Crimes Requiring Materiality -- Scope of the Targets to Test Materiality (12/3/17)

In United States v. Raza, ___ F.3d ___, 2017 U.S. App. LEXIS 23431 (4th Cir. 2017), here, the defendants were convicted of wire fraud and conspiracy to commit wire fraud predicated on a fraudulent mortgage lending scheme.  18 USC §§ 1343 & 1349, respectively.  Both crimes had a materiality element.  See Neder v. United States, 527 U.S. 1 (1999).  The question presented in the case was whether materiality is judged by reference to some "reasonable lender" or had to be material to the specific lender that was the target of the conduct.  The Court summarized the instructions given and the defendant's argument as:

• The government was obliged to prove that "the scheme or artifice to defraud, or the pretenses, representations, or promises, were material; that is, they would reasonably influence a person to part with money or property." See J.A. 1313.
• A particular fact is material if it "may be of importance to a reasonable person in making a decision about a particular matter or transaction." Id. at 1315.
• "A statement or representation is material if it has a natural tendency to influence or is capable of influencing a decision or action." Id. at 1318.

Based on those instructions, the defendants argue that the jury could have convicted them on the basis of false statements that an objective, reasonable lender might have considered material, but that SunTrust [the target of the conduct] itself did not deem to be material in the circumstances. 

The defendants support their contention of error with several court decisions that assess materiality in the fraud context. For example, in Neder, the Supreme Court concluded — in the context of a tax fraud prosecution — that to be material a false statement must be "capable of influencing[] the decision of the decisionmaking body to which it is addressed." See 527 U.S. at 16. In a similar vein, we have determined, in the context of fraud against a county government, that "[t]he test for materiality of a false statement is whether the statement has a natural tendency to influence, or is capable of influencing its target." See Wynn, 684 F.3d at 479. The defendants contend on appeal — and argued at trial — that those decisions required that the jury be instructed on a subjective standard of materiality.

Bottom-line, in a private lending context, the Court concluded that the reasonable lender test was the proper test rather than a test based on the specific lender to which the conduct was directed.  The Court distinguished Neder and other cases involving public agencies which requires that the test be what is material to the specific agency targeted.  This distinction makes sense because private lenders are numerous and thus some objective reasonable lender standard can be applied and is appropriate.  Government agencies -- and particularly the IRS -- tend to be one-off, whose activities and decisions are directed to their scope of responsibility and thus not shared with other agencies.  Some reasonable Government agency standard would not work if the fraud were directed to the IRS; thus the question is whether the conduct was material to the IRS, not some other class of reasonable Government agencies.  The Court contrasted these two approaches as "objective" -- looking to the reasonable lender rather than the specific lender -- and "subjective" -- looking to the specific agency.

Tax crimes in which there is a materiality requirement either textually or as interpreted include:  tax evasion (§ 7201); tax perjury (§ 7206(1));  aiding or assisting (§ 7206(2)); and false returns (§ 7207); false claims (18 USC 286 imported by use of the word fraud).

I think, also, that a materiality requirement is implicit in tax obstruction (§ 7212(a), the Omnibus Clause) via the requirement that the endeavor “must have the natural and probable effect of interfering with the due administration" of the IRS.  Cf. United States v. Aguilar, 515 U.S. 593, 509 & 601 (1995) (dealing with the Title 18 obstruction provision which parallels the Omnibus Clause).

2d Circuit Majority and Concurring Opinions of Fraud and Sentencing (7/28/13)

In United States v. Corsey, ___ F.3d ___, 2013 U.S. App. LEXIS 14897 (2d Cir. 2013), here, a per curiam decision, the Second Circuit opens its opinion:

This appeal principally raises two issues: (1) whether the misrepresentations underlying these convictions were not material because no reasonable financial professional would have believed them, and (2) whether the sentences imposed on appellants are procedurally unreasonable. 

The Fraud Issue 

In an FBI directed sting operation, the defendants attempted to sell the FBI informant in the financial brokerage industry on a laughable financial scheme.  I won't get into the details of it since they are well summarized in the opinion linked above.  The opinion later captures the flavor of this comical adventure in a question posed by defendant's counsel at sentencing:

"[W]hat hedge fund would fall prey to a purported coalition of Buryatian nationals and Yamasee tribesmen using AOL email accounts to offer five billion dollars in collateral for a loan to build a pipeline across Siberia? 

Buryatia is a federal republic of Russia, in the south central area of Siberia.  Yamasee is a confederation of native Americans.

But, the scheme, if anyone would have believed it and acted on it, could have defrauded a lender of over $3 billion. The problem in the case was that no lender with that kind of resources would have been defrauded because minimum due diligence would have easily uncovered the Three Stooges transparency of the fraud. That set the stage for the defendants claim that they should not have been convicted of a fraud that could not occur.

The Court of Appeals first states the test of fraud:

Fraud requires more than deceit. A person can dissemble about many things, but a lie can support a fraud conviction only if it is material, that is, if it would affect a reasonable person's evaluation of a proposal. "In general, a false statement is material if it has a natural tendency to influence, or is capable of influencing, the decision of the decision-making body to which it was addressed." Neder v. United States, 527 U.S. 1, 16 (1999)  (internal quotation marks and brackets omitted).

I should note that Neder involved convictions for mail fraud, wire fraud, bank fraud and tax perjury (Section 7206(1)).  Each of the fraud statutes involved explicit textual requirement of fraud.  Tax perjury does not require fraud, but it does require materiality as to the perjury.  And, the fraud statutes of conviction were read as having an element of materiality -- that is, there is no fraud unless there is the fraud is material.