Friday, July 22, 2016

Good Eleventh Circuit Analysis on the Meaning of Defraud in the Mail and Wire Fraud Statutes (7/22/16)

We have often discussed the word "defraud" as used in the federal criminal statutes.  To summarize the discussion, the word defraud as meant in most federal criminal statutes means, in my words, deceiving to take away something of value from victim.  However, in the federal criminal conspiracy statute, 18 USC § 371, here, which criminalizes in part pertinent a conspiracy "to defraud the United States," the word defraud, as interpreted, can mean a conspiracy to impair or impede the lawful function of a federal agency (such as most prominently for this blog, the IRS); the conspiracy need not have as its object the taking of money or value.  Now, there is a lot of nuance behind that general statement of the difference between defraud as used in the mail and wire fraud statutes and as used in the general conspiracy statute.  A good introduction, however, is provided by the Second Circuit in United States v. Coplan, 703 F.3d 46, 78 (2d Cir.2012), here, cert. denied, ––– U.S. ––––, 134 S.Ct. 71, 187 L.Ed.2d 29 (2013); I have discussed the issue in several blogs, I point readers now only to the one initially discussing Coplan, Coplan #1 - Panel Questions Validity of Klein Conspiracy (Federal Tax Crimes Blog 12/1/12), here; more detail on my thoughts on the difference is in John A. Townsend, Is Making the IRS's Job Harder Enough?, 9 Hous. & Bus. Tax L.J. 260 (2009), here.

In terms of the interests of this blog, the other key criminal statutes using the word "defraud" are the mail and wire fraud statutes which each criminal a "scheme or artifice to defraud."  18 USC §§ 1341, here; and 1343, here.  In United States v. Takhalov, ___ F.3d ___, 2016 U.S. App. LEXIS 12664 (11th Cir. 2016), here, in a colorful opinion, the panel applied the traditional interpretation of the word defraud.  The opinion has a short introduction that telescopes its reasoning:
The wire-fraud statute, 18 U.S.C. § 1343 does not enact as federal law the Ninth Commandment given to Moses on Sinai. n1 § 1343 forbids only schemes to defraud, not schemes to do other wicked things, e.g., schemes to lie, trick, or otherwise deceive. The difference, of course, is that deceiving does not always involve harming another person; defrauding does. That a defendant merely "induce[d] [the victim] to enter into [a] transaction" that he otherwise would have avoided is therefore "insufficient" to show wire fraud. See United States v. Starr, 816 F.2d 94, 98 (2d Cir. 1987).
   n1 See Exodus 20:16 ("Thou shalt not bear false witness against thy neighbor.") (KJV).
Here, the defendants feared that the jury might convict them of wire fraud based on "fraudulent inducements" alone. Hence they asked the district court to give the jurors the following instruction: that they must acquit if they found that the defendants had tricked the victims into entering a transaction but nevertheless gave the victims exactly what they asked for and charged them exactly what they agreed to pay. The district court refused to give that instruction, and the jury ultimately convicted the defendants of wire fraud and other crimes, most of which were predicated on the wire-fraud convictions. The question presented in this appeal is whether the district court abused its discretion when it refused to give the requested instruction.
Bottom line, the Eleventh Circuit panel held, over the Government's objection, that the requested instruction was indeed a correct instruction on the law and that the court had abused its discretion in refusing to give the requested instruction.  Criminal law enthusiasts will recall that it is not error to refuse a correct instruction where the point is adequately covered in other instructions (e.g., the general willfulness instruction in tax cases covers the concept of good faith) and, in any event, it may not be reversible error if error it be.

