant criminal statute

does not reach defendant's conduct (and get a better deal); or (2) enter

a conditional guilty plea preserving the right to appeal the sufficiency

of

the particular facts alleged in the indictment, see Fed. R. Crim. P.

11(a)(2) (providing for conditional guilty pleas).

To be sure, scholars have long criticized the plea bargaining process

on a variety of grounds, many of which question whether a plea

agreement presumptively makes both parties better off in the same way

that a commercial contract does. See, e.g., Albert W. Alschuler, The

Changing Plea Bargaining Debate, 69 Cal. L. Rev. 652 (1981). Defects

such as imperfect information, agency costs, and bilateral monopoly

infect the negotiation of guilty pleas, and because criminal convictions

are public goods, the parties to a plea agreement may fail to internalize

the costs that the agreement imposes on society. See generally Stephen

J. Schulhofer, Plea Bargaining as Disaster, 101 Yale L.J. 1979 (1992).

While these objections are forceful, they are objections to the entire

process of plea bargaining generally, and as such have largely been

rejected not only by the common experience of a generation of judges,

prosecutors, and defense lawyers, state and federal, but also by the

caselaw holding that counseled, voluntary plea bargains are

presumptively constitutional. See, e.g., Brady v. United States, 397 U.S.

742 (1970); McMann v. Richardson, 397 U.S. 759 (1970); Parker v. North

Carolina, 397 U.S. 790 (1970); see generally Scott & Stuntz, supra, at

16

criminal defense lawyer as well as the former United States

Attorney for the Eastern District of Pennsylvania and

Assistant Attorney General of the United States in charge of

the Criminal Division, overlooked the particular legal

argument that Panarella makes on appeal. It is more likely

that Panarella, through counsel, deliberately chose to waive

this objection to the sufficiency of the information. For this

reason, this appeal is particularly troubling.

But it is at least conceivable that Mr. Dennis overlooked

the defense that Panarella here raises. If so, leaving aside

the possibility that Panarella may claim ineffective

assistance of counsel in a habeas proceeding under 28

U.S.C. S 2241, Panarella's guilty plea was not a deliberate

waiver of his argument that the superseding information

fails to charge an offense. Indeed, as Panarella points out,

the plea agreement contains no explicit waiver of

Panarella's right to appeal his conviction on these

particular grounds.5 Nonetheless, a guilty plea is presumed

to forfeit those defenses not explicitly reserved by entering

a conditional guilty plea. "[W]hen the defendant . . . admits

his guilt . . . he assumes the risk of ordinary error in either

his or his attorney's assessment of the law and the facts."

McMann v. Richardson, 397 U.S. 759, 774 (1970). To

_________________________________________________________________

1910 ("The many academic arguments for abolishing (or at least severely

restricting) plea bargaining have thus been largely ignored."). There is

no

reason for concluding that a defendant's waiver of his challenge to the

factual sufficiency of an indictment is any more susceptible to defects in

the plea bargaining process than those waivers that courts have

consistently upheld, see, e.g., Tollett v. Henderson, 411 U.S. 258 (1973)

(holding that a guilty plea precludes defendant's challenge to the

exclusion of African-Americans from the grand jury); Gioiosa v. United

States, 684 F.2d 176, 180 (1st Cir. 1982) (holding that a guilty plea

precludes objections to an unlawful search and seizure).

5. In the written plea agreement, Panarella did waive his right to appeal,

but the waiver spoke only to Panarella's right to challenge a sentence

falling within the limits agreed to by the parties. We have held that a

right of appeal may be waived but that the terms of the waiver must be

strictly construed. United States v. Khattak, No. 00-4169, 2001 U.S. App.

LEXIS 26121 (3d Cir. Dec. 6, 2001). Hence, the plea agreement in this

case did not explicitly waive Panarella's right to appeal his conviction

on

the ground that the superseding information failed to charge an offense.

17

require a defendant to enumerate explicitly in a plea

agreement each particular defense that the defendant is

surrendering would be impractical and would unnecessarily

increase the complexity of plea agreements.

The result that we are forced to reach is particularly

unwise in view of Rule 11(a)(2), which permits a defendant

to enter a conditional guilty plea explicitly reserving the

right to raise certain defenses on appeal. By requiring us to

entertain Panarella's appeal notwithstanding his

unconditional guilty plea, Rule 12(b)(2) renders a

conditional guilty plea under Rule 11(a)(2) pointless in

cases such as this, and undermines the rule.

For the foregoing reasons, we urge the Judicial

Conference Advisory Committee on Criminal Rules to

consider amending Rule 12(b)(2) to prevent what has

happened here, particularly in view of its amendments to

Rule 11 allowing for conditional guilty pleas.6

III.

Turning to the merits of Panarella's defense, we must

determine whether, on the facts alleged in the superseding

information, Panarella is guilty under 18 U.S.C.S 3 of being

an accessory after the fact to a wire fraud scheme to

deprive the public of Loeper's honest services, in violation

of 18 U.S.C. SS 1343, 1346. Panarella appears to concede

that, on the facts alleged in the superseding information, if

Loeper is guilty of committing honest services wire fraud in

violation of SS 1343 and 1346, then he is guilty of being an

accessory after the fact under 18 U.S.C. S 3. Thus, although

Loeper is not a defendant in this case, the critical question

is whether the facts alleged in the superseding information

establish that Loeper committed honest services wire fraud.

