USAU Conviction Reversed On Appeal.
Brennan and USAU were charged with mail fraud in the wake of a 1987 Pacific Southwestern Airlines crash, which killed all 43 people aboard. A disgruntled former employee of USAir, David Burke, had boarded the Los Angeles-San Francisco flight with a handgun, which he used to shoot his former supervisor, who was a passenger on the plane, the pilot and the co-pilot. PSA, which was in the process of being acquired by USAir, was covered by USAir's insurance.
Industry trade associations, including Alliance of American Insurers, the American Insurance Association and the National Association of Independent Insurers, had filed an amicus curiae brief, asking that the appellate court correct the district court's errors.
"We are pleased with the Second Circuit's decision," said Laura Kersey, counsel for the American Insurance Association, in Washington, D.C. "The Second Circuit made it clear that the government's argument that the defendants owed a fiduciary duty to their policyholders, coinsurers and reinsurers was flawed. Had the Second Circuit reached the opposite conclusion, it could have resulted in the criminal prosecution of good faith business decisions."
USAU acts as manager for an unincorporated consortium of some 15 insurance companies, known as United States Aircraft Insurance Group (USAIG), whose members pool their resources to insure aviation-related risks. Although USAU does not directly provide insurance or bear insurance risks, the company writes liability and casualty insurance policies, collects premiums, investigates claims and manages claims litigation.
Forty-four wrongful death suits were brought against, among others, USAir/PSA, Ogden-Allied Corp. -- the company operating the passenger security screening checkpoint for PSA in Los Angeles -- and Los Angeles International Airport by survivors of the passengers and crew. As lead insurer for both USAir and Ogden, USAU hired separate counsel for the companies and monitored their investigation of likely liability exposure. According to court documents, Brennan expressed the view that the crash was a "USAir accident," and USAU set a provisional $55 million reserve to cover USAir's anticipated liability while setting only a $1 million reserve for Ogden's legal and related expenses.
USAU and Brennan were indicted in federal court in 1995, on charges that they had defrauded USAir and USAIG's insurers and reinsurers by allocating the loss solely to USAir. According to the indictment, USAU's management of the litigation and its allocation decision had been distorted by a conflict of interest, under which USAU/USAIG gained a financial advantage by allocating the loss to USAir instead of Ogden. USAU had apparently failed to fully reinsure USAIG's risk on the Ogden policy, the government alleged, and because of this reinsurance gap, USAIG was potentially responsible for up to $7.5 million of Ogden's liability. USAIG, which would have had no non-reinsured liability if the entire amount of the settlements had been allocated to USAir's policy, was potentially liable for up to $7.5 million if Ogden was allocated a share, the documents state.
Brennan was sentenced to 57 months in prison and fined $100,000 when a Brooklyn federal jury found USAU and its president had committed fraud against USAir, its coinsurers and reinsurers by making misrepresentations and failing to disclose information, including the possible conflict of interest. USAU was fined $20.5 million and ordered to make restitution of $20.6 million.
The 43 counts of mail fraud, for which Brennan and USAU had been charged, stemmed from letters sent by the company to USAir, the coinsurers and the reinsurers. The letters contained affirmative misrepresentations that caused the recipients to accept, rather than question, USAU's handling of the claims and litigation and its allocation of responsibility, prosecutors alleged.
The three-judge appeals panel questioned the appropriateness of the venue, holding that the case should have been heard in the Southern District of New York (which encompasses USAU's lower Manhattan offices), rather than in Brooklyn, part of the Eastern District. Prosecutors argued that the venue was proper because the mailings had traveled through John F. Kennedy or La Guardia airports, both in the Eastern District, en route to or from USAU's offices. According to the government and the district court, this sufficed to establish venue in the Eastern District.
The Second Circuit Court found that, because the crimes had been committed at USAU's headquarters, the proper venue for the trial should have been Manhattan, in the Southern District. The court reversed the convictions and dismissed the indictments on the basis that the defendants were entitled to prosecution in a lawful venue.
Although the court did not consider other grounds for reversal, it recognized that they did exist. "Given our conclusion that venue was improper in the Eastern District, we need not address defendants' other arguments for reversal," wrote Judge Pierre Leval in his opinion. "However, in view of the possibility that a United States Attorney, in a district where venue could properly be laid, may consider undertaking a new prosecution, we observe that the case against defendants appears seriously problematic in several respects."
The panel questioned the government's allegations that USAU owed fiduciary duties to USAir and USAIG's coinsurers and re-insurers. "There is strong reason to think the district court's instruction to the jury on the nature of fiduciary duties was flawed," the court noted. In the USAU case, the court referred to the plaintiffs as "concededly sophisticated companies with experience in the industry," who had "a variety of practical and contractual rights to participate in or challenge defendants' decisions."
The adequacy of the government's evidence proving that USAU and Brennan had launched a scheme to defraud under the mail fraud statute was also questioned by the court.
"We do not decide these issues," said Leval. "However, in the event a United States Attorney should contemplate initiating a new prosecution, careful attention should be given to each of these points because they would give rise to serious questions on a future appeal."