Wednesday, August 26, 2020

District Court Sustains Tax Convictions but Grants Acquittal on Wire Fraud Convictions Because No Fraud (8/26/20)

In United States v. Barringer (W.D. VA Dkt No. 1:19CR00051 Order Dated 8/21/20), CL here, Barringer “convicted by a jury of three counts of willfully failing to pay over payroll taxes, two counts of wire fraud, and three counts of making false statements to federal agents.”  Broadly speaking, the gravamen of the conduct charged was an attempt to keep a business afloat by not paying over the employee’s withheld tax.  That pattern of behavior is not uncommon.  Also, it appears that Barringer’s conduct was to help her keep a good paying job.  That pattern also is not uncommon.  The interesting twist in this case is the wire fraud counts under 18 U.S.C. § 1343, and conviction on those counts.  The district court entered judgment of acquittal on the two wire fraud counts.

The factual background for the wire fraud convictions was Barringer’s effort to withdraw funds from her 401(k) plan to use the funds, perhaps in part, to keep the employer afloat.  Barringer first asked the provider of the account, a financial company, for guidance on withdrawing funds she needed to keep the employer in operation.  The provider said that that was not a permitted reason to withdraw from the account.  Barringer then applied for the withdrawal to prevent foreclosure on her primary residence, which was among the permitted reasons to withdraw.  In fact, though, Barringer was ahead on her residence payments and was not under threat of foreclosure.  The provider made the distribution.  Barringer used some of the money to pay the employer’s creditors without paying to the IRS on the withholding tax obligations and used some for her own purposes.  Then, in an interview with the IRS she repeated the lie as to her reason for withdrawal from the 401(k) account.  These facts are the basis for the wire fraud counts and for one of the false statement counts (17 U.S.C. § 1001).

The Court held that, on the record, the Government did not prove the critical element of fraud.  Although it was clear that Barringer misrepresented her reason for the withdrawal in order to fit one of the permitted reasons for withdrawal, the question was whether she thereby sought to and did commit a fraud against another person.  She was, after all, withdrawing her own money.  Here is what the Court said about that (Slip Op. 9-:

            The defendant’s main challenge is directed towards her wire fraud convictions. I agree that the government failed to prove that the defendant’s deceit deprived another of a property interest. To obtain a conviction for wire fraud, in violation of 18 U.S.C. § 1343, the government must show that the defendant “(1) devised or intended to devise a scheme to defraud and (2) used the mail or wire communications in furtherance of the scheme.” United States v. Wynn, 684 F.3d 473, 477 (4th Cir. 2012). The element “to defraud” has “the common understanding of wronging one in his property rights by dishonest methods or schemes, and usually signify the deprivation of something of value by trick, deceit, chicane, or overreaching.” Carpenter v. United States, 484 U.S. 19, 27 (1987).

            The defendant’s sufficiency challenge is that the government did not present evidence that she deprived, or intended to deprive, another of something of value because the government did not present evidence of who or what might have been deprived of their property interest by her deception and that she believed she was the sole owner of her 401(k) plan assets. * * * *

            The trial record contains substantial evidence of Barringer’s misrepresentations and knowledge, including documents, bank statements, and her own statements to law enforcement agents when confronted about her actions. While the trial record supports the defendant’s convictions for her failure to pay payroll taxes and her false statements to the federal agents, the government did not show that another individual or entity had property rights in the 401(k) assets so that her deceit to obtain these funds deprived that other individual or entity of a property right. The government relies solely upon the testimony of Ron Vincek, a representative of AXA, the 401(k) plan provider for J & R. I find that Vincek was not able to sufficiently prove who might have a property interest in Barringer’s 401(k) plan account, other than Barringer.

            In his testimony before the jury, Vincek discussed the general operation of 401(k) plans and authenticated the specific terms of J & R’s 401(k) plan. Vincek also testified as to the consequences AXA might face for an improper distribution due to a plan participant’s misrepresentations about eligibility for a hardship withdrawal. Tr. 70, ECF No. 87.

            The government thus argues that AXA’s relationship with J & R qualified as a property interest because it could be penalized by the IRS for releasing the 401(k) funds based upon a fraudulent hardship withdrawal. Vincek did not claim AXA was the victim of a fraud nor had it suffered any loss or financial hardship due to Barringer’s misrepresentations. Id. at 73. I find that under Adler, AXA’s contractual interest is not a qualifying property interest for purposes of the wire fraud statute. It is possible that the trustee designated by J & R, Reliance Trust Company, may have had a property interest in the 401(k) plan. But the government did not introduce any evidence about that relationship; no witness testified concerning it and no document - 11 - evidencing the trust arrangement was admitted. Moreover, there was no evidence that any misrepresentations were made to the trustee.

            Consequently, the government failed to prove an essential element of wire fraud — that someone was deprived of a property interest due to the defendant’s misrepresentations. The wire fraud convictions must be set aside.

