Defendants Acted with the Specific Intent to Defraud or Deceive

¶Mail and wire fraud are specific intent crimes. United States v. Walker, 191 F.3d 326, 334 (2d. Cir. 1999). The D.C. Circuit has stated that specific intent "requires more than a mere general intent to engage in certain conduct and to do certain acts." United States v. Rhone, 864 F.2d 832, 834 (D.C. Cir 1989). Rather, specific intent requires a showing that a person "knowingly does an act which the law forbids, intending with bad purpose either to disobey or disregard the law." Id.

1601

¶In committing the racketeering acts that are at issue in this case, each Defendant acted with the requisite specific intent to defraud.

¶Liability for mail and wire fraud attaches if, under the totality of the circumstances, the defendant intentionally devised or participated in a scheme reasonably calculated to deceive with the purpose of either obtaining or depriving another of money or property. See, e.g., McEvoy Travel Bureau, Inc. v. Heritage Travel, Inc., 904 F.2d 786, 791-93 (1st Cir. 1990); United States v. Cronic, 900 F.2d 1511, 1513-14 (10th Cir. 1990); Atlas Pile Driving, 886 F.2d at 991; Blachly v. United States, 380 F.2d 665, 671 (5th Cir. 1967); Silverman v. United States, 213 F.2d 405, 406 (5th Cir. 1954); Deaver, 155 F.2d at 743. Each individual racketeering act does not have to independently satisfy all of the elements of the mail and wire fraud statutes; the thing mailed or transmitted need only be intended to further the scheme in some way. Schmuck v. United States, 489 U.S. 705, 715 (1989); see also Philip Morris, 304 F. Supp. 2d at 70.

¶A mail or wire fraud offense does not necessarily require proof of any misrepresentation of fact or affirmative false statement, although such would be highly probative of a scheme to defraud. Philip Morris, 304 F. Supp. 2d at 70; United States v. Halbert, 640 F.2d 1000, 1007 (9th Cir. 1981). The mail fraud statute covers all fraudulent and deceptive statements, including statements that are literally true but deceptive in the context in which they are made. See, e.g., Emery v. Am. Gen. Fin., Inc., 71 F.3d 1343, 1348 (7th Cir. 1995) ("A half truth, or what is usually the same thing a misleading omission, is actionable as fraud, including mail fraud if the mails are used to further it, if it is intended to induce a false belief and resulting action to the advantage of the misleader and the disadvantage of the misled"); United States v. Townley, 665 F.2d 579, 585 (5th Cir. 1982) (holding that misleading newspaper ads and letters which were mailed "need not be false or fraudulent on their face, and the accused need not misrepresent any fact" since "it is just as unlawful to speak 'half truths' or to omit to state facts necessary to make the statements made, in light of the circumstances under which they were made, not misleading"); United States v. Allen, 554 F.2d 398, 410 (10th Cir. 1977).

1602

¶The United States has proven that Defendants have acted willfully and intentionally to further the Enterprise's scheme to defraud by making statements which were directly contrary to the internal, collective knowledge of each individual Defendant and the Enterprise as a whole. Accordingly, the Government has met its burden to show that Defendants acted with the specific intent to defraud or deceive.

a. Defendants Are Liable for the Acts of Their Officers, Employees, and Agents Each Defendant is liable for the acts of its officers, employees, and agents. Because a

