August 2003, Page p12

Schemes to Defraud
By Ellen Podgor

Many issues of The Champion could be spent discussing all the different forms of conduct that the government calls “schemes to defraud.” This shorter article examines what is not a scheme to defraud.

Federal prosecutors have used fraud statutes, most significantly the mail and wire fraud statutes1 to indict a prominent member of Congress,2 governors,3 students for cheating on an exam,4 individuals alleged to have committed fraud through their operation of a pet cemetery,5 and all too often, attorneys.6 The endless list of individuals charged with a violation of a fraud statute is allowed, in large part, because many of the statutes are predicated on a “scheme or artifice to defraud,” a term often interpreted with enormous breadth.

In the “weaponry”7 available to prosecutors one finds statutes such as mail fraud (18 U.S.C. § 1341), wire fraud (18 U.S.C. § 1343), bank fraud (18 U.S.C. § 1344), bankruptcy fraud (18 U.S.C. § 157), health care fraud (18 U.S.C., § 1347), major fraud (18 U.S.C. §1031) and securities fraud (18 U.S.C. §1348). Significantly, each of these statutes contain the term “scheme or artifice to defraud,”8 a term that comes from the mail fraud statute.

The crime of mail fraud originates from a minor provision, Section 301, of a recodification of the Postal Act. Initially passed in 1872, the statute has been modified on several occasions. For example, as part of the Anti-Drug Abuse Act of 1988, Congress expanded the scope of conduct to include the “intangible right of honest services,”9 and as part of the Violent Crime Control and Law Enforcement Act of 1994, Congress inserted language permitting mail fraud prosecutions that used a “private or commercial interstate carrier” as opposed to a mailing via the post office. The Hon. Jed Rakoff, in a 1980 article, called mail fraud the “prosecutor’s Stradivarius or Colt 45,”10 and without doubt, it has lived up to this characterization. Chief Justice Burger in a dissenting opinion described mail fraud as the “stopgap” device to be used “to deal on a temporary basis with the new phenomenon, until particularized legislation can be developed and passed to deal directly with the evil.”11 But time has demonstrated that even when specific legislation is passed, prosecutors are seldom restricted in their use of the mail fraud statute.12 

The ease afforded to prosecutors in their use of this statute is multiplied when it appears as a predicate act for a RICO charge or when money laundering is added to the indictment.13 The White Collar Crime Penalty Enhancement Act of 2002 strengthened prosecutorial power even more by allowing certain fraud statutes to have the same penalties for the offense when the conduct involves attempts or conspiracies.14

Conceding that the government has enormous power to indict if they can allege a “scheme or artifice to defraud,” the question for the defense is what restrictions exist to limit the range of conduct encompassed within this specific phrase. In focusing on this one phrase, it is important to stress that there are many other avenues to curtail creative prosecutions in the fraud area. The restrictions have been across the elements of the statute with requirements of intent,15 materiality,16 and in the case of mail fraud, a mailing in furtherance of the scheme to defraud.17 One also finds a variety of restrictions dependent on the specific fraud offense, such as bank fraud requiring a “financial institution” and wire fraud requiring a transmission in interstate commerce. There is abundant scholarship that dissects these fraud statutes, most notably the mail fraud statute, offering strong arguments for contesting these charges.18 This article does not repeat the many arguments that apply to various elements of these statutes. Because the focus here is on the phrase, “scheme or artifice to defraud,” the arguments presented apply to all fraud statutes that employ this language. This is by no means, however, an exhaustive list of all the possible arguments. Rather, this article considers arguments that are often overlooked in presenting a defense against the “scheme to defraud” element of fraud statutes.

Threats and coercion are not schemes to defraud
Courts occasionally reject a creative prosecution that attempts to extend the boundaries of the “scheme to defraud” language. In Fasulo v. United States,19 a 1926 decision, the Supreme Court refused to allow the government to use alleged threats as a basis for mail fraud. Mailings “for the purpose of obtaining money by means of threats of murder or bodily harm” were held to be outside the “scheme to defraud” language. Despite the fact that the threatening conduct may be more “reprehensible” than fraudulent conduct, the court found that it did not fall within the legislative requirement of a “scheme to defraud.”20 Likewise, schemes “to frighten” are “simply not criminalized by the mail fraud statute.”21

Frauds against other countries are not always a scheme to defraud
Globalization has brought a host of new issues to the table in criminal law discussions.
One new issue applicable here, is whether the “scheme to defraud” can involve a deprivation of a foreign government’s taxes. In United States v. Boots,22 the First Circuit refused to permit a government prosecution for wire fraud that was allegedly premised upon an intent to “defraud Canada and the Province of Nova Scotia of tobacco duties and taxes.” Finding “no authority to proceed,” the First Circuit court stated, “schemes aimed at depriving a foreign government of duties and taxes are not the same as domestic tax fraud, nor are they even the same as private commercial frauds aimed at foreign entities or individuals.” Although this position will probably not be successful in the Second Circuit, as a result of a contrary ruling on this issue,23 the applicability of schemes to defraud foreign governments remains ripe for argument in other jurisdictions.

