December 20, 2016

White Collar Defense and Investigations

Supreme Court Interprets Statute as Prohibiting Schemes Which Only Intend Financial Loss to Non-Bank Parties

By: Gayle E. Littleton and Nathaniel K. S. Wackman

Does a thief who steals money from a bank account commit federal bank fraud, where he intends to cheat the victim account holder, but has no intent to cause the bank loss? Resolving a circuit split on the question, the US Supreme Court unanimously held last week in Shaw v. United States[1] that he does. Writing for the Court, Justice Steven Breyer concluded that fraudulently obtaining funds from a depositor’s account defrauds the financial institution of its property rights in the account, even where the bank loses no money as a result of the fraud.

The Case Below

Lawrence Shaw was living with his girlfriend when he came up with a get-rich-quick scheme.[2] Shaw’s girlfriend had agreed to receive the Bank of America (“BoA”) checking account statements of an acquaintance, Stanley Hsu, while Hsu was working and living overseas. Using information gleaned from Hsu’s statements, Shaw set up a PayPal account that he linked to Hsu’s BoA account. Shaw then used the PayPal account to transfer $300,000 from Hsu’s BoA account into a series of accounts controlled by Shaw. Hsu eventually realized he was missing hundreds of thousands of dollars from his account and alerted BoA and authorities.

Following standard banking industry practices, BoA reimbursed Hsu only for those transfers initiated within the 60 days that preceded his reporting of the fraud. Even for those transfers where BoA credited Hsu for money taken in the scheme, the source of the funds was PayPal, which had to reverse the transfers and return the money to BoA. When all was said and done, Hsu and PayPal lost money, but BoA lost nothing.

Shaw was indicted in the US District Court in Los Angeles on seventeen counts of bank fraud, in violation 18 U.S.C. § 1344(1), which makes it a crime “knowingly [to] execut[e] a scheme . . . to defraud a financial institution.” Shaw proceeded to jury trial and requested the district court instruct the jury that § 1344(1) required the government to prove that Hsu intended to cause loss to the bank itself. The district court denied the request, and Shaw was convicted of 14 of the 17 counts against him.

Shaw appealed, and the Ninth Circuit affirmed. Shaw petitioned for certiorari, noting a circuit split between nine circuits, which had held that § 1344(1) required the government to prove that the defendant intended to cause loss to the bank, and three circuits, including the Ninth, which had held it did not.

The Supreme Court’s Decision

Shaw’s case, argued on the first day of the Supreme Court’s October 2016 term, first made news when Justice Breyer used the daring Paris heist of Kim Kardashian’s jewelry as a jumping-off point for a series of questions.[3] Just as it is against the law for the thieves to steal Kardashian’s jewelry, even if they do not intend that she suffer any personal loss because the jewelry is presumably insured for its full value, isn’t it still bank fraud for Shaw to defraud the bank, even if he only intends to cause loss to Hsu and PayPal? In a brisk eight-and-one-half page opinion, the Court answered affirmatively. The Court agreed with the parties that a scheme under § 1344(1) must “be one to deceive the bank and deprive it of something of value.”[4] However, the Court held that the statute contains no additional requirement that the defendant intend monetary loss to a financial institution. In reaching its opinion, the Court rebutted a series of Shaw’s arguments to the contrary.

First, even if the bank suffered no financial loss, Shaw deprived the bank of something valuable: its property rights in Hsu’s checking account. Citing modern banking treatises, the Court characterized a bank’s property right to its customer accounts as ownership, bailment, or just possession depending on the specific relationship between the bank and its customer.[5] Regardless of how characterized, the Court concluded that these property rights have value, whether or not their deprivation results in monetary loss to the bank.

Second, to commit bank fraud, Shaw need not intend to cause BoA any loss. The Court held that the bank-fraud statute “demands neither a showing of ultimate financial loss nor a showing of intent to cause financial loss.”[6] Citing analogous mail-fraud cases, the Court further noted that it has never been a requirement under federal law that the fraudster intend a financial loss or that the fraud victim suffer an actual financial loss.[7]

Third, Shaw intended to execute a scheme to defraud the bank, even if he was ignorant of the bank’s expected loss (or lack thereof) or the bank’s precise property interest in the targeted funds. No statutory language requires bank-fraud prosecutions to turn on the defendant’s awareness “of the niceties of bank-related property law.”[8] The Court soundly rejected such specialized knowledge as a basis for criminal culpability, highlighting past cases, including Pasquantino v. United States[9] and Carpenter v. United States,[10] where the Court affirmed fraud convictions despite the novelty or obscurity of the property at issue in the fraud.