The federal wire fraud statute provides, in relevant part:

_________________________________________________________________

6. To be sure, there may be constitutional objections to precluding a

defendant who enters an unconditional guilty plea from challenging his

conviction on the grounds that the specific facts alleged in the charging

document are beyond the reach of the relevant criminal statute, and in

revisiting Rule 12(b)(2) the Committee ought to consider such issues.

18

Whoever, having devised . . . any scheme . . . to

defraud, . . . transmits . . . by means of wire . . . in

interstate or foreign commerce, any writings, signs,

signals, pictures, or sounds for the purpose of

executing such scheme or artifice, shall be fined under

this title or imprisoned not more than five years, or

both.

18 U.S.C. S 1343. Section 1346 of Title 18 elaborates on the

meaning of "scheme to defraud," stating that"[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." Congress enacted

S 1346 in response to the Supreme Court's decision in

McNally v. United States, 483 U.S. 350 (1987), which

overturned a long line of lower court decisions and held

that the mail and wire fraud statutes did not reach

schemes to defraud citizens of their intangible right to a

public official's honest services, but rather were"limited in

scope to the protection of property rights." Id. at 360. In

interpreting S 1346, we therefore look to both post-McNally

cases interpreting S 1346 and pre-McNally cases

interpreting S 1341 and S 1343 for guidance. See United

States v. Antico, No. 00-1446, 2001 U.S. App. LEXIS 25318,

at *41 n.16 (3d Cir. Nov. 28, 2001) ("[C]ommentary and

judicial reflection indicate that [S 1346] was enacted to

overturn McNally and restore the evolution of mail and wire

fraud to its pre-McNally status."); United States v. Lopez-

Lukis, 102 F.3d 1164, 1169 (11th Cir. 1997) ("[W]e consider

pre-McNally cases as persuasive authority in evaluating the

scope of honest services.").

"Honest services fraud typically occurs in two scenarios:

(1) bribery, where a legislator was paid for a particular

decision or action; or (2) failure to disclose a conflict of

interest resulting in personal gain." United States v. Antico,

No. 00-1446, 2001 U.S. App. LEXIS 25318, at *45 (3d Cir.

Nov. 28, 2001); see also United States v. Woodward, 149

F.3d 46, 54-55 (1st Cir. 1998). Because the superseding

information does not allege that Panarella bribed Loeper,

the question presented by this appeal is under what

circumstances nondisclosure of a conflict of interest rises to

the level of honest services fraud.

19

The government argues that because the superseding

information alleges that Loeper unlawfully concealed a

financial interest while taking discretionary action that

directly benefitted that interest, the information sufficiently

alleges that Loeper committed honest services wire fraud.

The superseding information alleges that from 1993

through 1997 Loeper filed false Statements of Financial

Interest in violation of 65 Pa. C.S.A. SS 1104(a) & 1105,

failing to report more than $300,000 in income that he

received from Panarella for the consulting services that he

provided to Panarella's tax collection business. The

superseding information further alleges that during this

time Loeper, while serving as Senate Majority Leader, spoke

and voted against proposed legislation that would have

significantly harmed Panarella's business by restricting the

enforcement of the business privilege tax.7

_________________________________________________________________

7. As a threshold matter, Panarella contends that in construing the

superseding information, we should consider only the facts alleged in the

charging paragraph, which reads:

On or about September 8, 1997, in the Eastern District of

Pennsylvania defendant Nicholas Panarella, Jr., knowing that an

offense against the United States had been committed, namely, wire

fraud in violation of Title 18, United States Code, Sections 1343

and

1346, knowingly and willfully assisted F. Joseph Loeper, Jr. in

order

to hinder and prevent Loeper's apprehension, trial and punishment

by editing the response from S.R. to the reporter so as to continue

to conceal the financial relationship between Panarella and Loeper,

in violation of Loeper's duty to provide honest services.

On the basis of this language, Panarella submits that the entire scheme

to defraud alleged in the superseding information is limited to his

efforts

to conceal his financial relationship with Loeper from a reporter. We

believe, however, that the allegation that Panarella edited S.R.'s

response

to the reporter defines only Panarella's participation as an accessory

after the fact, and that the actual scheme to defraud the public of

Loeper's honest services, to which Panarella was an accessory after the

fact, is defined by the detailed factual allegations set forth in the body

of

the superseding information.

More particularly, although the charging paragraph refers to the

"conceal[ment] [of] the financial relationship between Panarella and

Loeper, in violation of Loeper's duty to provide honest services," we do

not read this language as limiting the alleged violation of Loeper's duty

20

Panarella submits that these allegations alone are

insufficient to establish that Loeper committed honest

services wire fraud, since, as the government concedes,

there is no allegation that Loeper sold his vote to Panarella

or that Loeper's financial relationship with Panarella

influenced Loeper's decision to speak and vote against the

proposed legislation. We must decide, then, whether

allegations that Loeper unlawfully concealed his income

received from Panarella while taking discretionary action

that Loeper knew would directly benefit Panarella amounts

to a scheme to deprive the public of his honest services, or

whether an additional allegation that Loeper's discretionary

action was influenced by Panarella's payments is necessary.