Schemes to defraud require a deprivation of something of value
Courts have consistently had the burden of determining the conduct that falls within the definition of a “scheme to defraud.” In United States v. Hammerschmidt,24 the Court explored the word “defraud” noting that in some statutes it requires a “deprivation of something of value by trick, deceit, chicane or overreaching.”25 Incumbent in most fraud statutes is a requirement of a deprivation of “property” or “the intangible right of honest services,” dependent upon the language used in the charging document.26 

An array of cases have developed that enforces the requirements of a showing of a deprivation of property. Although “confidential business information” is considered intangible property,27 there is still a requirement that there be a deprivation of this property. In Czubinski v. United States,28 the First Circuit stated that “mere browsing of the records of people about whom one might have a particular interest, although reprehensible, is not enough to sustain a wire fraud conviction on a ‘deprivation of intangible property’ theory.”29 

The court stated, “[b]inding precedents, and good sense, support the conclusion that to ‘deprive’ a person of their intangible property interest in confidential information under Section 1343, either some articulable harm must befall the holder of the information as a result of the defendant’s activities, or some gainful use must be intended by the person accessing the information, whether or not this use is profitable in the economic sense.”30
The court in Czbinski rejected a fraud prosecution of an IRS employee who allegedly accessed computer information for personal reasons.

Licenses do not always meet the requirements for a “scheme to defraud.” In Cleveland v. United States,31 the Court held that a state video poker license was not “property” for the purposes of mail fraud.32 This Supreme Court decision not only enforces the Court’s rejection of licenses as property for a “scheme to defraud” but also reinforces the Court’s position of non-interference in state matters.33 

Some schemes to defraud require a state law predicate
Courts have also restricted government use of fraud prosecutions premised upon the “intangible right of honest services.” Dependant upon the circumstances and court, the phrase may be held to be vague34 or the evidence may be insufficient to meet the applicable standard. Recently in United States v. Murphy,35 the Third Circuit endorsed Judge Winter’s dissenting opinion in Margiotta,36 finding the need to limit mail fraud when premised upon “intangible rights.” The court in Murphy stresses the need for “a fiduciary relationship established by state or federal law.” The Murphy decision sends a clear message that private matters will not be treated the same as public ones37 and adopts “a state law limiting principle for honest services fraud.”38 

Without sufficient evidence there is no scheme to defraud
Courts occasionally find a prosecution deficient because of insufficient evidence of a “scheme to defraud.”39 Egregious conduct does not automatically constitute a “scheme to defraud.” For example, promotion schemes, a common form of activity upon which mail fraud counts may be alleged, are not per se a “scheme to defraud.” As noted by the court in United States v. Goodman,40 “[w]ithout some objective evidence demonstrating a scheme to defraud, all promotional schemes to make money, even if ‘sleazy’ or ‘shrewd’ would be subject to prosecution on the mere whim of the prosecutor.”41 As noted by the court in United States v. Brown,42 “the fraud statutes do not cover all behavior which strays from the ideal; Congress has not yet criminalized all sharp conduct, manipulative acts, or unethical transactions.”43 The “[m]ere breach of contract in itself [does not] constitute a scheme to defraud.”44 Mailed “litigation documents, even perjurious ones” have been found to be beyond the contours of the statute.45 

Future
Although the phrase “scheme to defraud” allows prosecutors enormous leeway in their case selection, courts have the ability to reject overly creative indictments. Until such time as fraud statutes are found to be vague and ambiguous, the lines of legitimacy will result from challenges to prosecutions that overreach. It is up to defense attorneys to continue to place new limits on the term “scheme to defraud.”

