Articles Posted in Fraud

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The Seventh Circuit’s opinion in United States v. Hawkins – written by Easterbrook – presents a fascinating legal defense. When is getting money from someone for side benefits from the government bribery and when is it fraud?

Mr. Hawkins and his co-defendant Mr. Racasi worked in Chicago for the Board of Review – the entity that hears tax assessment appeals. They took money from a cop – Haleem – who they thought was dirty and, in fact, was – he was so dirty he was acting as an undercover officer to work his time down on some other criminal conduct of his.

It is an interesting question whether a dirty cop who has turned cooperator because his dirtiness has led to its own charges is truly “undercover” but let’s elide over that for a minute.

Messrs. Hawkins and Racasi took Mr. Haleem’s money so that they could work some influence at the Board that lowers tax assessments on some property Haleem owned. One of the properties didn’t have its assessment reduced, but the rest did.

They were charged with bribery and fraud in connection with the bribery. They were also charged with conspiracy, but that’s just because these days AUSAs get made fun of at the NAC if they don’t add a conspiracy charge to every case.

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Restitution may be the most important issue that most criminal defense lawyers are uninterested in litigating. Folks who practice in the criminal space – even the white-collar space – tend to see themselves as a champion of liberty. They care about freedom and justice. They are significantly less interested in fighting over money.

usa-dollar-bills-1431130-m.jpgNonetheless, money is an important thing in many people’s lives. And, if a person is convicted of a crime, the government will try to take their money too – either through a fine, a forfeiture judgment, or restitution.

The Second Circuit, in United States v. Cuti, recently narrowed the scope of what expenses can be part of a restitution judgment.

Anthony Cuti was the CEO of Duane Reade until 2005. He was convicted of securities fraud after trial in connection with two accounting fraud schemes to inflate the company’s earnings. His conviction was upheld in a separate appeal – that’s not the issue in this case.

This case is all about the Benjamins.

Mr. Cuti is Fired

In 2004, Duane Reade was purchased by Oak Hill — a private equity firm. Mr. Cuti was terminated shortly after in 2005.

As sometimes happens, Oak Hill and Mr. Cuti did not agree on all of the details of how his termination should be sorted out. The case went to arbitration. Paul Weiss represented Duane Reade in the arbitration.

Shortly before the arbitration was started though, Duane Reade’s general counsel learned that there were some suspected shenanigans that involved Mr. Cuti.

The company hired Cooley to investigate.

It will surprise exactly no one that having Paul Weiss and Cooley do a bunch of legal work was really expensive.

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United States v. Fard is a nice study in the wrong way for a lawyer to handle a plea hearing.

Let me say, at the start, that I get that a plea hearing can be hard. Sometimes a lawyer sees what’s in his client’s best interests more clearly than the client. There can be a temptation to push a client really hard to take a plea when the client doesn’t want to. And getting a client who has reluctantly inked a plea through a plea hearing can also be hard.

There are few things you can do to handle that. Maybe you spend more time with the client explaining why a plea makes sense. Maybe you talk – with permission – to the client’s loved ones about whether a plea makes sense. Maybe, if the client doesn’t want to plead, you reflect that it’s the client’s Sixth Amendment right to go to trial, and not the lawyer’s and you take the case to trial.

But what do you not do?

You don’t just enter the plea for your client and speak over the person at the hearing.

Which appears to be what happened in Mr. Fard’s case.

watermark.php.jpgMr. Fard’s Charges and Trial Date

Mr. Fard was indicted for, basically, mortgage fraud. The day before trial, Mr. Fard’s lawyer asked the judge to push the trial date back six weeks because he thought he was close to a plea deal.

Mr. Fard’s lawyer explained that he thought his client could provide significant cooperation and that he was close to a deal with the government.

The judge didn’t give him six weeks, but did push it back a month. He then took a recess and Mr. Fard’s lawyer talked to the government with his client.