The relevant facts were that the defendants were owners of clubs that used what are called "Bar Girls" or "B-girls" to entice unsuspecting male customers into their bars.  Those girls did not disclose to the customers their relationship with the bar.  Defendants did not contest those facts.  But, they urged, that merely enticing unsuspecting and uninformed customers into the bar was not sufficient to meet the definition of defraud.  More would be required, they urged, in order to make a case that the conduct rose to the level of the word defraud in the statute.  Now, there was evidence that, after the customers entered the bar some conduct occurred which might meet the definition of defraud, but the defendants did contest whether they knew that such conduct occurred.  Since they contested that conduct and their knowledge of the conduct, they urged, the Government had to prove those facts beyond a reasonable doubt and, more importantly, they urged, they were entitled to an instruction to the jury that, if all the Government proved beyond a reasonable doubt was that they knew that the girls were deceiving the customers to enter the bar, that conduct did not establish that they intended to defraud the customers and they should be acquitted.  (In stating the defendants' claims, the panel does note an analogous episode from the classic movie Casablanca, noting that the defendant's defense was "what one might call the Casablanca defense, arguing that they were 'shocked, shocked' to learn that fraud was taking place within their South-Beach versions of Rick's Café Américain.n2 [citing in fn2 "See generally Casablanca (Warner Brothers 1942) ("Rick: How can you close [up my bar]? On what grounds? Captain Renault: I'm shocked, shocked to find that gambling is going on in here! Croupier: Your winnings, sir.")").

Focusing on the opposing positions on appeal, the panel said (record citations omitted for readability):
In the government's view, the jury could convict the defendants of wire fraud based on those lies alone. The defendants argued just the opposite—that "just because they have [used promoters to persuade men to come back to the respective establishments] does not constitute fraud with regard to the wire fraud or conspiracy to commit these frauds." 
At the close of evidence, the defendants asked for a jury instruction to support this theory. Specifically, they asked the court to instruct the jury that "[f]ailure to disclose the financial arrangement between the B-girls and the Bar, in and of itself, is not sufficient to convict a defendant of any offense[.]" The court denied that theory-of-the-defense instruction, however, because the court did [*6]  not believe it was "an accurate statement of the law." 
During closing argument, the government argued exactly what the defendants had expected it would argue: that the B-girls' concealment of their bar-affiliation to the men were material misrepresentations sufficient to constitute fraud. ("The first lie was by the girls to get them to come to the clubs by not telling them that they work for the clubs and got a percentage and this was material. This was important because, as even the defendant's own witness told you, had they known that these women worked for the clubs they likely wouldn't have even gone.")]. When defense counsel stood up to make their closing arguments, they did so in front of a jury that had just heard that the B-girls' lies were material and had never received an instruction to the contrary. Perhaps for this reason, defense counsel focused their efforts elsewhere, arguing that there was not enough evidence to connect the defendants to the other fraudulent activities at the clubs. Specifically, the defendants argued that they were not involved in the alleged fraud that took place within the clubs, and that they did not believe they were doing anything illegal.  Following closing arguments, the jury convicted the defendants on several counts, including multiple counts of wire fraud and money laundering. This appeal followed.
In its analysis, the panel first addressed the legal issue of a mere intent to deceive -- the only subject of the requested instruction -- was a correct statement of the law.  That was the instruction the trial judge refused.  The analysis is quite good and relatively straight-forward (although the panel decision does perhaps state it in more words -- albeit interestingly presented -- than necessary).  Here is the analysis (some footnotes omitted) [JAT Note:  The author of the panel decision is a Kentucky district judge sitting by designation, a background fact important for one of the examples in the analysis]:
The law in question here is the wire-fraud statute, which makes criminal any "scheme or artifice to defraud." 18 U.S.C. § 1343. The statute itself, however, does not explain what constitutes such a scheme or artifice. United States v. Bradley, 644 F.3d 1213, 1240 (11th Cir. 2011). Thus, the meaning of the phrase "scheme to defraud" has been "judicially defined." United States v. Pendergraft, 297 F.3d 1198, 1208 (11th Cir. 2002). And that definition is a broad one, "broad[er] . . . than the common law definition of fraud." Id. It is a "reflection of moral uprightness, of fundamental honesty, fair play and right dealing in the general and business life of members of society." Gregory v. United States, 253 F.2d 104, 109 (5th Cir. 1958). 