¶corporation can act only through its agents, it may be held liable for the acts of its officers, employees, and other agents in certain circumstances. Meyer v. Holly, 537 U.S. 280, 285 (2003); Burlington Indus., Inc. v. Ellerth, 524 U.S. 724, 756 (1998); New York Central & Hudson R.R. v. United States, 212 U.S. 481, 494 (1909) (holding that "a corporation is held responsible for acts not within the agent's corporate powers strictly construed, but which the agent has assumed to perform for the corporation when employing the corporate powers actually authorized, and in such cases there need be no written authority under seal or vote of the corporation in order to constitute the agency or to authorize the act"); R.R. Co. v. Hanning, 82 U.S. 649, 657 (1872) (finding that "the principal is liable for the acts and negligence of the agent in the course of his employment, although he did not authorize or did not know of the acts complained of"); Restatement (Second) of Agency § 219, et seq. (1958). Specifically, under the theory of respondeat superior, a corporation may be held liable for the statements or wrongful acts of its agents or employees when they are acting within the scope of their authority or the course of their employment so long as the action is motivated, at least in part, to benefit the corporation. Sun-Diamond Growers, 138 F.3d at 970, aff'd, 526 U.S. 398 (1999); Local 1814, Int'l Longshoremen's Ass'n v. NLRB, 735 F.2d 1384, 1395 (D.C. Cir. 1984); Restatement (Second) of Agency § 236.

1603

¶Furthermore, if a corporate agent exercises the authority conferred upon him and performs an act within the course of his employment, the corporation is liable even if the act was unlawful or was done contrary to instructions or policies, as long as the agent acted with an intent to benefit the corporation. United States v. Automated Med. Labs, 770 F.2d 399, 407 (4th Cir. 1985); United States v. Beusch, 596 F.2d 871, 877 (9th Cir. 1979); United States v. Hilton Hotels Corp., 467 F.2d 1000, 1004 (9th Cir. 1972); United States v. Harry L. Young & Sons, Inc., 464 F.2d 1295, 1296-97 (10th Cir. 1972); United States v. American Radiator & Standard Sanitary Corp., 433 F.2d at 204-05; Egan v. United States, 137 F.2d 369 (8th Cir. 1943).

¶While the federal courts of appeals have not reached a consensus about how the theory of respondeat superior applies specifically in RICO cases brought under § 1962(c), the Third, Sixth, and Eleventh Circuits have all found that where, as here, the defendant corporation is not the Enterprise itself, the corporation is liable for the acts of its officers. Cox v. Administrator United States Steel & Carnegie,¹⁷¹⁷ Defendants make the claim that their efforts to manipulate nicotine delivery were well-known in the public health community and therefore cannot be the source of a fraud claim. However, Defendants have taken internally inconsistent positions. While making these claims, they simultaneously argued and presented evidence to support their position that they did not manipulate nicotine delivery. Defendants cannot have it both ways. Moreover, while it is true that the public health community had some understanding of Defendants' design parameters, that understanding fell far short of the much more sophisticated understanding which Defendants possessed and utilized.Show full note F.3d 1386, 1405 (11th Cir. 1994) (citing Petro-Tech, Inc. V. Western Co., 824 F.2d 1349, 1361-62 (3rd Cir. 1987)) (finding that "theories of respondeat superior . . . are not out of place" where the defendants named are not the section 1962(c) enterprise); Davis v. Mutual Life Ins. Co.,⁶⁶ See United States' Preliminary Proposed Findings of Fact at 14. -11- F.3d 367,379 (6th Cir. 1998) (holding that "[n]o . . . prohibition . . . prevents the imposition of liability vicariously on corporate 'persons' on account of the acts of their agents, particularly where the corporation benefitted by those acts."). Similarly, the Ninth Circuit has held that "an employer that is benefitted by its employee or agent's violations of section 1962(c) may be held liable under the doctrines of respondeat superior and agency when the employer is distinct from the enterprise." Brady v. Dairy Fresh Products Co., 974 F.2d 1149, 1154 (9th Cir. 1992); compare with Miranda v. Ponce Federal Bank, 948 F.2d 41, 45 (1st Cir. 1991) (declining to apply "corporate liability on the enterprise's part under a theory of respondeat superior") see also Luthi v. Tonka Corp., 815 F.2d 1229, 1230 (8th Cir. 1987) (declining to apply respondeat superior where doing so would violate Congress's intent to separate the enterprise and the criminal "person").

