Case o' The Week: Treading Well on Fraud Clients - Treadwell, Wire Fraud, and "Intent to Harm"

Last week, the Green case taught us that one can commit wire fraud without breaking any specific state or federal law or regulation.

This week, the Ninth explains that one can commit wire fraud without intending to cause any loss to the "victims." See United States v. Treadwell, __ F.3d __, 2010 WL 309027 (9th Cir. Jan. 28, 2010), decision available here.

Ever feel like it would have been easier to defend Charles Ponzi (above), in 1920?

Players: Decision by Judge Gould, joined by Judge Bea and D.J. Molloy.

Facts: Treadwell and his co-defendants ran a massive, four-year Ponzi scheme that bilked 1,700 investors out of over $40 million. Id. at *1. The wire-fraud defense was that although the defendants “misrepresented the nature of the various corporations’ earnings, the defendants always believed that their investors would always make money.” Id. at *2. Without defense objection, the jury instructions stated that “it is no defense to fraud that the defendant honestly holds a certain opinion or belief, but also knowingly makes false or fraudulent promises, representations, or promises to others.” Id. (internal quotations omitted).

After a jury convicted the defendants on various conspiracy and wire counts Treadwell was sentenced to 300 months. Id. at *2.

Issue(s): “On appeal, [defendants] challenge their jury conviction, arguing that the jury instructions violated their Fifth Amendment due process rights because ‘intent to defraud’ under 18 U.S.C. § 1343 requires an intent to cause an actual loss.” . . . “[Defendants] argue that their . . . rights were violated by jury instructions that did not define ‘intent to defraud’ under 18 U.S.C. § 1343 to require an intent to cause a financial loss to the victims.” Id. at *3.

Held: “[T]o ‘defraud’ under § 1343 does not require an intent to cause a pecuniary loss to the victim.” Id. at *4 (quoting United States v. Oren, 893 F.2d 1057, 1062 (9th Cir. 1990)). “While an honest, good faith belief in the truth of the misrepresentations may negate intent to defraud, a good-faith belief that the victim will be repaid and sustain no loss is no defense at all.” Id. (quoting United States v. Benny, 786 F.2d 1410, 1417 (9th Cir. 1986)).

Of Note: The interesting defense argument focuses on, arguably, a circuit split. In the Second, Third, Fifth and Eight Circuits, “intent to defraud” requires a deprivation of asserts with an “intent to harm.” Id. at *4. In Treadwell, Judge Gould dodges the question of whether the Ninth has a “harm” requirement. Even if there is, though, Judge Gould concludes that “[t]he intent to induce one’s victim to give up his or her property on the basis of an intentional misrepresentation causes ‘harm’ by depriving the victim of the opportunity to weigh the true benefits and risks of the transaction, regardless of whether or not the victim will suffer the permanent loss of money or property.” Id. at *5 (emphasis added).

With all due respect, this rule seems to edge wire fraud closer to the unmoored “honest services” fraud problem. For example, assume that with a pure heart a broker embellishes the value of a stock in an e-mailed solicitation to her client. Her “victim” buys the stock, it rises, and the client makes a killing with a quick sale. Under Treadwell, the broker committed wire fraud – despite no intent to harm, and despite a tidy profit for the victim.

How to Use: Treadwell was a plain error challenge to jury instructions, and on horrible facts. Maybe the fraud issue still has some fight in a better case? The Supreme Court now has a trio of “honest services” fraud cases before it, and the Justices are clearly hostile to that amorphous species of fraud. See article here . Given an (arguable) circuit split on the “intent to harm” issue, and given the likely Supreme Court guidance coming down this term on fraud generally, Treadwell’s “intent to harm” challenge to the Ninth’s pattern fraud instructions may be worth preserving in a case going to trial anyway.

For Further Reading: Ever feel like the Madoff & Stanford headlines are stacking the government’s deck before the jury is even empaneled? Read Treadwell. The opinion is studded with history lessons on Ponzi schemes, Madoff, and other fraudsters. See e.g., id. at *1 n.1 (discussing the history of Charles Ponzi).

To survey the historical baggage we face in a fraud case, hit the N.Y.T.’s interesting summary here .


Image of Charles Ponzi from http://www.nytimes.com/2009/05/05/nyregion/05ponzi.html?_r=1, originally from the book “The Lawless Decade,” by Paul Sann.

Steven Kalar, Senior Litigator N.D. Cal. FPD. Website at www.ndcalfpd.org

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