Mr. Fard’s Plea Hearing

After that break, Mr. Fard’s lawyer told the court that his client was ready to plead. He said,

We are going to change our plea to Count 3 with no agreement with the government at this time. We are entering, I guess we would call it a blind plea to Count 3 of the indictment, Judge.

The judge started reading the indictment. He stopped and this exchange happened:

Court: Do you follow me so far?
Fard: Yes, I do.
Court: And so far do you agree that you did all this?
Defense Counsel: Judge, he agrees that he participated in the scheme and he had knowledge of the scheme.

The judge asked Mr. Fard about his knowledge of the scheme. His lawyer answered:

[Fard] had knowledge of Nationwide submitting these, permitting and submitting these phony applications, and he knew it was going on, but he did nothing about it, he just participated in the scheme as it went along.

Later in the hearing, Fard told the court

I mean, I did not plan any scheme. We just tried to build typical American dream to build and fix and sell and, you know, bring the dream true, and just got involved with the wrong people.

Fard and the court, shortly after, had this conversation

Court: Now, did you participate in that scheme to defraud the lenders by submitting to them and causing them to rely upon these false loan applications which were false in the respects which are recited in the draft that I read?
Fard: Your Honor, the lender was Nationwide Mortgage Financial, which they put the whole thing together. But I had acknowledgment, but I did not say anything against the lender. Lender is the one introduce these people to me to bring them as a partner. Lender was Nationwide Financial Mortgage, which they brought these people.

The judge announced that there would be a break. He encouraged defense counsel that if Mr. Fard wanted to plead guilty, he would have to actually, you know, plead guilty.

After the break, the court and Mr. Fard kept talking. It included this bit:

Court: Mr. Fard, what do you plead guilty to?
Fard: I participate and I had the acknowledgment of the partners probably their stuff was not kosher, the document was not kosher.
Court: What do you mean probably?
Fard: Like [defense counsel] said, the partner did not reside in the property.
Court: You say “partner.” Do you mean these nominees?
Fard: Yes, Your Honor.
Court: You knew that they were not qualified for these loans, if they told the truth about themselves?
Fard: Yes.
Court: Not what they intended to do. Did you know that?
Fard: Yes, Your Honor.
Court: All right. Now, did you know that the mortgage proceeds were going to be used by you and perhaps others to acquire and make improvements on properties other than this Oakley Avenue property?
Fard: The mortgage, we did lots of improvement on that subject property, and we might use some of the money for another property, but we spent a lot of money on that particular property.

The judge did two things. First, he said that, with respect to this plea, “[i]t’s like pulling teeth. I feel I ought to have a dental license this afternoon.” Then the court accepted the guilty plea.

The court probably had a busy calendar.

Fard’s Proffer Went Poorly

Fard met with the government to talk about cooperation right after his plea hearing. Fard told the government – much as he had just told the court – that he didn’t do anything wrong.

That was not what the prosecutors and agents wanted to hear. The proffer ended and Mr. Fard did not cooperate with the government.

The Motion to Withdraw the Plea

Mr. Fard told his lawyer he wanted to withdraw the plea. The court appointed a new lawyer for him on the motion to withdraw the plea. The new lawyer argued that Fard did not understand what he was pleading to, and that his prior lawyer had told him the case would be dismissed if he cooperated.

The court had a hearing on the motion to withdraw the plea where Fard testified, as did his prior lawyer. Fard said that he was told if he cooperated the government would drop the case.

The court decided Fard was lying and did not let him out of the plea.

The Sentencing

The district court, clearly frustrated with Fard, gave him a two-level bump up for obstruction of justice under the guidelines and denied him acceptance of responsibility credit. He was sentenced to 84 months in prison.

The Appeal

On appeal, the Seventh Circuit held that

Reviewing the record here in light of the relevant factors, we cannot conclude that Fard was fully aware of the nature of the crime to which he pled guilty. The guilty plea was “enveloped in confusion and misunderstanding,” . . . such that we cannot say with confidence that Fard truly understood that a wire fraud conviction required intent to defraud.