For the reasons that follow, we hold that where a public

official takes discretionary action that the official knows will

directly benefit a financial interest that the official has

concealed in violation of a state criminal law, that official

has deprived the public of his honest services under 18

U.S.C. S 1346.

to provide honest services to concealment alone. Rather, we interpret

this phrase as incorporating by reference the other facts specifically

alleged in the body of the superseding information, such as the fact that

Loeper took discretionary action as Pennsylvania Senate Majority Leader

that directly benefitted Panarella and that Loeper filed false Statements

of Financial Interest with the Pennsylvania Ethics Commission. To be

sure, the superseding information does not explicitly allege that these

facts constituted the scheme to defraud the public of Loeper's honest

services, and a court should "not strain to interpret a defective

indictment to be in conformity with [the mail or wire fraud statute]."

United States v. Olatunji, 872 F.2d 1161, 1166 (3d Cir. 1989).

Nonetheless, we do not believe that it is a stretch to read the

superseding information as alleging that the detailed facts recited in the

body of the superseding information as a whole amounted to honest

services fraud. Moreover, because Panarella challenges the sufficiency of

the superseding information for the first time on appeal, we must

construe the information liberally. See United States v. Cefaratti, 221

F.3d 502, 507 (3d Cir. 2000) ("[W]hen a challenge is urged for the first

time on appeal we will construe the indictment liberally in favor of

validity.").

21

A.

In urging us to reverse his conviction, Panarella relies

heavily on the Seventh Circuit's decision in United States v.

Bloom, 149 F.3d 649 (7th Cir. 1998), which reversed the

honest services fraud conviction of a Chicago alderman who

in his private capacity as a lawyer advised a client to use

a proxy bidder at a tax scavenger sale at which the client's

property was being auctioned, thereby depriving the city of

tax revenues. We believe that Bloom is distinguishable on

its facts, because the alleged scheme to defraud in Bloom

did not involve anything that the defendant did in his

official capacity. The only wrongdoing in Bloom was advice

given by the defendant in his private capacity as a lawyer.

See Bloom, 149 F.3d at 655 (noting that the indictment

"does not charge that [defendant] used his office in any

way, let alone that he misused it"). In contrast, in this case,

Loeper took discretionary action in his official capacity that

directly benefitted an unlawfully concealed financial

interest.

Although Bloom is distinguishable, Panarella asks us to

adopt the specific limiting principle espoused by Bloom,

which held that "[a]n employee deprives his employer of his

honest services only if he misuses his position (or the

information he obtained from it) for personal gain." Id. at

656-57. We see several problems with Bloom's definition of

honest services fraud as limited to misuse of office for

personal gain.

First, we believe that the notion of misuse of office for

personal gain adds little clarity to the scope ofS 1346.

Panarella contends that because there is no allegation in

the superseding information that Loeper sold his vote, there

was no misuse of office for personal gain. The government

responds that Loeper misused his office for personal gain

because he concealed a financial interest while taking

discretionary action directly benefitting that interest. This

dispute between the government and Panarella as to

whether, on the facts alleged in the superseding

information, Loeper misused his office for personal gain

illustrates the difficulty in applying the standard"misuse of

office for personal gain" and suggests that this standard,

rather than clarifying the meaning of "scheme or artifice to

22

deprive another of the intangible right of honest services,"

18 U.S.C. S 1346, adds an extra layer of unnecessary

complexity to the inquiry.

In addition to its lack of clarity, "misuse of office for

personal gain" risks being both over-inclusive and under-

inclusive as a limiting principle. To the extent that, as

Panarella argues, misuse of office for personal gain does not

cover a public official's nondisclosure of a conflict of

interest, it is too narrow, since, as discussed below,

nondisclosure of a conflict of interest in a fiduciary setting

falls squarely within the traditional definition of fraud, and

poses a similar threat to the integrity of the electoral

system as that posed by misuse of office for personal gain.

See Section III.C. Conversely, to the extent that "misuse of

office for personal gain" would envelop anyone from an

elected official who uses his position of power to seduce a

young intern to a Senator who takes home pencils from the

office supply cabinet for personal use, the standard is too

broad. And to the extent that it is unclear whether the

standard would cover the public officials in the examples

above and in the case before us, it is too vague to cure

whatever ambiguity exists in the meaning of honest services

fraud.

Although the Bloom court stated that "[n]o case we can

find in the long history of intangible rights prosecutions

holds that a breach of fiduciary duty, without misuse of

one's position for private gain, is an intangible rights

fraud," id. at 656, such cases do exist, even in the Seventh

Circuit. See, e.g., United States v. Bush, 522 F.2d 641 (7th

Cir. 1975); see also United States v. Espy, 989 F. Supp. 17

(D.D.C. 1997), rev'd in part on other grounds , 145 F.3d

1369 (D.C. Cir. 1998). In Bush, the Seventh Circuit

squarely held that the defendant's concealment of a conflict

of interest amounted to honest services fraud, even though

"[t]here is no concrete evidence of extortion, bribery,

kickbacks, or a violation of any criminal law other than the

mail fraud statute." Bush, 522 F.2d at 646 (footnote

omitted). Although the Bloom panel asserted that "the

indictment[ ] in . . . Bush . . . alleged that the defendant[ ]

converted to private use information that [he] possessed by

virtue of [his] public position[ ]," 149 F.3d at 655, we can

23

find no mention of this fact in the Bush opinion, and

therefore cannot agree with the Bloom court that conversion

of information to private use was the basis for the holding

in Bush.