"[D]espite its breadth," however, "the judicial definition" of a "scheme to defraud" has some limits. Bradley, 644 F.3d at 1240. The most important limit is obvious from the statute itself: the scheme must be a scheme to defraud rather than to do something other than defraud. For Congress could have made criminal any "scheme" simpliciter, but chose not to do so. The first question presented in this case, then, is what the word "defraud" means. 
To answer that question, we turn first to the dictionaries. For "[t]he ordinary-meaning rule is the most fundamental semantic rule of interpretation." Antonin Scalia & Bryan A. Garner, Reading Law 69 (2012). And "to determine the common usage or ordinary meaning of a term, [we] often turn to dictionary definitions for guidance." CBS Inc. v. PrimeTime 24 Joint Venture, 245 F.3d 1217, 1223 (11th Cir. 2001); see also Stein v. Paradigm Mirasol, LLC, 586 F.3d 849, 854 (11th Cir. 2009) (noting that "[a] term that is undefined in a statute carries its ordinary meaning" and turning first to the dictionary to determine that meaning). Black's defines the word "defraud" as "[t]o cause injury or loss to (a person or organization) by deceit." Black's Law Dictionary 516 (10th ed. 2014.). Webster's says much the same. Webster's Third New International Dictionary 593 (2002) (defining the word "defraud" as "to take or withhold from (one) some possession, right, or interest by calculated misstatement or perversion of truth, trickery, or other deception"). 
These definitions make clear that there is a difference between deceiving and defrauding: to defraud, one must intend to use deception to cause some injury; but one can deceive without intending to harm at all. See Black's at 492 (defining the word "deception" as "[t]he act of deliberately causing someone to believe that something is true when the actor knows it to be false"); Webster's at 585 (defining the word "deception" as "the act of deceiving, cheating, hoodwinking, misleading, or deluding"). Thus, deceiving is a necessary condition of defrauding but not a sufficient one. Put another way, one who defrauds always deceives, but one can deceive without defrauding. 
For this reason, the law in the Eleventh Circuit makes clear that a defendant "schemes to defraud" only if he schemes to "depriv[e] [someone] of something of value by trick, deceit, chicane, or overreaching." Bradley, 644 F.3d at 1240. But if a defendant does not intend to harm the victim—"to obtain, by deceptive means, something to which [the defendant] is not entitled"—then he has not intended to defraud the victim. Id. 
From that conclusion, a corollary follows: a schemer who tricks someone to enter into a transaction has not "schemed to defraud" so long as he does not intend to harm the person he intends to trick. And this is so even if the transaction would not have occurred but for the trick. For if there is no intent to harm, there can only be a scheme to deceive, but not one to defraud. 
Consider the following two scenarios. In the first, a man wants to exchange a dollar into four quarters without going to the bank. He calls his neighbor on his cell phone and says that his child is very ill. His neighbor runs over, and when she arrives he asks her to make change for him. She agrees; the quarters pass to the man; the dollar passes to the woman; and they part ways. She later learns that the child was just fine all along. The second scenario is identical to the first, except that instead of giving the woman a true dollar, he gives her a counterfeit one. 
The first scenario is not wire fraud; the second one is. n4 Although the transaction would not have occurred but-for the lie in the first scenario—the woman would have remained home except for the phony sickness—the man nevertheless did not intend to "depriv[e] [the woman] of something of value by trick, deceit, [and so on]." Bradley, 644 F.3d at 1240. But in the second scenario he did intend to do so.
   n4 This assumes, of course, that the man's cell-phone signal travels across state lines, thus constituting a "wire, radio, or television communication in interstate or foreign commerce." 18 U.S.C. § 1343. 
More specifically, the difference between the scenarios is that, in the first scenario, the man did not lie about the nature of the bargain: he promised to give the woman a true dollar in exchange for the quarters, and he did just that. In the second, he lied about the nature of the bargain: he promised to give her a true dollar but gave her a fake one instead. 