They remanded the case to let Fard out of his guilty plea.

Because, duh.

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Does marriage fraud happen in the marriage, or at the wedding? As it happens, marriage fraud, at least according to the Eleventh Circuit, is a bit of a misnomer – it’s really better thought of as wedding fraud.

The statute is 8 U.S.C. § 1325(c). It says that it’s a marriage fraud whenever “[a]ny individual who knowingly enters into a marriage for the purpose of evading any provision of the immigration laws.” The case is United States v. Rojas.

2.jpgYunier Rojas and Soledad Marino were friends. Good friends, but just friends. Apparently not even friends with benefits. Just friends.

Ms. Marino is an Argentinian who had overstayed her nonimmigrant visa. Mr. Rojas, as a friend, married her so that she could stay in the country.

The happy day was April 23, 2007.

Two years later, Ms. Marino sent in an application to adjust her status, as a result of her marriage. She sent in a marriage license from April 2007, as well as a list of addresses where she had lived with Mr. Rojas as a married couple.

Folks from Immigration and Customs Enforcement – ICE – interviewed the couple, together.

The interview didn’t go well. As a result of discrepancies between what they said, the interviewers decided to interview the couple separately. The two gave different answers about their marriage. One suspects that they were more substantive than whether her favorite flavor of ice cream was really pistachio.

Finally, the ICE agents told the couple that they thought the marriage was a fraud. Both Mr. Rojas and Ms. Marino admitted that it was.

Mr. Rojas signed a statement saying that he and Ms. Marino were just friends – and that he married her so she could stay in the country.

As often happens when folks volunteer information about their own criminal conduct, law enforcement responded charitably – the government indicted Mr. Rojas.

The indictment came on April 27, 2012.

This was, of course, five years and four days after April 23, 2007 – the day the couple were married.

Mr. Rojas filed a motion to dismiss the indictment, which was denied.

On appeal, the Eleventh Circuit, per curiam, in an opinion that didn’t require argument, held that the crime of marriage fraud is completed on the day that the couple enters into the marriage.

This is because the criminal conduct is “knowingly enter[ing] into a marriage” that’s a sham to defeat immigration laws.

The government argued that the crime of immigration fraud was not complete until the couple lied to the government about the purpose of the marriage. That, after all, is when the government first learned that a crime had happened.

Since the purpose of entering in a sham marriage – according to the government – is to lie to immigration, the couple has to actually finish lying to immigration for the crime to be done.

The Eleventh Circuit rejected this argument.

To prove marriage fraud, the government must show that (1) the defendant knowingly entered into a marriage (2) for the purpose of evading any provision of the immigration laws.2 See 8 U.S.C. § 1325(c). It is undisputed that Rojas and Marino married on April 23, 2007. It is likewise undisputed that Rojas, at the time he entered into the marriage, did so for the purpose of violating the immigration laws–namely, using the marriage to adjust Marino’s immigration status. Filing for immigration benefits may serve as circumstantial evidence of the defendant’s unlawful purpose and may lead, as it did in this case, to charges and prosecution for making a false, fictitious, or fraudulent statement to DHS, in violation of 18 U.S.C. § 1001(a)(2). The plain language of the marriage fraud statute, however, cannot plausibly be read to require that a defendant take the additional step of filing for immigration benefits in order for the crime to be complete.

The district court abused its discretion by holding otherwise.

So, Mr. Rojas is free to go. Though I suspect that the statute of limitations on lying to the ICE investigators may not have run yet.

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Bernard Kurlemann may have done many things – he borrowed millions to build a pair of houses in Mason, Ohio, for example – but he did not make a false statement to a bank.

And the Sixth Circuit, in United States v. Kurlemann, held that the district court was wrong to instruct the jury that it could convict him for anything less.