Rather than substituting one ambiguous standard for

another in holding that an official deprives the public of his

honest services only if he misuses office for personal gain,

we believe that state law offers a better limiting principle for

purposes of determining when an official's failure to

disclose a conflict of interest amounts to honest services

fraud. Cf. United States v. Brumley, 116 F.3d 728, 734-35

(5th Cir. 1997) (en banc) (using state law to define the

contours of honest services fraud). Although we need not

decide whether a violation of state law is always necessary

for nondisclosure to amount to honest services fraud, we

note that the clarity of Pennsylvania's disclosure statute

criminalizing a public official's nondisclosure of his sources

of income addresses rule of lenity concerns, see infra

Section III.D, more effectively than does "misuse of office for

personal gain." Moreover, the existence of a violation of

state law in this case mitigates the federalism concerns that

arise from federal prosecutions of local public officials, see

infra Section III.B, in a way that "misuse of office for

personal gain" does not.

Bloom considered the use of state law as a limiting

principle, since the advice that the defendant in Bloom gave

his client -- to use a proxy bidder at a tax scavenger sale

at which the client's property was being sold -- counseled

the client to engage in unlawful conduct. Ultimately,

however, the Bloom court rejected the use of state law as a

limiting principle:

One way to cope with this problem [of the breadth of

honest services fraud] would be to limit prosecutions to

cases in which a defendant's acts not only violated a

fiduciary duty but also transgressed some other rule of

law. . . . As a limiting principle, this has two

shortcomings. First, Bloom did not violate 35 ILCS

200/21-265(a)(1); only [Bloom's client] and the straw

purchaser did so. Second, and more important, this

line of argument has nothing to do with Bloom's status

as an alderman. If advising a client to violate a state

24

law in order to avoid paying taxes is a scheme to

defraud the governmental body that should have

received those taxes . . . , then every member of the bar

would be as culpable as Bloom.

Bloom, 149 F.3d at 654. We find this reasoning

unpersuasive as a basis for rejecting use of state law as a

limiting principle.

The fact that Bloom did not violate the relevant state law

is in itself no reason to reject state law as a limiting

principle -- it simply shows that if state law is adopted as

a limiting principle, then Bloom did not commit honest

services fraud. Similarly, the fact that the state law "ha[d]

nothing to do with Bloom's status as an alderman" is not a

reason for rejecting as a limiting principle state law that

does relate to a defendant's status as a public official.

Under either the limiting principle adopted in Bloom, which

requires misuse of office for personal gain, or the limiting

principle that requires a violation of some state criminal

law regulating public officials, Bloom's conviction would

have been reversed. In our view, the Bloom court thus failed

to explain why misuse of office for personal gain provides a

sounder limiting principle than state law.

B.

We are mindful that the prosecution of state public

officials for honest services fraud raises federalism concerns

about the appropriateness of the federal government's

interference with the operation of state and local

governments. See McNally v. United States, 483 U.S. 350,

360 (1987) (refusing to "construe the [federal mail fraud]

statute in a manner that leaves its outer boundaries

ambiguous and involves the Federal Government in setting

standards of disclosure and good government for local and

state officials"). In our view, use of state law as a limiting

principle defining the scope of honest services fraud in

close cases better addresses these federalism concerns than

does the limiting principle of misuse of office for personal

gain, which Panarella urges upon us.

In this case, the intrusion into state autonomy is

significantly muted, since the conduct that amounts to

25

honest services fraud is conduct that the state itself has

chosen to criminalize. See United States v. Antico, No. 00-

1446, 2001 U.S. App. LEXIS 25318, at *43 n.18 (3d Cir.

Nov. 28, 2001) ("[W]e need not reconcile the principles of

federalism with S 1346 in this case because[defendant]

owed a duty to the citizens of Philadelphia under state and

local law."). See generally George D. Brown, Should

Federalism Shield Corruption? -- Mail Fraud, State Law and

Post-Lopez Analysis, 82 Corn. L. Rev. 225, 282-99 (1997).

To be sure, the violation of Pennsylvania's disclosure

statute is only a misdemeanor, see 65 Pa. C.S.A. S 1109(b),

whereas violation of the federal mail fraud statute may

result in up to five years imprisonment, see 18 U.S.C.

S 1343. This disparity in punishment, however, may occur

whenever federal criminal law defines predicate offenses by

reference to state law. See, e.g., 16 U.S.C.SS 3372(a)(2) &

3373(d) (making it a federal criminal offense to transport,

sell, or purchase fish or wildlife obtained in violation of

state law); 18 U.S.C. S 1955 (making it a federal criminal

offense to conduct a gambling operation in violation of state

law).

Indeed, it is a truism that a healthy federalism involves

some interposition of state and federal governments into

each other's respective spheres of sovereignty. See Testa v.

Katt, 330 U.S. 386 (1947) (requiring state courts of general

jurisdiction to entertain claims predicated on federal law

where Congress has conferred concurrent jurisdiction); Erie

R.R. Co. v. Tompkins, 304 U.S. 64 (1938) (requiring federal

courts sitting in diversity jurisdiction to apply and enforce

state law); The Federalist No. 51, at 351 (James Madison)

(Jacob E. Cooke ed., 1961) ("The different governments will

controul each other; at the same time that each will be

controuled by itself.").