Now imagine another, more common scenario: a young woman asks a rich businessman to buy her a drink at Bob's Bar. The businessman buys the drink, and afterwards the young woman decides to leave. Did the man get what he bargained for? Yes. He received his drink, and he had the opportunity to buy a young woman a drink. Does it change things if the woman is Bob's sister and he paid her to recruit customers? No; regardless of Bob's relationship with the woman, the businessman got exactly what he bargained for. If, on the other hand, Bob promised to pour the man a glass of Pappy Van Winkle n5 but gave him a slug of Old Crow n6 instead, well, that would be fraud. Why? Because the misrepresentation goes to the value of the bargain.
   n5 "Pappy's," as it is often called, is a particularly rare bourbon varietal: nearly impossible to find, and nearly impossible to afford when one finds it.
   n6 Although Old Crow has a venerable pedigree—reportedly the go-to drink of Mark Twain, Ulysses S. Grant, Hunter Thompson, and Henry Clay—it is not Kentucky's most-expensive liquor. Its "deluxe" version, "Old Crow Reserve," retails for approximately $15 per bottle.
Thus, a "scheme to defraud," as that phrase is used in the wire-fraud statute, refers only to those schemes in which a defendant lies about the nature of the bargain itself. That lie can take two primary forms: the defendant might lie about the price (e.g., if he promises that a good costs $10 when it in fact costs $20) or he might lie about the characteristics of the good (e.g., if he promises that a gemstone is a diamond when it is in fact a cubic zirconium). In each case, the defendant has lied about the nature of the bargain and thus in both cases the defendant has committed wire fraud. But if a defendant lies about something else—e.g., if he says that he is the long-lost cousin of a prospective buyer—then he has not lied about the nature of the bargain, has not "schemed to defraud," and cannot be convicted of wire fraud on the basis of that lie alone. 
The Second Circuit has interpreted the wire-fraud statute in precisely this way. Their cases have "drawn a fine line between schemes that do no more than cause their victims to enter into transactions that they would otherwise avoid—which do not violate the mail or wire fraud statutes—and schemes that depend for their completion on a misrepresentation of an essential element of the bargain—which do violate the mail and wire fraud statutes." United States v. Shellef, 507 F.3d 82, 108 (2d Cir. 2007); see also United States v. Starr, 816 F.2d 94, 98 (2d Cir. 1987) ("Misrepresentations amounting only to a deceit are insufficient to maintain a mail or wire fraud prosecution. Instead, the deceit must be coupled with a contemplated harm to the victim [that] affect[s] the very nature of the bargain itself. Such harm is apparent where there exists a discrepancy between benefits reasonably anticipated because of the misleading representations and the actual benefits which the defendant delivered, or intended to deliver.") (internal quotation marks omitted); United States v. Regent Office Supply Co., 421 F.2d 1174, 1182 (2d Cir. 1970) ("[W]e conclude that the defendants intended to deceive their customers but they did not intend to defraud them, because the falsity of their representations was not shown to be capable of affecting the customer's understanding of the bargain nor of influencing his assessment of the value of the bargain to him, and thus no injury was shown to flow from the deception."). 
Moreover, the Second Circuit's interpretation of the wire-fraud statute is not a parochial interpretation of an ambiguous provision of federal law. Their interpretation follows as a matter of logic from Congress's decision to use the phrase "scheme to defraud" rather than "scheme" or "scheme to deceive." We therefore adopt that interpretation as our own. A jury cannot convict a defendant of wire fraud, then, based on "misrepresentations amounting only to a deceit." Shellef, 507 F.3d at 108. Thus, even if a defendant lies, and even if the victim made a purchase because of that lie, a wire-fraud case must end in an acquittal if the jury nevertheless believes that the alleged victims "received exactly what they paid for." Id. 