1418355_flag_blowing_in_the_breeze.jpgThe Costs of Owning Expensive Real Estate

If you believe the government’s evidence against Mr. Kurlemann at trial, he worked with a realtor – Eric Duke – to arrange for two straw purchasers to buy his two million dollar homes.

It’s expensive to carry such homes, you see. He really wanted out from under the mortgage payments.

The trouble is that the banks who were lending the money to the purchasers were uncomfortable with a down payment that came from the seller, Mr. Kurelmann.

And the straw purchasers were uncomfortable using their own money, because, well, they were straw purchasers.

So, Mr. Kurlemann created documents which were true enough, but that created an impression of something that was not true.

For example, one of the homes was described as having a $280,000 down payment, paid to Mr. Kurelmann. It was true that the buyer had made a $280,000 payment to Mr. Kurelmann – the buyer took a $280,000 cashier’s check given to him from an entity controlled by Mr. Kurelmann and swapped it for another $280,000 cashier’s check payable to another entity controlled by Mr. Kurlemann. Mr. Kurlemann accepted the second cashier’s check as a down payment, and a copy of the check was sent along as proof of payment of the down payment.

So, no false statements were made, but what was provided was intentionally misleading.

As the Sixth Circuit (in an opinion written by Judge Jeffery Sutton, who is a fun writer, whatever else is true of him) summarized what happened next:

The predictable, perhaps inevitable, happened. Both buyers defaulted on their loans. The bank investigated, and federal prosecutors filed a raft of charges against Duke and Kurlemann. Duke pled guilty to seven counts, including loan fraud and making false statements to a lending institution, and agreed to testify at Kurlemann’s trial. A jury convicted Kurlemann of six counts, including making false statements to a lending institution, see 18 U.S.C. § 1014; and committing bankruptcy fraud, 18 U.S.C. § 157. The district court sentenced Kurlemann to concurrent 24-month sentences, one for the false-statement convictions and one for the bankruptcy-fraud convictions, and ordered him to pay $1.1 million in restitution.

The False Statement Jury Instruction That Was So Much More

Mr. Kurlemann’s jury was instructed that, for purposes of a false statement charge,

[a] “statement may be false,” according to one of the jury instructions in Kurlemann’s case, “when it contains a half-truth or when it conceals a material fact.”

That is not the law.

The opinion quotes the lengthy text of 18 U.S.C. § 1014 – which, seriously, is long – and summarizes it with:

That is a long way of saying that making a “false statement or report” to a bank in order to get a loan is prohibited. And that is a long way of not saying that the statute prohibits “half-truths,” “material omissions” or “concealments,” which takes us to the nub of the matter. Whether made orally or offered through a written report, a “false statement” must be that–a statement, a “factual assertion” capable of confirmation or contradiction.

Here, because, for example, the check was merely misleading, not actually false, it wasn’t a false statement.

An omission, concealment or the silent part of a half-truth, is not an assertion. Quite the opposite. Omissions are failures to speak. Half-truths, in which the speaker makes truthful assertions but conceals unfavorable facts, amount to one type of omission. Concealment, in which the speaker says nothing at all but has a duty to speak, amount to another. No doubt, both types of omissions hold the potential to mislead and deceive. But § 1014 covers “false statements.” It does not generally cover misleading statements, false pretenses, omissions, schemes, trickery, fraud or other types of deception.

Because of the error in the jury instruction, Mr. Kurlemann’s false statement conviction was vacated and the case was remanded.

And, seriously, this post doesn’t do justice to how much fun this opinion is to read. It’s nice to see judicial snark doled out for a win for a guy who is accused of a crime.

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United States v. Izurieta is an odd opinion. Turns out the Eleventh Circuit was a very good defense attorney in this case.

Two brothers – Yuri and Anneri Izurieta – ran an import/export business. They brought food into the United States from Central America.

999830__3.jpgThey were charged with not following FDA procedures when they brought food into the country that – according to a trial stipulation – contained e coli and salmonella.

They were convicted at trial.

