November 13, 2012

The Second Circuit on Fraud, the Federal Sentencing Guidelines, and Mass-Marketing

If Mitt Romney is right that 47% of Americans think of themselves as victims, then the Second Circuit's opinion in United States v. Lacy may be deeply unpopular.

Like Mitt Romney, Kirk Lacey and Omar Henry had a vision for the future.

Unlike Mitt Romney, their vision involved short sales, straw buyers, and a little light mortgage fraud.

Like Mitt Romney, Mr. Lacey and Mr. Henry were not able to see their vision realized.

MTC Real Estate, Inc.

Mr. Lacey and Mr. Henry worked at MTC Real Estate.

MTC would buy houses in a short sale, then find a straw buyer who had no intention of making mortgage payments. That person would buy the house at a price higher than the one MTC bought it for. MTC would make the difference, the straw buyer would default, and the bank that loaned the money was left holding the bag.

1400144_vintage_radio_2.jpgTo find enough straw buyers, MTC advertised on the radio. Straw buyers were promised $50,000 for buying a house. Some of the straw buyers were even paid what they were promised.

It was a simple and deeply illegal business.

Sentencing

Mr. Lacey and Mr. Henry - along with eight others - were charged with conspiracy to commit bank and wire fraud for this real estate plan.

Mr. Lacey and Mr. Henry - unlike the eight others - went to trial. They lost.

The government, at sentencing, asked for a two-level upward enhancement of their guidelines under U.S.S.G. § 2B1.1(b)(2)(A)(ii), which says:

If the offense. . . (ii) was committed through mass-marketing, increase by 2 levels;

Mr. Lacey and Mr. Henry argued that this enhancement shouldn't apply - the radio ads were directed at straw buyers who were not victims. The banks were the victims here, not the straw buyers. In fact, the straw buyers even made $50,000 each. Much of the time.

As the Second Circuit put it,

The district court agreed with the government, noting that "the MTC marketing campaign was critical to the success of the fraud" because the marketing was "how MTC found people with distressed properties that could be exploited." The district court therefore held that although the mass-marketing was not directed at the victims of the fraud (that is, the banks that made the mortgage loans), the mass-marketing was still "relevant conduct" to the offense and so the enhancement should apply.

Mr. Henry was sentenced to a year and a day - allowing him to receive good time credit from the Bureau of Prisons. Mr. Lacey was sentenced to 46 months.

The Second Circuit and Fraud Victims

The Second Circuit reversed finding, basically, that

After a careful reading of the Guidelines and other relevant authority, we hold that the mass-marketing enhancement is properly applied only when the targets of the mass-marketing are also in some way victims of the scheme. Because it is not clear on the current record whether the straw buyers who were the targets of the mass-marketing in this case were in some sense victims, we will remand to the district court for further factfinding.

The court of appeals looked at the language of the mass-marketing enhancement and noted that the offense has to be "committed through mass-marketing."

As at least one other Circuit has recognized, an offense is "committed through mass-marketing" when mass-marketing is used to recruit or deceive victims of the offense, not when mass- marketing targeted at audiences other than victims is used in connection with the fraud in some other, more tangential manner. See United States v. Miller, 588 F3d. 560, 568 (8th Cir. 2009).

So, to the Second Circuit's way of looking at this,

It is not enough that a scheme may be advanced by the use of mass marketing techniques; a scheme is committed through mass-marketing only when the mass marketing is directed toward individuals who will be harmed by the scheme.

Indeed, the language surrounding the enhancement for mass-marketing helped the Second Circuit reach this reading:

All the other subsections of § 2B1.1(b)(2) base enhancements on the number of victims. Indeed, the mass-marketing enhancement is posed as an alternative to the smallest number of victims in an escalating series of adjustments based on rising numbers of victims. The pattern thus strongly suggests that the enhancement scheme is designed to measure the scope of the wrong by the number of victims, and that the use of mass-marketing is relevant even when the number of actual victims is small, because fraudulent mass-marketing creates a large number of potential victims.

So the district court's reasoning was off, and the case has to be remanded.

Possible Defeat from the Jaws of Victory

But, of course, nothing is as simple in the land of federal criminal appeals.

The court went on to say that

If a mortgage fraud scheme predictably results in pecuniary harm to unwitting, deceived straw buyers, the straw buyers have sustained "actual loss" and are therefore "victims" within the meaning of the Guidelines. They are therefore properly considered under the mass-marketing enhancement.

Not content to let a district court judge figure out how to find that the enhancement applies, the Second Circuit went on to explain exactly what the district court would have to look for on remand:

Returning to the facts of the instant case, it is not clear on the present record whether at least some of the consumers who were the targets of mass marketing were in some sense victimized, notwithstanding that the main thrust of the fraud was directed at banks. To the extent that any straw buyer was in on the scheme or received the promised $50,000 payment, such a buyer could not be seen as a victim. But some straw buyers testified that their credit scores were ruined. Others testified that they intended in good faith to purchase the property and pay the mortgage

More happily, the court of appeals described at some length why radio ads may not be mass-marketing under the guidelines definition at all.

A fun time will doubtless be had in the district court on remand as it follows the Second Circuit's instructions to

consider two questions: first, whether the defendants engaged in "mass-marketing" within the meaning of the relevant Guideline, as interpreted by the commentary; and second, if the defendants did engage in "mass-marketing," whether the consumers who were the target of that mass-marketing were also in some sense victims of the overall criminal scheme, i.e., whether they were injured by the scheme.

Also, the court asked the Sentencing Commission to make this stuff clearer.

Also, why does the Second Circuit hyphenate "mass-marketing" but not "factfinding"?

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