1604

¶There are strong public policy grounds supporting this approach. Applying respondeat superior "will encourage employers to monitor more closely the activities of their employees and agents to ensure that these agents are not involved in racketeering activities. Thus, respondeat superior and agency liability furthers both the compensatory and deterrent goals of the RICO statute." Brady, 974 F.2d at 1155. Likewise, the Sixth Circuit has held that a prohibition, if it existed, against imposing liability vicariously "would prevent corporate 'persons' from ever being found liable under RICO, since corporate principals may only act through their agents. Such a rule would be manifestly contrary to the intent of Congress." Davis v. Mutual Life Ins. Co. of New York,⁶⁶ See United States' Preliminary Proposed Findings of Fact at 14. -11- F.3d 367, 379 (6th Cir. 1993). Similarly, in this vein, the Supreme Court has recognized that there is "no good reason why corporations may not be held responsible for and charged with the knowledge and purposes of their agents, acting within the authority conferred upon them. . . . If it were not so, many offenses might go unpunished and acts be committed in violation of the law, where [as here] the statute requires all persons, corporate or private, to refrain from certain practices forbidden in the interest of public policy." New York Central, 212 U.S. at 495.

1605

b. Defendants Are Deemed to Possess the Collective Knowledge of Their Officers, Employees, and Agents Corporations are liable for the collective knowledge of all employees and agents within (and

¶acting on behalf of) the corporation. United States v. Bank of New England, N.A., 821 F.2d 844, 855-56 (1st Cir. 1987). In that case, the Bank of New England was convicted of violating the Currency Transaction Reporting Act for failing to report various financial transactions. At trial, the district court instructed the jury to consider the bank "as an institution" whose "knowledge is the sum of the knowledge of all the employees. That is, the bank's knowledge is the totality of what all of the employees know within the scope of their employment." Id. at 855. As to intent, the Court instructed: "If you find that the Government has proven with respect to any transaction either that an employee within the scope of his employment willfully failed to file a required report or that the bank was flagrantly indifferent to its obligations, then you may find that the bank has willfully failed to file the required reports." Id.

¶On appeal, the bank challenged the trial court's instructions regarding its knowledge and intent. The bank contended that "it is error to find that a corporation possesses a particular item of knowledge if one part of the corporation has half the information making up the item, and another part of the entity has the other half." Id. at 856. The First Circuit rejected the bank's argument, finding the instructions correct as to both knowledge and intent. It's reasoning, which the Court finds highly persuasive, was that "[a] collective knowledge instruction is entirely appropriate in the context of corporate criminal liability. . . . [T]he knowledge obtained by corporate employees acting within the scope of their employment is imputed to the corporation." Id. at 856. In addition, the court stressed that it would be unjust to allow a corporation to avoid liability merely because it chose to divide its knowledge, thus allowing it to "plead innocence." Id. (citations omitted). As the

1606

¶Eleventh Circuit emphasized in First Alabama Bank, N.A. v. First State Insurance Co., 899 F.2d 1045, 1060 n.8 (11th Cir. 1990), the reason that courts impose constructive knowledge upon the principal "is to avoid the injustice which would result if the principal could have an agent conduct business for him and at the same time shield himself from the consequences which would ensue from knowledge of conditions or notice of the rights and interests of others had the principal transacted his own business in person."

¶In cases decided after Bank of New England, courts have continued to allow the knowledge of agents and employees to be aggregated and imputed to the corporation. See, e.g., Sun-Diamond Growers, 964 F. Supp. at 491 n.10 (D.D.C. 1997) (noting that the defendant "makes much of the fact that purportedly no other corporate officials knew about Mr. Douglas' activities. However, knowledge obtained by a corporate agent acting within the scope of his employment is imputed to the corporation"), reversed on other grounds, 138 F.3d 961 (D.C. Cir. 1998), aff'd, 526 U.S. 398 (1999). In In re Worldcom, Inc. Securities Litigation, for example, the court considered a challenge to certifications by accounting firm Arthur Andersen under the fraud provision of the Securities Exchange Act of 1934. That statute, like the mail and wire fraud statutes, requires proof of "an intent to deceive, manipulate, or defraud." 352 F. Supp. 2d 472 (S.D.N.Y. 2005). Relying on Bank of New England, the District Court held that "plaintiffs in securities fraud cases need not prove that any one individual employee of a corporate defendant also acted with scienter. Proof of a corporation's collective knowledge and intent is sufficient." Id. at 497.