They appealed and raised some interesting issues – a Confrontation Clause challenge, a challenge to some of the prosecutor’s statements during the trial, and an issue about how the sentence was calculated.

Everyone showed up for oral argument ready, presumably, to talk about these issues. The briefs had been filed. The issues were clear. I’d like to think the defense lawyer was wearing a new suit.

Then, at oral argument, the Eleventh Circuit panel asked whether the indictment in the case actually set out something that is a violation of the criminal law of the United States.

As it happens, it didn’t.

So, there’s a practice pointer for defense lawyers – check to make sure that an indictment accuses the person charged with something that is actually a crime.

Here are the details.

The brothers were charged with seven counts:

Count 1 charged a conspiracy to unlawfully import in violation of 18 U.S.C. § 371. Counts 2 – 7 charged the Izurietas with the failure “to redeliver, export, and destroy with FDA supervision” five shipments.

More specifically, Counts 2 through 7 charged a violation of 18 U.S.C. § 545, which says,

Whoever fraudulently or knowingly imports or brings into the United States, any merchandise contrary to law, or receives, conceals, buys, sells, or in any manner facilitates the transportation, concealment, or sale of such merchandise after importation, knowing the same to have been imported or brought into the United States contrary to law . . . Shall be fined under this title or imprisoned not more than 20 years, or both.

So the “contrary to law” part is really important.

Here, the brothers violated an FDA regulation which provided for civil, but not criminal penalties. Does section 545 convert the violation of that regulation into a crime?

The Ninth Circuit had previously weighed in on this in 2008 in United States v. Alghazouli, 517 F.3d 1179, 1187 (9th Cir. 2008) and found that section 545 doesn’t do the alchemy of converting not criminal regulations into criminal ones.

There, relying in part on an 1892 Supreme Court case that held that “[i]t is necessary that a sufficient statutory authority should exist for declaring any act or omission a criminal offence” in the course of striking down a conviction for violating a bookkeeping regulation under the Oleomargarine Act (which, seriously, sounds insane. You should read more about it here and here).

The Fourth Circuit, on the other hand, held in United States v. Mitchell, 39 F.3d 465 (4th Cir. 1994), that section 545 criminalizes the violation of otherwise noncriminal regulations when the underlying regs are “legislative” in nature because, really, we’re not going to lead the world in prison population without everyone doing their part.

The Eleventh Circuit ragged a bit on the Ninth Circuit’s opinion, then noted that

lenity remains an important concern in criminal cases, especially where a regulation giving rise to what would appear to be civil remedies is said to be converted into a criminal law.

Because of ambiguity about whether the regulations that these brothers violated could be prosecuted criminally, the Eleventh Circuit held that, under the rule of lenity, they couldn’t be.

The indictment, then, didn’t allege a violation of the criminal law. And the brothers’ convictions were vacated.

Gentle reader, you may be wondering whether, procedurally, this is kosher. Can it be that an appellate court can first raise whether the indictment charges a violation of the law at oral argument?

It can, because the issue is jurisdictional. If there’s no adequate allegation of a crime, then the court of appeals doesn’t have jurisdiction to hear the case. So, if there’s a jurisdictional error, that can be raised at any point.

As the Eleventh Circuit noted,

In Seher, we held that this court is required to raise sua sponte the jurisdictional issue of whether the indictment sufficiently alleges an offense in violation of the laws of the United States provided the mandate has not issued on direct appeal. Seher, 562 F.3d at 1359.

Also, the opinion was written by Judge Jane Restani, a judge on the United States Court of International Trade, sitting by designation on the Eleventh Circuit. You don’t see that very often.

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Erica Hall was an office assistant at an OB/GYN office in Coral Springs, Florida. The job may not have paid well, because Ms. Hall was trying to make some extra cash on the side by selling patient information to some folks who would use it to get fake credit cards.