Notes
1. 18 U.S.C. §§ 1341, 1343.
2. See United States v. Rostenkowski, 59 F.3d 1291 (D.C. Cir. 1995). Rostenkowski pled guilty to mail fraud charges and was later pardoned by President Clinton. See Clinton Pardons Rostenkowski, Others, available at http: www.cnn.com/2000/ALLPOLITICS/stories/12/22/clinton.pardon.02/.
3. See United States v. Edwards, 303 F.3d 606 (5th Cir. 2002); United States v. Mandel, 862 F.2d 1067 (4th Cir. 1988) (former governor of Maryland’s conviction was vacated after McNally decision).
4. See United States v. Alkaabi, 223 F. Supp. 2d 583 (D.N.J. 2002).
5. See Patricia Hurtado, LI Pet Cemetery Owner Arraigned, Newsday, Sept. 14, 1991, pt. II, at 6.
6. See, e.g., Cleveland v. United States, 531 U.S. 12 (200) (Supreme Court reversed conviction); United States v. Rybicki, 287 F.3d 257 (2d Cir. 2002) (pending en banc decision).
7. “With regard to the statutory weapons available to prosecutors, they rank by analogy with hydrogen bombs on
stealth aircraft.” Ralph K. Winter, Paying Lawyers, Empowering Prosecutors, and Protecting Managers: Raising the Cost of Capital in America, 42 Duke L.J. 945 (1993).
8. There are additional statutes that use the term “scheme or artifice to defraud.” See, e.g., Fraud and Misrepresentation by Commodity Trading Advisors (7 U.S.C. § 60). Some fraud statutes do not employ that term, but rather list specific forms of conduct that can form the basis of a crime under the fraud statute. See, e.g., Computer Fraud (18 U.S.C. § 1030). See also Ellen S. Podgor, Criminal Fraud, 48 Am. U. L. Rev. 729 (1999).
9. 18 U.S.C. § 1346.
10. Jed S. Rakoff, The Mail Fraud Statute (pt. 1), 18 Duq. L. Rev. 771, 774 (1980).
11. See United States v. Maze, 414 U.S. 395, 405-06 (1974).
12. See United States v. Anerson, 618 F.2d 487 (8th Cir. 1980), but see United States v. Henderson, 386 F. Supp. 1048 (S.D. N.Y. 1974).
13. See Teresa E. Adams, Notes and Comments, Tacking on Money Laundering Charges to White Collar Crimes: What Did Congress Intend, and What are the Courts Doing?, 17 Ga. St. L. Rev. 531 (2000). 
14. 18 U.S.C. § 1349.
15. See United States v. D’Amato, 39 F.3d 1249 (2d Cir. 1994).
16. See Neder v. United States, 527 U.S. 1 (1999).
17. See Ellen S. Podgor, Mail Fraud: Opening Letters, 43 South Carolina L. Rev. 223, 239 - 61 (1992).
18. See Paul Mogin, Reining in the Mail Fraud Statute, The Champion 12 (May 2002); Peter Henning, Maybe It Should Just Be Called ‘Federal Fraud.’ The Champion 6 (Dec. 1995); Ellen S. Podgor, Mail Fraud: Limiting the Limitless, The Champion 4 (Dec. 1994).
19. 272 U.S. 620 (1926).
20. Id. at 201; see also Naponiello v. United States, 291 F. 1008 (7th Cir. 1923); but see Huff v. United States, 301 F.2d 760 (5h Cir. 1962) (“The mere fact that extortion may constitute one aspect of the transaction does not insulate the fraudulent representations and plan from prosecution as a scheme to defraud.”); Muench v. United States, 96 F.2d 332 (8th Cir. 1938).
21. United States v. Pendergraft, 297 F.3d 1198 (11th Cir. 2002).
22. 80 F.3d 580 (1st Cir. 1996)
23. See United States v. Trapilo, 130 F.3d 547 (2d Cir. 1997) (finding no exemption from the wire fraud statute even when the “scheme involved [the alleged] defrauding a foreign government of tax laws”); United States v. Miller, 26 F. Supp.2d 415 (N.D. N.Y. 1998).
24. 265 U.S.182 (1924).
25. Id. at 188.
26. See McNally v. United States, 483 U.S. 350 (1987); 18 U.S.C. § 1346.
27. See Carpenter v. United States, 484 U.S. 19 (1987).
28. 106 F.3d 1069 (1st Cir. 1997)
29. Id. at 1076.
30.  Id. at 1074.
31. 531 U.S. 12 (2000).
32. Id. at 24.
33. Id. at 27.
34. See United States v. Handakis, 286 F.3d 92 (2d Cir. 2002).
35. 323 F.3d 102 (3rd Cir. 2003).
36 United States v. Margiotta, 688 F.2d 108, 136 (2d Cir. 1982).
37. See also John C. Coffee, Jr., Modern Mail Fraud: The Restoration of the Public/Private Distinction, 35 Am. Crim. L. Rev. 427 (1988).
38. Murphy, 323 F.3d at 116. See also United States v. Brumley, 116 F.3d 728 (5th Cir. 1997).
39. See, e.g., United States v. Yoakam, 116 F.3d 1346 (10th Cir. 1997); United States v. Jackson, 26 F.3d 999 (10th Cir. 1994).
40. United States v, Goodman, 984 F.2d 235 (8th Cir. 1993).
41. Id. at 240.
42. 79 F.3d 1550 (11th Cir. 1996).
43. Id. at 1563.
44. McEvoy Travel Bureau, Inc. v. Heritage Travel, Inc., 904 F.2d 786, 791 (1st Cir. 1990).
45. Pendergraft, 297 F.3d at 1209.


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