 JAT Comments:

1. The investigation and prosecution in question appears to be tax focused rather than centering around some nontax investigation and prosecution.  It is not common to see wire fraud charges in tax focused investigations.  Virtually all tax crimes could be charged with either wire fraud or, its counterpart, mail fraud, but usually the tax specific charges are preferred.  Indeed, in order to keep the focus on tax specific charges, DOJ’s Criminal Tax Manual (“CTM”) includes Tax Division Directive No. 128, here, requires DOJ Tax approval to charge wire and mail fraud.  Since, this case would have proceeded through DOJ Tax anyway, DOJ Tax did approve the wire fraud charges.  (The DOJ Tax policy is really is keep AUSAs on the same page and not acting without DOJ Tax approval in a case where the gravamen of the offense is tax related.)  The point is generally to use tax specific charges when possible.  And, usually the tax specific charges will be sufficient to vindicate the Government’s interest in punishing the pattern of conduct where tax is the gravamen of the conduct.

2. It seems to me that the Government’s criminal enforcement priorities could have been satisfied by originally charging only the tax crimes and false statement.  If the jury would not convict for those tax counts, it most likely would not have convicted for the mail fraud counts.  And the tax counts are more than sufficient to justify whatever sentence is appropriate based on (i) the underlying tax loss and other conduct that go into the Sentencing Guidelines factors and (ii) any Booker variance factors.  So, it is not clear to me from the opinion why the Government charged mail fraud in the first place.  In this regard, certainly the false statement charge on repeating the lie as to the reason for withdrawal also would have made the non-wire fraud charges sufficient to vindicate the Government’s tax enforcement priorities.

3. If the Government just felt the imperative to make some statement about false representations to plan administrators as to reasons for withdrawal, then I guess it mounted the most obvious charge it could make, wire fraud.  The other obvious charge that might have worked, tax obstruction (§ 7212(a)) was foreclosed by Marinello v. United States, 138 S. Ct. 1101  (2018), because there was no pending or expected investigation to obstruct.

4.  The Barringer Court’s holding on the fraud requirement in criminal statutes and the wire fraud statute specifically is correct.  But, tax practitioners must keep in mind that there is a prominent exception in the defraud /  Klein conspiracy under 18 USC § 371.  (Note that § 371 has two types of conspiracy – (i) offense conspiracy requiring a conspiracy to commit a statutorily defined offense and (ii) defraud conspiracy, commonly called Klein conspiracy, “to defraud the United States, or any agency thereof.”  The Supreme Court has recognized the disconnect between the defraud requirement in § 371 which does not require a “fraud” objective in the normal requirements for fraud in other criminal statutes; the Supreme Court has just decided that the system can live with the disconnect, permitting conviction of conspiracy to defraud even  without fraud being involved.  I have written / ranted on that subject at some length, so I spare readers here.  See John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough, 9 Hous. Bus. & Tax. L.J. 255 (2009), here.  Of course, in most cases charged as a defraud / Klein conspiracy, there will be a fraud object.  But not all, at least if the rhetoric as to the scope of the defraud / Klein conspiracy is correct. Consider the following from CTM 23.07[1][b] Scope of Defraud Clause (bold-face supplied by JAT):

The Supreme Court has held that "[t]o conspire to defraud the United States" means (1) "to cheat the government out of money or property" or (2) "to interfere with or obstruct one of its lawful  governmental functions by deceit, craft or trickery, or at least by means that are dishonest." Hammerschmidt v. United States, 265 U.S. 182, 188 (1924). The defraud clause of Section 371 is very broad and encompasses a vast array of conduct, including acts that do not constitute a crime under a separate federal statute. United States v. Tuohey, 867 F.2d 534, 536-67 (9th Cir. 1989). This is because the term "defraud" when used in Section 371 is broader than its common law definition, even going beyond the definition used in the mail and wire fraud statutes. McNally v. United States, 483 U.S. 350, 356 (1987), superseded on other grounds by statute, Pub.L. 100-690, Title VII, § 7603(a), 102 Stat. 4508 (1988); Dennis v. United States, 384 U.S. 855, 861 (1966); United States v. Tuohey, 867 F.2d 534, 537-38 (1989); but see United States v. Caldwell, 989 F.2d 1056, 1059 & n.3 (9th Cir. 1993). 

For how far the Government has attempted to push the defraud / Klein conspiracy where no actual fraud object was involved, see United States v. Caldwell, 989 F.2d 1056 (9th Cir. 1993), where Judge Kozinski penned this famous opening line:  "We consider whether conspiring to make the government's job harder is, without more, a federal crime."  The answer, he concluded for the panel, was no.  (That line was the inspiration for my article cited and linked above.)  In Marinello, the Supreme Court found a way to constrain similarly broad scope language for tax obstruction (§ 7212(a)), but, except for Caldwell, courts as yet have generally not found constraints on similarly broad scope language in the defraud / Klein conspiracy.  See my most recent posting on this issue, Eighth Circuit Holds that Marinello Pending Proceeding Nexus in § 7212(a) Does Not Apply to Defraud / Klein Conspiracy (8/17/20), here.

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