1385735_sterilisation.jpgMs. Hall was told by the folks the government described as her coconspirators that for every patient’s personal information she handed over, she’d be paid $200. If the information was able to be used to create a credit card that could be used, she’d be paid $1000 for that patient information.

Even though Ms. Hall handed over information for between 65 to 141 folks, and that 16 of those people had information that could be used to make fake credit cards, she was only paid $200.

If you can’t trust a co-conspirator, who can you trust.

Ms. Hall pled guilty to conspiracy to commit bank fraud, conspiracy to identity theft, and wrongfully obtaining and transferring someone’s health information.

When the probation officer wrote her presentence report, she was given a four-level enhancement for the offense involving more than 50 victims.

Ms. Hall objected to the “more than 50 victim” enhancement – she argued that a “victim” for the purposes of the fraud guidelines, is only someone who suffers and actual loss.

The district court didn’t agree though. The district court “concluded that the intentional transfer of information in exchange for consideration constituted actual use for the purposes of § 2B1.1(b)(2)(B).”

The Eleventh Circuit, in United States v. Hall, reversed the district court and vacated the sentence based on this application of the number of victims enhancement.

First, as the court of appeals pointed out,

Application Note 4(E) provides that a “‘victim’ means (i) any victim as defined in Application Note 1; or (ii) any individual whose means of identification was used unlawfully or without authority.”

So, when the identity information was transferred, was that a use of the information?

The Eleventh Circuit said no:

When we apply the rules of statutory construction to the enhancement, we disagree with the district court’s interpretation. We first consider the plain meaning of the word “used” as elaborated upon in Application Note 4E. As the Supreme Court noted in Bailey, the word “use” means “to convert to one’s service,” “[t]o employ,” “to avail oneself of,” and “to carry out a purpose or action by means of.” 516 U.S. at 145, 116 S. Ct. at 506. In other words, “use” is the “application or employment of something . . . for the purpose for which it is adapted.” Black’s Law Dictionary 1681 (9th ed. 2009). “These various definitions of ‘use’ imply action and implementation.” Bailey, 516 U.S. at 145, 116 S. Ct. at 506. On the contrary, the definition of “transfer” is “[t]o convey or remove from one place or one person to another; to pass or hand over from one to another, esp. to change over the possession or control of” and “[t]o sell or give.” Black’s Law Dictionary 1636. Transfer means something distinctly different than use.

If I transfer my car to you, that doesn’t necessarily mean that I use it – I could just sign over the title. So, as the court of appeals found, transferring identity information – as Ms. Hall did – is a separate thing than using identity information – the thing that gets you the enhancement for the number of victims.

And Ms. Hall will go back for resentencing.

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The federal sentencing guidelines are probably the most problematic in three areas – fraud, child pornography, and drugs.

Today’s case, United States v. Diallo, illustrates two of the big problems with the fraud guidelines. First, they’re really complicated – so complicated that federal prosecutors sometimes don’t really understand how they work. In this case, the prosecutor at sentencing took a position so clearly inconsistent with the guidelines that the government abandoned it for the appeal.

(An astute reader will notice that this means the district court went along with the federal prosecutor’s flawed guidelines understanding. It’s a shame, but c’est la guerre.).

Second, the fraud guidelines are driven by what the “intended loss” is. And “loss” for sentencing guidelines purposes is a squishy notion. And squishy notions are bad when you’re trying to figure out how much prison time to give someone.

785364_creditcard.jpgCredit Card Problems

Issa Diallo had a problem with credit cards. Sure, like many Americans, he charged more than he should of. Unlike many Americans, he put these charges on cards that weren’t issued to him.

He went into a Wegman’s (it’s a grocery store, for our geographically diverse readers) and bought 26 gift cards with a counterfeit credit card. The next day he came back to do it again and was arrested.