¶Thus,"the knowledge of the employee is the knowledge of the corporation." Apex Oil Co. v. United States, 530 F.2d 1291, 1295 (8th Cir. 1976); see also United States v. Josleyn, 206 F.3d 144, 159 (1st Cir. 2000); United States v. Inv. Enters.,¹⁰¹⁰ All of these studies will be discussed in much greater detail in Section IV, infra. -17- F.3d 263, 266 (5th Cir. 1993); Eitel v. Schmidlapp, 459 F.2d 609, 615 (4th Cir. 1972) (where defendant's agent fraudulently conveyed property to defendant, agent's knowledge of fraud would be imputed to principal even where there was no evidence of actual knowledge on part of principal: "the principal cannot claim the fruits of the agent's acts and still repudiate what the agent knew."); Duplex Envelope Co. v. Denominational Envelope Co., 80 F.2d 179, 182 (4th Cir. 1935).

1607

¶Moreover, a principal is held responsible for the knowledge acquired by its agent even if the information is never communicated to it, see, e.g., N.Y. Univ. v. First Fin. Ins. Co., 322 F.3d 750, n.2 (2d Cir. 2003), and even after termination of the services of that officer, employee, or agent, see Acme Precision Prods., Inc. v. Am. Alloys Corp., 422 F.2d 1395, 1398 (8th Cir. 1970).

¶In a much earlier case, dealing with somewhat different issues, the Supreme Court set forth its persuasive rationale for the collective knowledge doctrine:

[w]e see no valid objection in law, and every reason in public policy, why the corporation, which profits by the transaction, and can only act through its agents and officers, shall be held punishable by fine because of the knowledge and intent of its agents to whom it has entrusted authority to act in the subject-matter of making and fixing rates of transportation, and whose knowledge and purposes may well be attributed to the corporation for which the agents act.

¶New York Cent. & Hudson River R.R. Co. v. United States, 212 U.S. 481, 495 (1909).

¶Thus, the applicable case law makes clear that the knowledge, conduct, and statements of Defendants' agents and employees may be attributed to Defendants as corporate-principals.

c. Specific Intent May Be Established by the Collective Knowledge of Each Defendant and of the Enterprise as a Whole In light of the extensive Findings of Fact describing what each Defendant company knew as

¶well as the totality of the circumstances, the Court concludes that Defendants' fraudulent statements designated as Racketeering Acts evidence a specific intent to defraud. The Findings of Fact are replete with examples of representatives of each cigarette company Defendant, of CTR, and of the Tobacco Institute, either willfully stating something which they knew to be untrue or recklessly disregarding the falsity of their statements. A particularly egregious example is the use of hundreds of documents demonstrating Defendants' intent to offer smokers health reassurances with Light/Low Tar cigarettes even though Defendants knew that such cigarettes offer no meaningful reduction in disease risk. See Findings of Fact Section V(E)(5).

1608

¶Many of the fraudulent, deceptive, and misleading statements were issued as press releases, paid newspaper statements, pamphlets, and similar documents in the name of the corporate Defendants themselves. For example, the Tobacco Institute's 1974 version of its pamphlet titled "The Cigarette Controversy" (no bates) (US 23020), was attributed to the Tobacco Institute itself, rather than any named individual. Likewise, the 1994 advertisement in the New York Times containing misleading and deceptive statements on nicotine and addiction titled, "Facts You Should Know," (no bates) (US 65446), was issued by Philip Morris itself. In those instances, where such statements directly contradicted the internal knowledge of the company, specific intent to defraud is easily established. The overwhelming evidence that Defendants, collectively, possessed knowledge demonstrating the fraudulent nature of their public statements on, inter alia, the health effects of smoking and exposure to secondhand smoke, the addictiveness of smoking and nicotine, and their marketing to youth is set forth in the Findings of Fact.