In particular, federal prosecution of state and local public

officials can play a beneficial role where state prosecutors

are reluctant to bring charges against political allies or

superiors. See United States v. Schermerhorn, 713 F. Supp.

88, 92 n.4 (S.D.N.Y. 1989) ("[O]ur own experiences in this

court have taught us that numerous illegal kickback,

election, and like schemes involving state and local officials

are, for whatever reasons, often not prosecuted by state law

26

enforcers. It is empirically clear to us, therefore, that in the

absence of federal intervention many of these political

crimes would go unpunished, and perhaps worse,

unnoticed or undiscovered."); Adam H. Kurland, The

Guarantee Clause as a Basis for Federal Prosecutions of

State and Local Officials, 62 S. Cal. L. Rev. 367, 377 (1989)

("For a variety of reasons, not all of them venal or corrupt,

local prosecutors have generally been unable to prosecute

local corruption consistently and effectively.").

C.

Rather than limiting honest services fraud to misuse of

office for personal gain, we hold that a public official who

conceals a financial interest in violation of state criminal

law while taking discretionary action that the official knows

will directly benefit that interest commits honest services

fraud. See United States v. Woodward, 149 F.3d 46, 62 (1st

Cir. 1998) ("A public official has an affirmative duty to

disclose material information to the public employer. When

an official fails to disclose a personal interest in a matter

over which she has decision-making power, the public is

deprived of its right either to disinterested decision making

itself or, as the case may be, to full disclosure as to the

official's motivation behind an official act." (quoting United

States v. Sawyer, 85 F.3d 713, 724 (1st Cir. 1996))); United

States v. Mandel, 591 F.2d 1347, 1363 (4th Cir. 1979),

aff 'd 602 F.2d 653 (4th Cir. 1979) (en banc) ("Provided the

requisite intent is shown, the official's failure to disclose the

existence of a direct interest in a matter that he is passing

on defrauds the public and pertinent public bodies of their

intangible right to honest, loyal, faithful and disinterested

government."); United States v. Keane, 522 F.2d 534, 546

(7th Cir. 1975) ("It is clear to us that one who breaches the

public trust by actively concealing a personal financial

interest from the public and from a public body charged

with the responsibility of passing judgment on matters

directly affecting that financial interest, and on which he

serves and in which he participates in the formulation of

collective judgment of that body, pursuant to his official

duties, may be prosecuted for mail fraud."); see also United

States v. Silvano, 812 F.2d 754, 759 (1st Cir. 1987) ("[A]n

27

employee's breach of a fiduciary duty falls within the

strictures of the statute when it encompasses the breach of

a duty to disclose material information to the employer.").

We acknowledge that in most cases upholding honest

services fraud convictions based on concealment of a

conflict of interest there was also an allegation of bribery or

that the concealed conflict of interest improperly influenced

the defendant's performance of his official duties. At least

in some cases, however, courts have convicted solely on the

basis of the defendant's intentional breach of a duty to

disclose, without any allegation or evidence of bribery or

other misuse of office. See United States v. Bush, 522 F.2d

641, 646 (7th Cir. 1975) (upholding an honest services

conviction even though "[t]here is no concrete evidence of

extortion, bribery, [or] kickbacks"); United States v. Espy,

989 F. Supp. 17, 25 (D.D.C. 1997), rev'd in part on other

grounds, 145 F.3d 1369 (D.C. Cir. 1998) ("The law in this

Circuit does not require allegations that a quid pro quo or

selling of office is necessary for the indictment to support

charges for honest services fraud."). Moreover, even where

evidence of misuse of office in addition to mere

nondisclosure exists, courts have explicitly disclaimed any

reliance on such evidence in affirming defendants'

convictions. See, e.g., United States v. Bronston, 658 F.2d

920, 926 (2d Cir. 1981) ("[T]he concealment by a fiduciary

of material information which he is under a duty to disclose

to another under circumstances where the non-disclosure

could or does result in harm to the other is a violation of

the statute. . . . [P]roof that the fiduciary relationship was

used or manipulated in some way is unnecessary.").

We believe that our holding -- that a public official

commits honest services fraud if he takes discretionary

action that he knows directly benefits a financial interest

that the official concealed in violation of state criminal law

-- has a sound basis in both doctrine and policy. As a

doctrinal matter, a public official's nondisclosure of a

financial interest while taking discretionary action that the

official knows will directly benefit that interest falls

squarely within the classical definition of fraud."Fraud in

its elementary common law sense of deceit . . . includes the

deliberate concealment of material information in a setting

28

of fiduciary obligation." United States v. Holzer, 816 F.2d

304, 307 (7th Cir. 1987), vacated and remanded for

consideration in light of McNally, 484 U.S. 807 (1987); see

also United States v. Dial, 757 F.2d 163, 168 (7th Cir.

