This week we have a guest post from Dan Broderick, the head of the Federal Public Defender office in Sacramento. Though Dan was briefly an AUSA in Los Angeles (back when I started at the Federal Public Defender’s office, actually), he saw the light after a few years and has been a defender for going on 20 years now, and we’ve forgiven him his trespasses. Here’s some of his thoughts on an intent to defraud issue.

BLOG BULLETS:

• Intent to defraud under the federal fraud statutes requires an intent to deceive and an intent to harm the victims.
• The Ninth Circuit model jury instruction on intent to defraud is subject to challenge because it doesn’t require this.
• This could be especially important in mortgage fraud cases brought after the real estate bubble burst.

NOW THE BLOG:

The mail fraud statute (18 U.S.C. § 1341), wire fraud statute (18 U.S.C. § 1343), and bank fraud statute (18 U.S. C. § 1344) all proscribe the same thing, namely, a “scheme or artifice,” first, “to defraud,” and/or, second, “for obtaining money or property by means of false or fraudulent pretenses, representations, or promises.” At first, these statutes seem to prohibit two types of conduct: fraudulent conduct and deceptive conduct. A scheme to cheat someone, in other words, and a scheme to deceive someone.

The Supreme Court has twice rejected this view, however. InMcNally v. United States, 483 U.S. 350, 358-59 (1987), the Court stated that Congress added the second phrase simply to modify the first phrase in order to emphasize that the statute reached false promises and misrepresentations about the future. TheMcNally opinion was superseded by statute, however, so the Supreme Court revisited the issue in Cleveland v. United States, 531 U.S. 12 (2000). In that § 1341 mail fraud case, the Court made it clear that an intent to defraud is an element of both prongs of these statutes:

“[T]he mail fraud statute . . . had its origin in the desire to protect individual property rights, and any benefit which the Government derives from the statute must be limited tothe Government’s interests as property holder.” [McNally, 483 U.S. at] 359, n. 8, 107 S. Ct. 2875 (emphasis added). We reaffirm our reading of § 1341 in McNally. (Citation omitted.) Were the Government correct that the second phrase of § 1341 defines a separate offense, the statute would appear to arm federal prosecutors with power to police false statements in an enormous range of submissions to state and local authorities. For reasons already stated (citation omitted), we decline to attribute to § 1341 a purpose so encompassing where Congress has not made such a design clear.

Cleveland, 531 U.S. at 26.

An intent to defraud necessarily means that the defendant contemplated and intended some actual harm or injury to his alleged victims. See, e.g., United States v. Starr, 816 F.2d 94, 98 (2d Cir. 1987) (only a showing of intended harm will satisfy the element of fraudulent intent); United States v. Jain, 93 F.3d 436, 442 (8th Cir. 1996) (the essence of a scheme to defraud is an intent to harm the victim); United States v. Cochran, 109 F.3d 660, 667-69 (10th Cir. 1997). A scheme to obtain money or property by false, non-fraudulent promises, however, does not necessarily involve any intent to cause harm or injury. A business, for example, can make statements in advertising that falsely overstate the company’s success rate, in an effort to acquire new customers. Although false, such statements may not be made with an intent to harm or cheat anyone; they were made merely to attract new business.

In the current wave of mortgage fraud cases, this distinction can be significant. One borrower can file a loan application riddled with false statements that are also fraudulent because the borrower has no intention of ever making payments. Another may file an application with only a few false statements, but with every intention of making all the payments and causing no loss to anyone. The latter borrower has no intention of harming or cheating anyone, and so does not have an intent to defraud as required by the statute.

The proof at a mortgage fraud trial is often only that the defendant’s loan application contained false statements. There is no proof that the defendant did not intend to pay the loan off or that the borrower made any of the false statements with an intent to defraud the lending institution. In the days before the real estate bubble burst, this was often the case. Borrowers thought the real estate market only had an upside. Lenders extensively encouraged use of “liar’s loans,” where the statements on the loan applications were largely irrelevant. Everyone thought they were going to make money and no one was being defrauded.

The Ninth Circuit’s pattern jury instructions on intent to defraud are incorrect statements of the law that fail to recognize the foregoing distinction, because they are written in the disjunctive. Model Instruction 3.16 defines intent to defraud as “an intent to deceive or cheat.” Model Instruction 8.121 for mail fraud parallels this with an identical internal definition, requiring as one of its elements that “the defendant acted with the intent to defraud; that is, the intent to deceive or cheat.”

These instructions are wrong because they eliminate the need to prove an intent to cheat. All the prosecutor has to show or argue is that some statement – any statement – on a mortgage loan application was knowingly false. It is irrelevant if the loan broker or the lender told the borrower it didn’t matter if each statement on the application was true. Nor does it matter if the borrower thought he or she would fully pay back the loan. Any supposedly material false statement was sufficient proof of an intent to defraud.

The Second Circuit long ago rejected this approach.

Where the false representations are directed to the quality, adequacy or price of the goods themselves, the fraudulent intent is apparent because the victim is made to bargain without facts obviously essential in deciding whether to enter the bargain. In closer cases, where the representations do not mislead as to the quality, adequacy of inherent worth of the goods themselves, fraud in the bargaining may be inferable from facts indicating a discrepancy between benefits reasonably anticipated because of the misleading representations and the actual benefits which the defendant delivered, or intended to deliver. (Citations omitted.) In either instance, the intent of the schemer is to injure another to his own advantage by withholding or misrepresenting material facts. Although proof that the injury was accomplished is not required to convict under 1341, we believe the statute does require evidence from which it may be inferred that some actual injury to the victim, however slight, is a reasonably probable result of the deceitful representations if they are successful.

United States v. Regent Office Supply Co., 421 F.2d 1174, 1182 (2d Cir. 1970).

The Ninth Circuit, on the other hand, has refused to acknowledge the problem. The comment to Model Instruction 3.16 simply cites to United States v. Shipsey, 363 F.3d 962 (9th Cir. 2004). In Shipsey, the defendant was charged with mail fraud and wire fraud among other offenses. Mr. Shipsey was hired as a general contractor to develop a housing project, but used monies loaned to the development partnership to construct his own home. The issue in the case had nothing to do with the erroneous intent to defraud instruction; in fact, Mr. Shipsey did not even argue that this instruction was erroneous. The issue was simply the form of a good faith instruction.

If you are defending a mail fraud, wire fraud, bank fraud, or mortgage fraud case at trial, you should object to the Ninth Circuit pattern instruction if the prosecution’s theory of guilt does not involve an intent to cheat. Your alternative instruction should make it clear that under McNally and Cleveland, an intent to defraud under any of these statutes cannot be met by a mere intent to deceive. An intent to defraud is an intent to deceive andcheat.

COMMENT FROM CARL:

Lest you think Dan’s attack on a Ninth Circuit jury instruction can have no hope because the Court would never invalidate its own model jury instruction, note that the Court has done that on several occasions in the past. Examples include United States v. Smith, 561 F.3d 934, 937-38 (9th Cir. 2009) (holding model Ninth Circuit assault with a dangerous weapon instruction partially invalid); United States v. Paul, 37 F.3d 496, 500 (9th Cir. 1994) (holding model manslaughter instruction invalid);United States v. Lessard, 17 F.3d 303, 305-06 (9th Cir. 1994) (holding model entrapment instruction invalid); United States v. Mendoza, 11 F.3d 126, 128-29 & n.2 (9th Cir. 1993) (holding model 18 U.S.C. § 924(c) elements instruction invalid); andUnited States v. Terry, 911 F.2d 272, 280 (9th Cir. 1990) (holding model constructive possession instruction invalid).