Saturday, November 17, 2012

On Bank

United States v. Gyanbaah, No. 10-2441-cr (2d Cir. November 8, 2012) (Winter, Lynch, Carney, CJJ)

The appellant here was part of a group that, for more than three years, stole names and other identifying information, then used it to file thousands of fraudulent tax returns in those victims’ names. The group expected that about half of the refunds would be approved; having sought $2.2 million in refunds, they actually received more than $500,000. When they received a refund check, one of the fraudsters would forge the payee’s signature and endorse the check over to a group member, who would deposit the check into a controlled bank account and withdraw the money. 

Gyanbaah, the particular appellant here, was linked to deposits at three different banks and nearly seventy fraudulent tax returns.  A jury convicted him of five counts, including, in relevant part, one count of bank fraud and one count of aggravated identity theft relating to that bank fraud. On appeal, the circuit agreed that the evidence was legally insufficient to support the bank fraud charge and that both that count and the related identity theft count should be reversed.

Despite the brazenness of the scheme, and the centrality of banks to its success, the conduct was not bank fraud because the government failed to prove Gynabaah’s “intent to victimize” the banks, that is "expose the banks to losses" by fraud. Its evidence on this point consisted only of the testimony of a Secret Service agent who explained only that when a bank “transmits funds to be collected” and it “comes back” as a counterfeit or fraudulent check, the bank “will no longer get those funds back” because “most of the time” the bank has “already given out the funds” to whoever withdrew them. But, “when pressed about specific losses suffered by banks as a result of [Gyanbaah’s] specific use of accounts,” the agent “could not confirm that such losses occurred.” And, while he believed that banks might have to bear the loss from accepting for deposit fraudulently obtained treasury checks, he was “unsure” if that was actually so.

On appeal, to defend the convictions, the government punted. It pointed to conversations between Gyanbaah and others indicating their desire to select banks that would be least likely to detect the scheme. But those conversations showed only an intent to avoid detection, not an intent to injure the banks.

The government also relied on the banks’ claimed exposure to losses, citing cases in which a defendant fraudulent caused a bank to pay out some of a depositor’s funds held in an account in that bank by, for example, cashing a forged check. But in that type of situation the bank’s “direct legal exposure to losses is sufficiently well known” that “a jury may infer that the defendant intended to expose the bank to the loss.” 

Here, by contrast, there was no “clear,” much less “well-known exposure of the banks to loss.”  Until alerted by the Treasury, the banks might well have been holders in due course with the risk of loss borne entirely by the Treasury. After all, here, in one such transaction, the treasury check was real, the signature of the final endorsee was the authorized signature for the account - even though it was fraudulently created by Gyanbaah - and was the only signature the bank needed to very to take the checks as a holder in due course. There was no evidence that the Treasury dishonored the checks or sought reimbursement from the banks. 

Judge Lynch filed an opinion concurring in the result, agreeing that it was dictated by the court’s precedent. He wrote separately to “express [his] view that those prior decisions are predicated on an unwarranted and unwise judicial injection of an offense element that” is not in the statute. Judge Lynch did not believe that “an intent to harm the bank is a required element of” bank fraud, and that it would be poor policy to include it. “The government cannot adequately protect federal insured banks from loss without being able to prosecute criminals who, while undertaking scheme to obtain property under the control of such banks, are ignorant or insouciant about whom they will harm.”  

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Radio Smack

United States v. Lacey, No. 11-2404-cr (2d Cir. November 7, 2012) (Winter, Straub, Lynch, CJJ)

Defendants Lacey and Henry were convicted after a jury trial of various offenses resulting from their involvement in a mortgage fraud scheme. In the scheme a real estate company, MTC,  would purchase “short-sale” properties from distressed homeowners, then resell them to straw buyers, who would obtain mortgages on the properties, without intending to live in them or make payments. MTC helped the straw buyers complete fraudulent mortgage applications to ensure that they would be approved, and sometimes made a few payments on the loans to further deceive the banks, but eventually the loans defaulted and the lending banks took title to the properties through foreclosure.

One component of the fraud involved radio ads, through which MTC recruited straw buyers. Those ads told buyers that they could earn a fee by buying a house through MTC - some actually did receive a fee - and also recruited distressed homeowners looking to sell.

On appeal, the defendants argued that these radio ads should not have triggered the “mass-marketing” enhancement of § 2B1.1(b)(2)(A)(ii), and a divided panel agreed. The majority concluded that the enhancement is “properly applied only when the targets of the mass-marketing are also in some way victims in the scheme.” This is so because the guideline applies to an offense “committed through mass-marketing.” As the Eighth Circuit has already observed, an offense is “committed through mass- marketing” only when mass-marketing is used to recruit or commit victims. It is not enough for the scheme to be advanced by mass-marketing.

This interpretation is also bolstered by the surrounding text; the enhancement is surrounded by provisions that relate to the number of victims; thus it is designed to measure “the scope of the wrong by the number of victims.” The use of mass-marketing is relevant to this calculus because it provides for an enhancement when the number of actual victims is small, but the marketing creates a large number of potential victims. 

Here, the record was unclear whether some of the consumers targeted by the radio ads were “in some sense victimized,” even though the “main thrust of the fraud was directed at banks.” Obviously, any buyer who was in on the scheme or who received payment from MTC could not be seen as a victim. But some straw buyers complained that their credit scores were ruined, and others complained that MTC misled them into believing that the scheme would result in a legitimate sale and that they would be able to pay for the properties through rental income. 

The record was also unclear whether the radio ads even constituted mass-marketing at all.  The relevant provision applies to a scheme intended to “induce a large number of persons to ... invest for financial profit.” Here, while the record contained some evidence that this was true, it did not establish it sufficiently clearly. 

The court accordingly vacated the sentence and remanded to the district court for findings on whether the defendants engaged in “mass-marketing” at all, and if so, whether the targets of the marketing were “also in some sense victims” of the scheme, in that they were injured by it. 

Judge Straub, in dissent, believed that the enhancement was properly applied because the “offense” - using the relevant conduct definition - employed mas-marketing. He disagreed that the enhancement applies only where the victim is targeted by the mass-marketing. 

The panel was unanimous, however, in concluding that the restitution order erroneously failed to credit the value of the collateral underlying the foreclosed loans.

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PC World

United States v. Harrison, No. 11-1240-cr (2d Cir. November 6, 2012) (Cabranes, Chin, Carney, CJJ) (per curiam)

The court's latest per curiam opinion holds that the appellate waiver provision of the standard Southern District plea agreement is enforceable, even in the wake of Dorsey v. United States, 132 S.Ct. 2321 (2012). Thus, although the defendant was sentenced to a 120-month mandatory minimum when, per Dorsey, his minimum should have been lower, he validly waived his right to appeal the sentence.