Here, the defendants asked the district court to instruct the jury that "[f]ailure to disclose the financial arrangement between the B-girls and the Bar, in and of itself, is not sufficient to convict a defendant of any offense[.]" R. 921 at 1; see also R. 1152 at 285 ("So [Pavlenko's] theory of defense is just because [the defendants used the B-girls to lure men into the clubs without disclosing their financial arrangement] does not constitute fraud with regard to the wire fraud or conspiracy to commit these frauds."). If the jury believed that the defendants had deceived the victims only about the B-girls' pay arrangement, then the jury would likewise believe that the defendants' misrepresentations "amount[ed] only to deceit" and that the victims "received exactly what they paid for." Shellef, 507 F.3d at 108. Thus, "failure to disclose the financial arrangement between the B-girls and the Bar" was not "in and of itself" sufficient to convict the defendants of wire fraud. The defendants' requested instruction therefore seems like a correct statement of the law. 
The government responds in a few ways. First, it argues that the Second Circuit cases have not "been applied in this Circuit." United States Br. at 43. True, but neither have we rejected the Second Circuit's interpretation; we simply have never considered the question they answered. And the "law" at issue is the proper interpretation of the federal statute itself, not some common-law creature unique to the Second Circuit. After all, the defendants' argument is not that the Eleventh Circuit is bound by the opinions of the Second Circuit. The argument is that the Second Circuit's interpretation of the statute is the right interpretation. Thus, the defendants argue, their proposed jury instruction was a correct statement of "the law," i.e., the statute. We have already explained why we agree. 
Second, the government argues that the proposed instruction "was incorrect legally, because it proposed to tell the jury that [the] defendants' conduct was outside the reach of the wire fraud statute." United States Br. at 54. No, it did not. It proposed only to tell the jury what portion of the defendants' conduct could be criminal under the statute and what portion could not. 
Third, the government argues that "Pavlenko's instruction was incorrect in its portrayal of the charges" because the government "never described the [defendants'] scheme" as one "to have attractive women induce patrons to purchase and consume alcoholic beverages under the illusion that the patron may later persuade the women to have sexual relations." United States Br. at 55. Fair enough. But the question at hand is a purely legal one: whether the defendants' proposed instruction was a correct statement of the law. And the government's characterization of the defendants' scheme has no bearing on the answer to that question. 
Finally, the government argues that the instruction "was incorrect in its depiction of the facts" because "[t]he evidence showed convincingly that the conspirators . . . intoxicated patrons without their knowledge or knowing consent, forcing liquor onto patrons, adulterating beverages, and physically pouring it down victims' throats in some instances." United States Br. at 55-56. Again, fair enough. But, again, totally irrelevant. What "the evidence showed"—even "showed convincingly"—simply has no bearing on whether the defendants' proposed instruction was a correct statement of the law. 
In sum, the defendants asked the district court to tell the jurors that they could convict only if they found that the defendants had schemed to lie about the quality or price of the goods sold to the [*19]  victims. And § 1343, which we interpret de novo, requires the jury to make just such a finding before convicting a defendant of wire fraud. Thus, the proposed instruction was a correct statement of the law.
The panel then does conclude that the trial judge abused his discretion in refusing the requested instruction.

The question as posed and discussed by the Eleventh Circuit panel does echo Judge Kozinski's pungent opening in United States v. Caldwell, 989 F.2d 1056 (9th Cir. 1993):
We consider whether conspiring to make the government's job harder is, without more, a federal crime.
The crime Judge Kozinski was considering was the defraud conspiracy.  (Hence the titled of my article, John A. Townsend, Is Making the IRS's Job Harder Enough?, 9 Hous. & Bus. Tax L.J. 260 (2009), here.)  As noted above, defraud in the conspiracy statute is broader than defraud in the mail and wire fraud statutes, but in each instance there is some concern as to the potential sweep of the statute unless some meaning is imported to the use of the word defraud.  I am convinced that the Eleventh Circuit got it right in Takhalav and that the Second Circuit was rightly concerned in Coplan about the expansive interpretation of defraud in the conspiracy statute, although constrained by Supreme Court precedent to accept the interpretation. (The expansive interpretation of the defraud conspiracy is unlikely to be reigned in at this stage simply because too many have been convicted.)

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