¶Regarding those statements made by individuals rather than a Defendant company itself, which are clearly attributable to the Defendant company, those statements also demonstrate the requisite intent to defraud on the part of the company.

1609

¶As discussed in detail above, the courts, including our Circuit, have established and affirmed the collective knowledge doctrine. However, the courts, including our Circuit, have uniformly rejected the theory of collective intent that the Government advocates -- i.e., that aggregation of different states of minds of various corporate actors is sufficient to demonstrate specific intent in cases where individuals within a corporation make fraudulent statements. Our Court of Appeals has stated that in Bank of New England, "corporate knowledge of certain facts was accumulated from the knowledge of various individuals, but the proscribed intent (willfulness) depended on the wrongful intent of specific employees." Saba v. Compagnie Nationale Air France, 78 F.3d 664, 670 n.6 (D.C. Cir. 1996) (finding that "[i]ndividual acts of negligence on the part of employees -- without more -- cannot . . . be combined to create a wrongful corporate intent.")34; see also United States v. L.B.S. Bank-NewYork, Inc., 757 F.Supp. 496, 501 n.7 (E.D. Pa. 1990) ("although knowledge possessed by employees is aggregated so that a corporate defendant is considered to have acquired the collective knowledge of its employees, specific intent cannot be aggregated similarly) (citations omitted); First Equity Corp. v. Standard & Poors Corp., 690 F.Supp. 256, 259-260 (S.D.N.Y. 1988) (holding that corporation cannot be deemed to have the requisite intent by mere inconsistences in knowledge of various employees).

¶At the same time, the courts, including our Circuit, have also rejected the theory of specific intent which Defendants advocate, i.e. requiring that a corporate state of mind can only be established by looking at each individual corporate agent at the time s/he acted. To do so would

¶Defendants try to read into this brief footnote more than is warranted. In light of the complexity and confusion in the law on this issue, it is hard to believe that this somewhat Delphic footnote will bear the weight which Defendants place on it.

1610

¶create an insurmountable burden for a plaintiff in corporate mail and wire fraud cases and frustrate the purposes of the statute.

¶While courts have not clearly articulated exactly what degree of proof is required, it is both appropriate and equitable to conclude that a company's fraudulent intent may be inferred from all of the circumstantial evidence including the company's collective knowledge. Saba, 78 F.3d at 668 ("the actor's intent may be inferred from indirect evidence and the reckless nature of his acts"); see also, Dana Corp. v. Blue Cross & Blue Shield Mutual of Northern Ohio, 900 F.2d 882, 886 n.2 (6th Cir. 1990); L.B.S. Bank-New York, 757 F. Supp. at 501 n.7.

¶Moreover, the public policy reasons which support the doctrine of collective knowledge apply equally here. There is "every reason in public policy" why a corporation, which can only act through its agents and officers, and which profits by their actions, should be held liable when the totality of circumstances demonstrate that such corporation collectively knew what it was doing or saying was false, but did it or said it nevertheless, even if it is impossible to determine the state of mind of the individual agent or officer at the time. Indeed, if it were otherwise, Defendants could avoid liability by simply dividing up duties to ensure that fraudulent statements were only made by or uninformed employees.