Law enforcement went into his car with a warrant. They found a treasure trove of stolen identity documents:

53 counterfeit credit cards, a counterfeit Louisiana driver’s license, 24 gift cards, a Global Positioning System (GPS), a laptop computer, a thumb drive, and a skimming device, which is a hand-held device that copies, stores, and encodes credit card information from a credit card’s magnetic strip. A subsequent search by Secret Service agents resulted in the discovery of a second thumb drive and another gift card. Searches of the laptop and thumb drives revealed over 200 compromised Discover, Visa, and MasterCard credit card accounts.

He pled guilty to having counterfeit credit cards under 18 U.S.C. § 1029(a)(3). In the plea, there was no agreement about the number of victims or the amount of the loss. These are, of course, massively important to figuring out the guidelines range under U.S.S.C. § 2B1.1.

What’s It Take To Be A Victim?

At sentencing, a Secret Service agent testified that there were credit cards for 51 financial institutions in Mr. Diallo’s possession.

There’s a four-level guidelines enhancement if there are more than 50 victims.

The government said that meant there were more than 50 victims, so the enhancement for more than 50 victims should apply.

The defense lawyer argued that “victim” for purposes of the number of victims enhancement, means people who actually lost money as a result of Mr. Diallo’s criminal conduct.

What’s the loss amount?

The Secret Service Agent testified that only $160,000 was actually charged on the cards that Mr. Diallo had. Though when you add up the credit limits for each of the cards, the total amount that could have been charged was $1.6 million.

So, since “loss” for the guidelines purposes means the higher of actual loss or “intended loss” – the amount that a person could reasonably think could have been lost as a result of the office – the government said that Mr. Diallo should have known that the loss could have been $1.6 million.

Mr. Diallo’s attorney was able to get the agent to acknowledge that there was no way Mr. Diallo could have known what the credit limit on the cards was absent a subpoena.

The District Court Speaks

These were hotly contested questions. There was testimony and argument. The Third Circuit reports that:

The Court’s analysis on these two issues consisted of the following: “The intended loss for credit cards he personally used and the cards he manufactured and provided to others totaled $1.6 million. Over 50 financial institutions were affected by his actions. So obviously it is a very serious offense.”

It’s not the most satisfying way to grapple with a hotly litigated legal issue.

The Appeal

On appeal, the government – perhaps reading the commentary for the sentencing guidelines that applied to this case relating to the number of victims enhancement for the first time – acknowledged that “victim” means “someone who suffered a loss.”

Since not all of the financial institutions had cards that were actually used by Mr. Diallo, there weren’t 50 or more companies that were actually harmed. So the government abandoned the “number of victims” argument.

Good on them for admitting their error. Perhaps it would have been better to do that before the sentencing hearing, but better late than never.

Turning to the loss amount issue, the Third Circuit started by setting the stage

This appeal requires us to determine how sentencing courts should calculate what “pecuniary harm was intended to result” from credit card fraud when the fraud’s perpetrator did not know the credit limit, which is the potential loss amount from the stolen credit card.

The appellate court reasoned that if the district court had really done a searching analysis and decided that there was a reasoned basis for thinking that Mr. Diallo meant to take the full limit of each card, that could be supported, perhaps, depending on how good the reasoning was.

But that’s not what happened here. And the Third Circuit was really not impressed with what the district court did.

from the District Court’s statement at sentencing–“The intended loss for credit cards he personally used and the cards he manufactured and provided to others totaled $1.6 million” App. 30-31–we would be speculating as to what evidence or argument was the basis for the District Court’s finding that $1.6 million was Diallo’s intended loss amount. This type of “speculation ‘is inappropriate’ in light of the inherently discretionary nature of the sentencing court’s decision.”

The case was sent back for resentencing.

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Daniel Castro was a high-ranking person in the Philadelphia Police Department. And the Third Circuit’s opinion in his case – United States v. Castro – may just be the most awesome published opinion I’ve seen in months.

Mr. Castro was charged with three separate extortion conspiracies and also with making a false statement to federal agents – a violation of 18 U.S.C. § 1001.

The jury hung on the extortion charges. They convicted on the false statement charge.