1985) ("Fraud in the common law sense of deceit is

committed by deliberately misleading another by words, by

acts, or, in some instances -- notably where there is a

fiduciary relationship, which creates a duty to disclose all

material facts -- by silence."). As explained below, the facts

alleged in the superseding information in this case

sufficiently establish that: (1) Loeper had a duty, both

under state common law and state criminal law, to disclose

material information to the public; (2) Loeper deliberately

concealed his income received from Panarella; and (3) this

information was material. We thus find that Loeper's

conduct falls squarely within the definition of fraud, in its

classical sense.

Both at common law and under Pennsylvania criminal

law, Loeper had a duty to disclose to the public material

information. "A public official is a fiduciary toward the

public, . . . and if he deliberately conceals material

information from them he is guilty of fraud." Holzer, 816

F.2d at 307; see also United States v. deVegter , 198 F.3d

1324, 1328 (11th Cir. 1999) ("Public officials inherently owe

a fiduciary duty to the public . . . ."); United States v.

Sawyer, 85 F.3d 713, 733 n.17 (1st Cir. 1996) ("[T]he

obligation to disclose material information inheres in the

legislator's general fiduciary duty to the public."). This

common law duty to disclose is codified by Pennsylvania

statute, which requires public officials to file annual

Statements of Financial Interest and criminalizes

intentional misrepresentations in these statements. See 65

Pa. C.S.A. SS 1104(a), 1105 & 1109(b).

By lying about his income, Loeper breached this duty to

disclose. The information that Loeper allegedly concealed in

this case -- his financial relationship with Panarella -- was

material because at the time Loeper misrepresented the

information, he was taking discretionary action that directly

benefitted Panarella's business. Cf. Holzer, 816 F.2d at 307

("The standard of materiality is an objective one; it does not

reach every piece of information that a particular litigant

29

might like to have about a judge. A judge need not disclose

information that would not make a reasonable person think

him incapable of presiding impartially in the case."). In this

case, however, Loeper, as a Pennsylvania Senator and in

the powerful position of Senate Majority Leader, both spoke

and voted against proposed legislation that would have

directly harmed Panarella's business. The information that

Loeper concealed was therefore material, since knowledge of

Loeper's income from Panarella would have been relevant

both to Loeper's colleagues in assessing Loeper's comments

when deciding how to vote on the bill, and to the electorate

in assessing whether Loeper placed his financial self-

interest above the public interest. Moreover, on the facts

alleged in the superseding information, Loeper clearly knew

that his discretionary action would directly benefit

Panarella's business, given Loeper's familiarity with both

the nature of the proposed legislation and the nature of

Panarella's business.

We thus conclude that because Loeper deliberately

concealed a financial interest in violation of Pennsylvania

criminal law, while taking discretionary action that he knew

directly benefitted that interest, his conduct constituted a

scheme to deprive the public of his honest services for

purposes of S 1346.

As a matter of policy, we believe this result is justified by

the central role of disclosure in a well-functioning

representative democracy. Critical to the health of the

electoral process is the voters' ability to judge whether their

representatives are acting to further their own financial

self-interest instead of the public interest. As noted in the

margin, the requirement under Pennsylvania law that

elected representatives disclose their sources of income

serves a purpose analogous to that served by federal laws

requiring candidates for federal office to disclose the source

of their campaign contributions.8

_________________________________________________________________

8. In discussing these disclosure requirements, the Supreme Court has

observed:

[D]isclosure provides the electorate with information as to where

political campaign money comes from and how it is spent by the

30

The criminal penalties that Pennsylvania law attaches to

a public official's concealment of a financial interest affirm

the crucial role of disclosure in the electoral process. See

65 Pa. C.S.A. S 1101.1(a) ("[P]eople have a right to be

assured that the financial interests [of public officials] do

not conflict with the public trust. Because public

confidence in government can best be sustained by

assuring the people of the impartiality and honesty of

public officials, this chapter shall be liberally construed to

promote complete financial disclosure as specified in this

chapter.").

Were it easy to detect and prosecute public officials for

bribery, the need for public officials to disclose conflicts of

interest would be greatly reduced. As long as a public

official does not act on a conflict of interest, the conflict of

interest by itself poses little threat to the public. One

reason why federal and state law mandates disclosure of

conflicts of interest, however, is that it is often difficult or

impossible to know for sure whether a public official has

acted on a conflict of interest. Cf. Holzer, 816 F.2d at 308

("How can anyone prove how a judge would have ruled if he

had not been bribed?"). The only difference between a

public official who accepts a bribe and a public official who

receives payments while taking discretionary action that

benefits that payor, as Loeper did in this case, is the

existence of a quid pro quo whereby the public official and

the payor agree that the discretionary action taken by the

public official is in exchange for payment. Recognizing the

practical difficulties in proving the existence of such a quid

_________________________________________________________________

candidate in order to aid the voters in evaluating those who seek

federal office. . . . The sources of a candidate's financial

support . . .

alert the voter to the interests to which a candidate is most

likely to

be responsive and thus facilitate predictions of future performance

in office.

Buckley v. Valeo, 424 U.S. 1, 66-67 (1976) (internal quotation marks and

footnote omitted); see also Nixon v. Shrink Mo. Gov't PAC, 528 U.S. 377,

408 (2000) (Kennedy, J., dissenting) (noting that disclosure of campaign

contributions allows the public to "judge for itself whether the candidate

or the officeholder has so overstepped that we no longer trust him or her

to make a detached and neutral judgment").

