Today, we have another post from Dan Broderick, who did a guest post four weeks ago (see “Intent to Defraud Is Misdefined in the Ninth Circuit Model Instructions,” linked at the right). Dan’s post this week is on another element of the fraud instructions – the element of materiality.

BLOG BULLETS:

• False statements qualify as fraud only if they are “material.”
• Case law requires a false statement to be “capable of influencing” not just any person but “the decisionmaking body to which it is addressed.”
• The Ninth Circuit model instructions on fraud fail to articulate this requirement, so you should object to them.

NOW THE BLOG:

If the defendant is charged with mail fraud (18 U.S.C. § 1341), wire fraud (18 U.S.C. § 1343), or bank fraud (18 U.S.C. § 1344), then one element of the offense is that any charged false statements must be “material.” See Ninth Circuit Model Instructions 8.121 (mail fraud); 8.124 (wire fraud); 8.27 (bank fraud). Materiality is a question of fact for the jury. United States v. Carpenter, 95 F.3d 773, 776 (9th Cir. 1996). The Ninth Circuit pattern jury instructions state in the comment section that the “common law test for materiality in the false statement statutes . . . is the preferred formulation.” That test is stated in United States v. Peterson, 538 F.3d 1064 (9th Cir. 2008) as “whether the statement ‘has a natural tendency to influence, or was capable of influencing, the decision of the decisionmaking body to which it was addressed.’” Id. at 1072 (quoting Kungys v. United States, 485 U.S. 759, 770 (1988) and citing United States v. Gaudin, 515 U.S. 506, 509 (1995) as “reaffirm[ing]” Kungys).

As noted in the parenthetical, this definition of “materiality” was drawn directly from the Supreme Court cases of Gaudin andKungys. Kungys explained:

The federal courts have long displayed a quite uniform understanding of the “materiality” concept as embodied in such statutes. (Citations omitted.) The most common formulation of that understanding is that a concealment or misrepresentation is material if it “has a natural tendency to influence, or was capable of influencing, the decision of” the decisionmaking body to which it was addressed.

Kungys, 485 U.S. at 770.

The phrase “capable of influencing” has usually been the most difficult obstacle for defendants to overcome in trials involving false statements where materiality is an element. As it sounds, “capable” does not mean that the false statement actually influenced anyone; just that it was of a nature that could have influenced someone. What this means in mortgage fraud cases is that we don’t want to spend a whole lot of time arguing that the false statements identified in the indictment were not capable of influencing a decision by some theoretical lender. Instead, we probably want to focus our “materiality” argument on the second part of the Gaudin/Kungys definition – whether the false statements were capable of influencing “the decision of the decisionmaking body to which it was addressed.”

But note that the Ninth Circuit’s materiality jury instruction quoted above does NOT use this language or even this notion. Instead it defines materiality by requiring that the statements “had a natural tendency to influence, or were capable of influencing, a person to part with money or property,” which substitutes a reference to “a person” for the “decisionmaking body to which [the statement] was addressed.” This change makes the reference more hypothetical, and should be challenged when seeking to focus attention on the actual decisionmaker as the entity which is “capable of being influenced.” This is especially critical if all or part of your defense is that at the time the false statements were made, loans were being approved regardless of what was said on the application.

In this regard, there is some support in non-mortgage fraud cases. For example, in Fedorenko v. United States, 449 U.S. 490 (1981), the allegedly material false statement was made in a visa application. Thus, the court found that materiality must be measured “in terms of its effect on the applicant’s admissibility into this country. . . . [A] misrepresentation must be considered material if disclosure of the true facts would have made the applicant ineligible for a visa.” Id. at 509. In the mortgage loan context, this would translate to whether the defendant’s false statements made him ineligible for a loan. If the lender’s practice was to grant loans, for example, even after being warned by underwriters that the false statements raised red flags in the loan application review, these false statements were immaterial to this lender.

Another example is Weinstock v. United States, 231 F.2d 699 (D.C. Cir. 1956), which was relied upon by the Supreme Court in its Kungys opinion. In Weinstock, the defendant was charged with an 18 U.S.C. § 1001 violation for making false statements to the Subversive Activities Control Board. Although the defendant’s statements were false, the court held that in the setting in which the statements were made, they were not material, as no tribunal would have been influenced by the statement. In so holding, the court noted the distinction between relevance and materiality:

‘Material’ when used in respect to evidence is often confused with ‘relevant’, but the two terms have wholly different meanings. To be ‘relevant’ means to relate to the issue. To be ‘material’ means to have probative weight, i.e., reasonably likely to influence the tribunal in making a determination required to be made. A statement may be relevant but not material. . . .

. . . The test is whether the false statement has a natural tendency to influence, or was capable of influencing, the decision of the tribunal in making a determination required to be made.

Id. at 701-702.

By focusing on the “decisionmaking body to which [the statement] was addressed,” we can also try to shift the focus from an official at the lending institution who will just spout bank policy, to whoever was looking at the actual loan packages and what those people were actually doing at the time of the loan(s). This is where the Ninth Circuit model instruction’s substitution which is noted above — of “a person” for the “decisionmaking body to which [the statement] was addressed” — creates a problem.

When you submit jury instructions on materiality, therefore, object to the Ninth Circuit model instruction and submit an instruction that requires any statement to “have a natural tendency to influence, or [be] capable of influencing, the decision of the decisionmaking body to which it was addressed, at the time it was submitted.”

Carl’s comment: Remember my comment on Dan’s earlier blog, in which I noted that Ninth Circuit model instructions are by no means sacrosanct. There are a number which the court has held insufficient.