He pled to one extortion conspiracy to avoid retrial and the plea agreement had an appeal waiver.

Yet, despite that, the Third Circuit reversed his false statement conviction because the government hadn’t proven it. The Third Circuit held that he was so clearly not guilty of making a false statement that it would be a manifest injustice to not reverse on those grounds – so the appeal waiver didn’t bar their consideration of the issue.

1095398_right_or_wrong.jpgThe (Not) False Statement

Mr. Castro had a friend, Rony Moshe. Mr. Castro lost some money in a bad investment. He thought of his losses as a debt owed to him by the person he invested with – a man named Encarnacion. Mr. Moshe proposed that he could refer some tough debt collectors to help Mr. Castro collect this “debt” from Mr. Encarnacion. Mr. Moshe really went out of his way to try to work with Mr. Castro.

As you may have already suspected, Mr. Moshe was also an FBI informant.

After a lot of back and forth and a lot of regrettable statements on wires, Mr. Moshe gave Mr. Castro some money that he told Mr. Castro came from Encarnacion. In fact, it came from the FBI.

The FBI interviewed Mr. Castro. The asked him if he ever got money from Mr. Encarnacion.

Mr. Castro said that he did not. Though of course he thought that he did. Though he didn’t – the money came from the FBI.

His statement that he didn’t get any money from Encarnacion was the basis of his false statement conviction.

Failing to Fib

On appeal, Mr. Castro argued that this wasn’t a false statement. In fact, it was a true statement – he did not, in fact, get any money from Encarnacion.

Mr. Castro didn’t know that the statement was true – he intended to lie. But, despite his best efforts, he failed to fib.

The Third Circuit set out the standard for a false statement prosecution:

To establish a violation of §1001, the government [is] required to prove each of the following five elements: (1) that [the accused] made a statement or representation; (2) that the statement or representation was false; (3) that the false statement was made knowingly and willfully; (4) that the statement or representation was material; and (5) that the statement or representation was made in a matter within the jurisdiction of the federal government.

The second element is plain as day. And Mr. Castro’s statement wasn’t false. So, the Third Circuit reversed his conviction for making a false statement.

The Government’s (Rejected) Arguments

The government was unhappy with this result – Mr. Castro thought he was committing a crime, even if he actually wasn’t. The Third Circuit empathized, but disagreed:

In the broadest sense, it is surely so that Castro was morally wrong even if not legally guilty, but our legal system does not convict people of being bad. If they are to be convicted, it is for specific crimes, and the government here undertook the burden of proving that Castro had committed each element of the specific crime set forth in § 1001. It failed to do that.

The government was really unhappy with this result. They argued that there’s a “sting operation exception” to the requirement that a person make a false statement for there to be a successful false statement prosecution. Undercover operations do odd things to the truth. Many is the time I’ve sat with someone after they’ve been arrested in a sting and the predominant emotion is betrayal. Folks just can’t get over being lied to by someone who turned out to be a federal agent.

The Third Circuit didn’t much care for the “sting operation exception”

The ready and dispositive response to that argument is that, even if a “sting exception” to the strictures of § 1001 is a good idea, it is simply not in the statute. Congress knows how to pass laws that penalize statements made to law enforcement officers by a defendant who incorrectly believes the statements to be false. Compare 18 U.S.C. § 1956(a)(1) (“knowing” laundering of funds “which in fact involves the proceeds” of a crime), with id. §1956(a)(3) (intentional laundering of funds “represented to be” proceeds of a crime). But it did not do so when it enacted § 1001, and we are not free to amend the law.

In a desperate move, the government then argued that the money really came “from” Encarnacion, even though they came from the FBI.

The Third Circuit’s response – “It is not clear how the quotation marks around the word “from” in that sentence help the argument.”

Ouch.

As a result, Mr. Castro’s false statement conviction was reversed.

So many ways to be wrong, but morally and in terms of what happened. Yet they add up to make something so right.

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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.