Mail and Wire Fraud

CORPORATE CRIMES

UNIVERSITY OF IOWA, COLLEGE OF LAW

 Elements of Mail and Wire Fraud

 A scheme to defraud, and

 The scheme involved material misstatements or
omissions, and
 The scheme resulted, or would result in the loss
of money, property, or honest service, and
 A wire transmission over state lines or a mailing, in
furtherance of that scheme
 Expansive Application

 Fraud hard to define:

 SCOTUS “to wrong someone in his property rights by
dishonest methods or schemes”
 Neither injury to property nor actual misrepresentation
required for scheme to defraud
 Inchoate offense
 Connection between fraud and wire/mailing can be
attenuated
 Felony offense
 Mailing or wiring in furtherance: Hypo

 I’m applying for a job and hand you a resume with a

list of impressive references, including their contact
information; you call one of the references and find
out they actually don’t know me. Wire fraud?
 Schmuck v. U.S.

 Facts: Schmuck purchased cars, rolled back the

odometers, and sold them to dealers for inflated prices;
the automobile dealers (who were not in on the scheme)
mailed title applications to the state department of
transportation in order to resell the cars
 Issue: Was the mailing in furtherance of Schmuck’s
scheme to defraud?
 Holding: Yes
 Takeaways:
 Mailing need not contain false information
 D need not personally mail or wire, must be reasonably foreseeable
 Wire need not be an essential element, just a “step in the plot”
 It can matter whether the scheme is one off or ongoing
 Scheme to Defraud: Hypo 1

 I’m working at a factory. The start horn begins

blowing right at 9am and I pull into my parking
spot right as it blows. I know this puts me at my
station three or four minutes late, but I clock a
full eight-hour day. Mail fraud?
 Neder v. U.S.

 Facts: Defendant engaged in real estate transactions

financed by fraudulently obtained bank loans
 Issue: Must the false information in the scheme to
defraud must be “material”?
 Holding: Yes
 Takeaway: False information in a fraudulent scheme
must be material under reasonable person test
 Note: actual reliance on false information is sufficient in most
jurisdictions
 Scheme to Defraud: Hypo 2

 You’re a student writer working on an authority check for

a journal with a small group of other student writers.
The student writers work remotely. Everyone “checks
out” some pages digitally, edits them, sends them back to
the articles editor, and then takes more. The process
continues until every page of the piece has been checked.
When you get your first set, you decide to play
videogames instead. After a while, the articles editor
emails you for a status update. You reply that you’ve
been working on it but the pages are pretty tough. The
articles editor replies: “OK, keep up the good work.
Every page you finish is one your fellow students writers
don’t have to do.”
 Bridge v. Phoenix Bond and Indemnity

 Facts: Participants in county auction brought RICO

suit against other participants who broke the auction
rules
 Issue: Must the party injured also rely on the
scheme?
 Holding: No
 Takeaway: Victim of mail fraud need not rely on the
fraud.
 Scheme to Defraud: Hypo 3

 I sell Amish cheese at the farmers market. I am

not in fact Amish, but I dress in the most typical
Amish outfit I can conjure. You happen to be in
the market for Amish cheese. When you ask how
the cheese is made, I tell them how the process
starts when my mom wakes up at the crack of
dawn each day. Charmed by the story, you buy
two pounds, paying with Square. Wire fraud?
 U.S. v. Regent Office Supply

 Facts: D used false story lines to get purchasers on

the phone; products sold were always lower price
and better quality than competitors’
 Issue: “Does solicitation of a purchase by means of
false pretenses not directed at the quality, adequacy,
or price of goods to be sold, or otherwise to the
nature of the bargain” suffice for mail fraud?
 Holding: No
 Crucial Quote: “The defendants intended to deceive
their customers, but they did not intend to defraud”
 U.S. v. Regent Office Supply, cont’d

 Takeaways:
 Defendant must intend to defraud
 Note: Need not actually defraud
 Note: Courts split on whether intent to harm is required

 Actual injury need not be proved

 Omissions Hypo

 You are a divorce attorney. Jane calls you asking you

to represent her in her divorce of Jack. You
represented Jack in his previous divorce, but don’t
tell Jane this. You agree to represent Jane. You
don’t tell Jack.
 U.S. v. Siegel (2d Cir.)

 Facts: Two senior corporate officers sold returned

products “off the books” and used the proceeds to
pay union bribes (and maybe pocket some
themselves); never told shareholders
 Issue: Does an employee’s failure to disclose a breach
of fiduciary duty constitute a scheme to defraud his
employer? [Note: mere breach of fiduciary duty not
sufficient]
 Holding: Yes
 U.S. v. Siegel, cont’d

 Takeaway: Mail and wire fraud can be predicated on

a scheme to breach fiduciary duties so long as:
 1) there was a duty to disclose and
 2) no disclosure and
 3) the failure to disclose could cause harm to the party to
whom the duty is owed
 Breakout Discussion

 Mail and wire fraud end up criminalizing misconduct

that is traditionally civil, like corporate breach of
fiduciary duty (Siegel) or tortious interference with
prospective business (Bridge). Is that concerning?
 Summary 1