31

pro quo, disclosure laws permit the public to judge for itself

whether an official has acted on a conflict of interest.

To sum up, we reject Panarella's argument that an

allegation of bribery or other misuse of office is necessary

to sustain a conviction for honest services wire fraud.

Rather, for the reasons discussed above, we hold that if a

public official fails to disclose a financial interest in

violation of state criminal law and takes discretionary

action that the official knows will directly benefit that

interest, then that public official has committed honest

services fraud.

D.

Panarella argues that the rule of lenity dictates that we

construe S 1346 narrowly to exclude from its scope a public

official who conceals a financial interest while taking

discretionary action that directly benefits that interest. The

rule of lenity, which requires that ambiguities in criminal

statutes be resolved against the government, "serves to

ensure both that there is fair warning of the boundaries of

criminal conduct and that legislatures, not courts, define

criminal liability." Crandon v. United States , 494 U.S. 152,

158 (1990); see also United States v. Sanders , 165 F.3d

248, 251 (3d Cir. 1999).

We note that, as a textual matter, it is not a strained

reading of S 1346 to hold that a public official who

deliberately lies about his income while taking discretionary

action in his official capacity that directly benefits his

concealed financial interest "deprives [the public] of the

intangible right of honest services." At all events, our

criminal law contains numerous statutes whose

construction and application pose difficulties in

interpretation. See, e.g., 15 U.S.C. S 1 (criminalizing "[e]very

contract, combination . . . , or conspiracy in restraint of

trade"). Deprivation of honest services is perforce an

imprecise standard, and rule of lenity concerns are

particularly weighty in the context of prosecutions of

political officials, since such prosecutions may chill

constitutionally protected political activity. Moreover,

decisions of our own Court stating that "fraud is a broad

32

concept that `is measured in a particular case by

determining whether the scheme demonstrated a departure

from fundamental honesty, moral uprightness, or fair play

and candid dealings in the general life of the community,' "

United States v. Monostra, 125 F.3d 183, 186 (3d Cir. 1997)

(quoting United States v. Goldblatt, 813 F.2d 619, 624 (3d

Cir. 1987)), do little to allay fears that the federal fraud

statutes give inadequate notice of criminality and delegate

to the judiciary impermissibly broad authority to delineate

the contours of criminal liability.

We believe that the policies underlying the rule of lenity

are not implicated in this case, however, because Loeper's

deliberate concealment of his income from Panarella clearly

violated a Pennsylvania criminal statute, 65 Pa. C.S.A.

SS 1104(a), 1105 & 1109(b). This statute gave both Loeper

and Panarella unambiguous notice that Loeper's

nondisclosure was criminal. A public official who

deliberately chooses to lie about an income source in

violation of a criminal law clearly imposing a duty to

disclose does so at his peril. The subsequent efforts taken

by Panarella and Loeper to conceal Loeper's initial

misrepresentation further undermine any claim of

inadequate notice. See United States v. Holzer , 816 F.2d

304, 309 (7th Cir. 1987), vacated and remanded for

consideration in light of McNally, 484 U.S. 807 (1987)

("Elaborate efforts at concealment . . . are powerful evidence

that a defendant's conduct violates an ethical standard well

known to him and to the whole community, and not just

something thought up after the fact by a perhaps overly

sensitive federal judge."); Dial, 757 F.2d at 170 ("The

defendants' elaborate efforts at concealment provide

powerful evidence of their own consciousness of

wrongdoing."). Finally, the existence of a clear violation of

Pennsylvania criminal law complies with the separation of

powers principle requiring legislatures, not courts, to define

criminal conduct.

E.

In sum, we hold that where a public official conceals a

financial interest in violation of a criminal disclosure

statute and takes discretionary action in his official

33

capacity that he knows will directly benefit that interest,

the official has engaged in "a scheme or artifice to deprive

[the public] of the intangible right of honest services." 18

U.S.C. S 1346. Concomitantly, we emphasize the

narrowness of our holding. First, Loeper's nondisclosure

was in clear violation of Pennsylvania criminal law. The

existence of this violation of state law resolves federalism

and vagueness concerns that might otherwise arise in cases

such as this.9 Second, Loeper took discretionary action in

his official capacity that he knew would benefit his

undisclosed financial interest. This action rendered the

information that Loeper concealed material, since the

public would find the information relevant in assessing

Loeper's voting record. Finally, our holding is limited to

public officials, and does not reach private officials' breach

of a fiduciary duty to disclose. Because disclosure is critical

to the electoral process, unlawful concealment of conflicts

of interest by public officials implicates weightier concerns

than breaches of fiduciary duty by persons who do not hold

public office. See John C. Coffee, Jr., Modern Mail Fraud:

The Restoration of the Public/Private Distinction , 35 Am.

Crim. L. Rev. 427, 462 (1998) ("[T]he victims of public

corruption lack any right of exit. Put simply, they cannot

_________________________________________________________________

9. Although we hold that the existence of a violation of state law,

coupled

with the other facts discussed above, is sufficient to establish honest

services wire fraud in this case, we need not decide whether a violation

of state law is necessary for nondisclosure of a conflict of interest to

amount to honest services fraud. Our decision in United States v. Antico,

No. 00-1446, 2001 U.S. App. LEXIS 25318 (3d Cir. Nov. 28, 2001),

suggested in dicta that a violation of state law is not necessary for

nondisclosure of a conflict of interest to constitute honest services

fraud.