¶Specific intent of individual Defendants and their employees can be inferred from the collective knowledge of each Defendant company itself and the reckless disregard of that knowledge evidenced in statements made by, and on behalf of, each Defendant company. Evidence establishing reckless disregard for the truth or falsity of a statement, as well as willful blindness, satisfies the intent standard. United States v. Munoz, 233 F.3d 1117, 1136 (9th Cir. 2000) ("reckless indifference to the truth or falsity of a statement satisfies the specific intent requirement in a mail fraud case");

1611

¶In re Korean Airlines Disaster of September 1, 1983, 704 F. Supp. 1135, 1136 (D.D.C. 1988), aff'd in relevant part, 932 F.2d 1475 (D.C. Cir. 1991); United States v. Prows, 118 F.3d 686, 692 (10th Cir. 1997); United States v. Coyle, 63 F.3d 1239, 1243 (3rd Cir. 1995). In addition, "[f]raudulent intent may be inferred from the modus operandi of the scheme." United States v. Reid, 533 F.2d 1255, 1264 (D.C. Cir. 1976). Fraudulent intent may also be proven by inference from the totality of the circumstances, including by indirect or circumstantial evidence. See, e.g., United States v. Alston, 609 F.2d 531, 538 (D.C. Cir. 1979) (totality of the circumstances); United States v. Sawyer, 85 F.3d 713, 733 (1st Cir. 1996) (indirect and circumstantial evidence).

¶In this case, evidence of the existence and methods of the Enterprise's overall scheme to defraud and Defendants' individual roles in that Enterprise – including each Defendant's purposeful and conscious actions taken in light of its collective knowledge – reveals a "cumulative pattern" of decisions, actions, and inaction that is powerful circumstantial evidence of specific fraudulent intent. See In re WorldCom, Inc. Sec. Litig., 352 F. Supp. 2d at 499. The Findings of Fact overwhelmingly demonstrate that Defendants took deliberate steps to protect, execute, and further the fraudulent scheme by making statements that they knew were not true. Again, to give but one example, the members of the Tobacco Institute Executive Committee, comprised of cigarette company Defendants' executives, approved TI communications directed to the public that promoted the fraudulent position that there was an "open question" regarding whether smoking or nicotine is addictive. At the same time, each of those executives' companies had knowledge both that smoking and nicotine are addictive and that smoking causes disease. See Findings of Fact Section V(B)(3). In the majority of instances, the authors of the fraudulent statements alleged as Racketeering Acts were executives, including high level scientists – CEOs, Vice Presidents, Heads of Research &

1612

¶Development, not entry level employees -- at each of the Defendant companies who would reasonably be expected to have knowledge of the company's internal research, public positions, and long term strategies.

¶In addition, Defendants' representatives' reckless disregard for the truth of their public statements about the health effects of smoking, smoking and nicotine addiction, and other smoking and health issues similarly establishes specific intent to defraud. Numerous documents from the 1950s forward show Defendants' recognition that their internal understanding of smoking's adverse health effects and the addictiveness of nicotine contradicted the position they took with smokers, potential smokers, and the American public. See, e.g., (no bates) (US 21794) (internal memo of Philip Morris nicotine researcher acknowledging that nicotine is a drug while noting Philip Morris's policy that "we must be officially heedless of the drug properties of nicotine"). Time after time, Defendants' executives and policy-makers chose courses of action intended to preserve the chasm between internally recorded facts and knowledge and externally professed ignorance and denial. Further, there is substantial evidence in the record that over the years, numerous executives and scientists of Defendants participated actively in the oversight and control of industry activities that were calculated to advance their fraudulent scheme. For instance, the Chief Executive Officers of Philip Morris, Reynolds, B&W, Lorillard, American, and Liggett, served on the Board of Directors and/or the Executive Committee of the Tobacco Institute. The General Counsels of the Cigarette Company Defendants were members of the Committee of Counsel. The Boards of Directors of CTR and CIAR were comprised of employees of Defendants. Furthermore, Defendants actively supported, both with funding and manpower, the numerous other bodies whose structures, functions, and activities are described throughout the Findings of Fact.

1613

¶Accordingly, the specific intent required for liability under 18 U.S.C. §§ 1341 and 1343 is demonstrated by each Defendant's public statements and representations, its collective knowledge and the collective knowledge of the Enterprise of which it was a part, and its willful disregard of that knowledge.