 Mail/Wire Fraud is: 1) mailing/wire 2) in furtherance of 3)

scheme to defraud
 Gives prosecutors broad discretion
 Schmuck: defendant need not send mailing, mailing need not
contain false information, can matter whether there’s an ongoing
scheme
 Neder: misleading information must be material
 Bridge: victim need not rely on false information
 Regents: defendant must intend to defraud; misrepresentations
that don’t go to nature of deal don’t count
 Note: courts split on whether intent to injure (or just intent to benefit) is required
 Siegel: duty to disclose, no disclosure, possibility of harm to
party to whom duty is owed
 Note: Courts require more than just breach of fiduciary duty: concealment or
harm
 Objects of Fraud

 Tangible Property
 Intangible Property
 Intangible, Non-Property Rights
 Intangible Property: Carpenter v. U.S.

 Facts: Winans worked for WSJ column “Heard on the

Street,” which reported information on stocks; the
reports affected stock prices; Winan fed pre-publication
information to come brokers who shared profits with
Winans; Carpenter was Winan’s roommate and abetted
him
 Issue: Whether WSJ’s interest in the confidentiality of
column information is “money or property” for mail/wire
fraud purposes.
 Holding: Yes
 Takeaway: Property is no less property because it is
intangible
 Other Examples of Intangible Property

 Shareholder right to monitor and control how

corporate money is spent is property (United States
v. Wallach (2d. Cir.)
 Foreign government interest in receiving taxes is
property (Pasquantino v. United States)
 But domestic government interest in issuing business
licenses is not (Cleveland v. United States)
 Test company’s interest in maintaining the
integrity of its testing process is property (United
States v. Hedaithy (3d Cir.)
Non-tangible Non-Property: Honest Services

 Scope of meaning unclear

 Some courts look to private duties defined in agency
law (care, loyalty, etc.)
 Some courts look to duties specified in employment
contract
 O’Sullivan: often confuses object of fraud with the
fraud it
 No requirement of an intent to injury
 Some courts require foreseeable harm and/or materiality
 McNally v. U.S.

Wombell Insurance

(appointed by Hunt) (commissions)

(commission agreement)

Hunt ($) Seton Investments

(Dem. Chairman) (Controlled by Hunt and Gray)
(chooses KY insurance) (Owned and operated b McNally)
($)
($)
Gray
(public official) McNally
(private individual)
 McNally v. U.S., cont’d

 Facts: A state fiduciary had the power to designate

the insurance companies the state would use, and he
designated an insurance company who he’d
prearranged would split commissions with further
insurances companies in which he and his friends
had interests
 Mailing: commission checks
 Object of Fraud: KY citizens right to have state
affairs conducted honestly
 Scheme: non-disclosure
 McNally v. U.S., cont’d

 Trial disposition
 Hunt: Pleads guilty to tax and mail fraud
 Gray: convicted
 Either as aide to Hunt
 Or in his own right

 McNally: convicted
 Either as aide to Hunt or aide to Gray
 Does it feel like Gray and McNally did something
criminal?
 Gray and McNally didn’t receive the state’s money, just commissions
 No allegation that state would have paid more
 Commission sharing was not against state law
 McNally v. U.S., cont’d

 Issue on appeal: Is the argued object of fraud (KY

citizen’s rights to honest services) appropriate under
mail fraud statute?
 Holding: No
 Argument:
 “Defraud” commonly refers to wronging in property rights
 “[O]r for obtaining money or property” serves to clarify what
“scheme to defraud” can apply to
 Takeaway: Mail and wire fraud don’t cover
intangible right of citizens to good government
 Breakout Discussion

 Should mail and wire fraud include deprivation of

honest services? Public only? Private too? If so, what
statutory language do you pass after McNally?
 Congressional Response to McNally

 “For purposes of this Chapter, the term ‘scheme or

artifice to defraud’ includes a scheme or artifice to
deprive another of the intangible right of honest
services.” (18 U.S.C. 1346)
 Skilling v. U.S.

 Facts: Skilling charged with mail/wire fraud for

conspiring to defraud Enron shareholders by
misinterpreting the company’s fiscal health
 Issue: Is 18 U.S.C. 1346 is unconstitutionally vague?
Does it apply to concealment cases?
 Holding: No; 1346 only criminalizes the “bribe-and-
kickback core of the pre-McNally case law”
 Bribery: D intends to give or receive something o value to influence
an official act
 Kickback: return a portion of money received, normally as a result of
coercion or a secret agreement
 Takeaway: Honest services cases limited to bribery and
kickback schemes
 Summary 2

 Possible objects of fraud (as distinguished from the

means of fraud)
 Tangible property—cash
 Intangible property—endless variety because of
prosecutorial ingenuity
 Carpenter—confidentiality and reputation
 Honest services—breach of fiduciary duty plus
something else (non-disclosure, potential for harm)
 McNally—honest services not a suitable object of mail/wire fraud
 Skilling—honest services limited to bribery and kickback cases