See id. at *49 ("Duties to disclose material information affecting an

official's impartial decision-making . . . exist within this fiduciary

relationship regardless of state or local law codifying a conflict of

interest."). However, since the defendant's nondisclosure in Antico

violated state law, the Antico court, like this Court, did not have

occasion

to hold squarely that a public official who does not violate state law may

nonetheless be guilty of honest services fraud for failing to disclose a

conflict of interest. See id. ("When coupled with the duty imposed by

state and local conflict of interest laws, Antico's failures to disclose

his

finanicial business arrangement with Ricciardi and to recuse himself

from taking action with respect to her applications fall within the scope

of honest services fraud.").

34

change governments. But investors can change

investments.").

We believe that the narrowness of our holding, and in

particular our reliance on Loeper's violation of Pennsylvania

criminal law as a limiting principle, avoids the parade of

horribles envisioned by those who fear overly broad

application of the federal mail and wire fraud statutes. See

United States v. Bloom, 149 F.3d 649, 654 (7th Cir. 1998)

(arguing that under the prosecution's theory, "every city

employee would be required to shop exclusively in Chicago

in order to maximize its receipts from sales taxes, and

would be guilty of a federal felony if he bought a pair of

boots through the mail from L.L. Bean"); United States v.

Margiotta, 688 F.2d 108, 140 (2d Cir. 1982) (Winter, J.,

dissenting) (fearing that "[a] partisan political leader who

throws decisive support behind a candidate known to the

leader to be less qualified than his or her opponent because

that candidate is more cooperative with the party

organization, is guilty of mail fraud unless that motive is

disclosed to the public").

IV.

Finally, we address Panarella's argument that his guilty

plea lacked an adequate factual basis, as required by

Federal Rule of Criminal Procedure 11(f). Rule 11(f)

provides that "[n]otwithstanding the acceptance of a plea of

guilty, the court should not enter a judgment upon such

plea without making such inquiry as shall satisfy it that

there is a factual basis for the plea." This rule is intended

to "protect a defendant who is in the position of pleading

voluntarily with an understanding of the nature of the

charge but without realizing that his conduct does not

actually fall within the charge." McCarthy v. United States,

394 U.S. 459, 467 (1969).

Because Panarella's argument that his guilty plea lacked

an adequate factual basis rests primarily on the same

argument that the superseding information failed to charge

an offense, we reject his Rule 11(f) challenge. 10 Since we

_________________________________________________________________

10. Panarella also argues that in reviewing the factual basis for his

guilty

plea, we should consider only the following exchange with the District

Court at his plea colloquy:

35

would reach the same result under either a plain error or

abuse of discretion standard of review, we need not decide

the question of the appropriate standard of review where,

as in this case, a defendant fails to raise a Rule 11(f)

challenge before the district court, e.g., by moving to

withdraw the plea. See United States v. Cefaratti, 221 F.3d

502, 509 & n.3 (3d Cir. 2000) ("A district court's finding of

_________________________________________________________________

THE COURT: All right. Just to be absolutely certain, Mr.

Panarella, did you help Mr. Loeper continue the false disclosure

form that he filed, the story about the false disclosure form that

he

filed in 1993, by some things that you did in 1997?

THE WITNESS: Yes.

THE COURT: That's what I want to be comfortable with. I'm

satisfied that the defendant is competent to plead. The plea is

voluntary, and not the result of force or threats or any promises,

apart from the plea agreement which has been fully disclosed on

this record.

There is, I'm comfortable, a factual basis for the plea of guilty,

along with accessory after the fact for Mr. Panarella's involvement

in

assisting Mr. Loeper in covering up Mr. Loeper's false cover story.

Panarella contends that this exchange shows that the trial judge relied

solely on the admission quoted above, and that in reviewing the District

Court's Rule 11(f) finding, we may therefore consider only this

admission. Panarella submits that by itself the admission quoted above

provides an inadequate factual basis for accepting his guilty plea, even

if the theory charged in the superseding information is valid.

We do not agree that, in concluding that Panarella's guilty plea had an

adequate factual basis, the District Court relied exclusively on the

admission quoted above. Before this admission, the government

summarized the facts that it would prove at trial, which included

Loeper's concealment of his payments from Panarella and the

discretionary action taken by Loeper that directly benefitted Panarella.

After this summary, the court asked the defendant,"Mr. Panarella, do

you agree with the prosecutor's summary of what you did?" Panarella

replied "Absolutely." We therefore conclude that the factual basis for

Panarella's guilty plea that the trial judge relied on included the

government's summary of what it would prove at trial, and Panarella's

admission that he "absolutely" agreed with the summary. This

admission, together with the admission quoted above, provided an

adequate factual basis for Panarella's guilty plea.

36

a factual basis for a plea is reviewed for an abuse of

discretion. . . . The government maintains that Cefaratti's

failure to raise this issue before the District Court

necessitates plain error review -- an issue on which there

is some disagreement in the courts. We need not decide

this issue in light of our disposition." (citations omitted)).

For the foregoing reasons, the judgment of the District

Court will be affirmed.

A True Copy:

Teste:

Clerk of the United States Court of Appeals

for the Third Circuit

37