January 31, 2013

To Prove Mail Fraud, The Government Has To Show You Used The Mail

Our brave new world of internet technology is encouraging innovation of all kinds. Innovation of new ways to interact with each other, new ways to learn, new ways to work, new ways to embezzle and create records of one's embezzlement, and new ways for the government to try to prosecute.

In United States v. Phillips, the Ninth Circuit - in an opinion written by S.D.N.Y. SuperJudge Rakoff sitting by designation - brushed back a prosecution for embezzlement from a tech company.

1369865_mailbox.jpgThe government, you see, prosecuted a former CEO of a tech company for mail fraud.

No one uses the mail any more.

False Invoices and Bad Emails

Mark Phillips was the co-founder and CEO of MOD Systems Inc. MOD was a high-tech start-up that was trying to develop and monetize a platform to sell and distribute content to consumers.

Mr. Phillips had a girlfriend - Jan Wallace. Like many men with a girlfriend, he liked to email her. She liked to email him back. It was good.

Unfortunately, Mr. Phillips was also involving her in a scheme to get money out of his company and onto his wrist.

Feel Good Watches

Ms. Wallace introduced Mr. Phillips to Feel Good Watches. Mr. Phillips decided to buy two watches from Feel Good. I'd like to think it was one for him and one for her; it's the romantic in me.

The watches cost $30,000 each - they were Breguet watches. At that price, one can imagine that they would make you feel very good indeed.

Feel Good mailed the first watch to Mr. Phillips. Mr. Phillips then emailed Ms. Wallace and said,

I received the watch, it's beautiful . . . If possible could I pay you for this so I can pay out of a company for consulting work.

Mr. Phillips then created a number of fake invoices for a company called Wallace Black LLC. He had MOD pay Wallace Black LLC through his attorney. The money that went to Wallace Black LLC was deposited into an account controlled by Ms. Wallace.

All of these communications and transfers - it appears - went through email or wires.

Ms. Wallace did not provide accounting services to MOD. It isn't clear whether she provided them to Feel Good Watches.

The fake invoices created a complicated paper trail. Following it was made easier for the government by Mr. Phillips emails with Ms. Wallace.

There was also a regrettable transfer of funds from the company to make a down payment on a mortgage for Mr. Phillip's condo.

The Charges and Trial

Mr. Phillips was charged with wire fraud, mail fraud, and money laundering. He was convicted at trial and sentenced to 48 months in prison.

Where's the Mail?

On appeal, Mr. Phillips argued that he hadn't committed mail fraud, since he hadn't used the mail.

The government's position was that Mr. Phillips used the mails when one of the watches - the first one - was mailed to him.

Mr. Phillips, on the other hand, countered that the watch wasn't a part of the conspiracy, rather, it was simply something that was just that he used the money he received from MOD to buy a watch.

The question is whether the mails were used in furtherance of the scheme to defraud. So, was the watch sent to further the scheme?

The Ninth Circuit said no.

The Supreme Court has previously ruled, in United States v. Maze, that where a man used a stolen bank card to pay for motels, and the motels mailed invoices for the stuff he charged, the mailing of the invoices wasn't enough to make things into mail fraud.

Because the bank card scheme's success didn't depend on the mailings, the Court said there was no mail fraud there.

Here, for Mr. Phillips, because the watch being mailed wasn't necessary to the scheme to defraud Mr. Phillips' company, he wasn't guilty of mail fraud.

As the Ninth Circuit put it,

Here, as in Maze, the success of Phillips's fraudulent scheme did not depend in any way on the use of the mails. The fact that Phillips purchased a watch with $30,000 of fraudulently obtained MOD funds, instead of using the funds for his personal benefit in some other fashion, did not in any way affect the scheme "to defraud MOD and to obtain money from MOD," as charged in Count 5. The fact that payment eventually was made to a watch dealer and that watch dealer mailed a watch in return was not a part of the scheme to defraud MOD and to obtain money from MOD - it was simply the byproduct of that scheme. Put another way, as a result of Phillips's successful execution of his scheme to defraud, he had sufficient funds to pay for the watch.

The mail fraud conviction was, therefore, reversed.

About This Blog

The Federal Criminal Appeals Blog is published by Kaiser, LeGrand & Dillon PLLC in Washington, DC. Kaiser, LeGrand & Dillon PLLC represent people who have been charged with federal crimes, are under federal investigation, or have a federal criminal appeal.

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