Fourth, the Court rejected Shaw’s argument that § 1344(1) requires a defendant to have the express purpose of harming the bank’s property interest. Rather, intent, not purpose, is all the statute requires. The Court distinguished government-fraud cases cited by Shaw that require proof of the defendant’s purpose, noting that, unlike the bank-fraud statute, the statutes at issue in those cases required proof of purpose or involved an area of law with “special rules and protections” found only in government-fraud cases.[11]

Finally, Shaw argued unsuccessfully that his crimes were clearly covered by § 1344(2), which makes it a crime to use “false or fraudulent pretenses” to obtain “property. . . under the custody or control of” a bank, and that he should not be prosecutable under § 1344(1) as a result. The Court stated that there was “no good reason” to read the statutes this way.[12] Citing to its 2014 decision in Loughrin v. United States,[13] the Court noted that the subsections “overlap substantially but not completely,” which is common in criminal statutes.[14] To illustrate the point, the Court used as an example “a shopper [who] makes a false statement to a department store cashier in order to pay for goods with money ‘under the custody or control of a financial institution.’”[15] Such a false statement was likely not a violation of § 1344(1) because the statement itself was made to a third- party and not the bank.

In sum, the Court found the plain language of the statute did not require Shaw to intend to cause the bank a financial loss and Shaw’s counterarguments provided no reason to disregard this common-sense reading of the statute.[16] For purposes of § 1344(1), the Court wrote, it was enough that “the defendant knew that the bank held the deposits, the funds obtained came from the , and the defendant misled the bank in order to obtain those funds.”[17]

Implications of the Shaw Decision

In Shaw, the Supreme Court soundly rejected an attempt to require a further layer of complexity in bank-fraud cases. Bank fraud is already deemed the source of “the most demanding, difficult, and time-consuming cases

undertaken by law enforcement in the area of white-collar crime.”[18] With Shaw in hand, federal prosecutors can continue to target bank fraud without worrying which of the complex web of banking laws, regulations, and industry practices governs whether the bank itself stood to lose money from the fraudulent scheme. Also significantly, the Court’s opinion in Shaw did not mention or address an amicus brief that argued the government’s proposed interpretation of § 1344(1) encroached on areas of criminal law traditionally left to the states. The Supreme Court indicated sympathy for such federalism concerns in Loughrin.[19] The amicus brief forcefully argued that the bank-fraud statute should be interpreted as reserved for crimes implicating federal interests, not the actions of a lone defendant defrauding a single victim by depleting the victim’s checking account.[20] But the Court in Shaw remained silent on that issue and left difficult questions about the reach of the federal government’s criminal power for another case.

[1] No. 15-5991, 2016 WL 7182235, at *1 (U.S. Dec. 12, 2016).

[2] See United States v. Shaw, 781 F.3d 1130, 1132–33 (9th Cir. 2015).

[3] See Transcript of Oral Argument at 4–6, Shaw, 2016 WL 7182235, at *1.

[4] Shaw, 2016 WL 7182235, at *7 (emphasis in original).

[5] Id. at *3.

[6] Id.

[7] Id.

[8] Id. at *4.

[9] 544 U.S. 349 (2005). Pasquantino held that “Canada’s right to uncollected excise taxes on imported liquor counted as ‘property’ for purposes of the wire fraud statute.” Shaw, 2016 WL 7182235, at *4.

[10] 484 U.S. 19 (1987). Carpenter held that “a newspaper’s interest in the confidentiality of the contents and timing of a news column counted as property for the purposes of the mail and wire fraud statutes.” Shaw, 2016 WL 7182235, at *4.

[11] Id. at *5.

[12] Id. at *6.

[13] 134 S. Ct. 2384 (2014).

[14] Id. at *5–6.

[15] Id. at *6.

[16] Despite siding with the government’s interpretation of the bank-fraud statute, the Court was doubtful whether the jury instructions properly articulated the required elements of § 1344(1). The Court vacated and remanded for the Ninth Circuit to examine the jury instructions for error. Id. at *7.

[17] Id. at *3.

[18] Fed. Bureau of Investigation, Financial Crimes Report to the Public, Fiscal Years 2010-2011, https://www.fbi.gov/stats-services/publications/financial-crimes-report-2010-2011.

[19] 134 S. Ct. at 2392–95.

[20] See Br. of Amicus Curiae National Ass’n of Criminal Defense Lawyers In Support of Petitioner and Urging Reversal at 4–8, Shaw, 2016 WL 7182235, at *1. Contact Us Gayle E. Littleton, Partner

Phone: 312 840-7478 Email: [email protected] Download V-Card

Nathan K.S. Wackman, Associate

Phone: 312 840-7571 Email: [email protected] Download V-Card

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