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From Banking and Finance Law Daily, June 23, 2014

Bank fraud doesn’t always require intent to defraud bank

By Richard A. Roth, J.D.

A person who bought merchandise using fraudulent checks and then returned the merchandise for cash committed bank fraud even though he did not have any intent to defraud the paying banks, the U.S. Supreme Court has decided. In an opinion that drew no dissents, but two concurrences, the Court determined that 18 U.S.C. §1344(a)(2) is violated when a person obtains money from a bank by fraud, even if the focus of the fraud is someone other than the bank (Loughrin v. U.S., June 23, 2014, Kagan, Justice).

The government’s trial evidence proved that the individual stole checks from mailboxes, altered them for his own use, and then bought merchandise from Target stores in amounts of up to $250. After completing the purchases, he promptly went back to the stores and returned the merchandise for cash. Eventually, the drawee banks paid two of the six checks he used.

Tenth Circuit decision. The relevant statute says that a person commits a crime by using a fraudulent scheme “to obtain any of the moneys, funds, credits, assets, securities, or other property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises” (18 U.S.C. §1344(a)(2)). This is different from 18 U.S.C. §1344(a)(1), which prohibits using a fraudulent scheme “to defraud a financial institution.”

The government contended, and the U.S. Court of Appeals for the Tenth Circuit agreed, that the requirements of 18 U.S.C. §1344(a)(2) were satisfied if the person obtained money from the bank by means of fraud (see U.S. v. Loughrin, 10th Cir.).

According to the Tenth Circuit, a person could violate 18 U.S.C. §1344(a)(2) by obtaining money from a bank while defrauding someone else. This could “cast a wide net for bank fraud liability,” the Tenth Circuit conceded, but the result was required by the law’s plain language and the circuit’s precedents.

Text of the law. The plain language of the law did not include a requirement that the person intend to defraud a bank, according to Justice Kagan’s opinion for the Court. 18 U.S.C. §1344(a)(2) considers two aspects of a scheme, the opinion said: the scheme’s goal, obtaining money; and the scheme’s means, a false representation. A specific intent to deceive a bank, as opposed to a merchant, was not a factor.

A scheme that had a specific intent to deceive a bank was prohibited by 18 U.S.C. §1344(a)(1), the opinion noted.

The court’s opinion then considered and rejected the defendant’s two arguments about why a specific intent to defraud a bank had to be proved.

Comparison to mail fraud. The bank fraud and mail fraud statutes have some similarities, the Court agreed, and the mail fraud law required a specific intent to defraud. That did not matter.

The organization of the two laws differed, the Court said. Unlike the mail fraud law, the bank fraud law was structured using multiple clauses, with each clause indicating a distinct offense. That meant that defrauding a bank, which required an intent to defraud that bank, was different from obtaining property from a bank by fraud, which did not require that specific intent.

The bank fraud law was passed three years before the mail fraud law was interpreted as requiring specific intent, the Court also noted. When the bank fraud law was passed, the mail fraud law generally was not seen as requiring a specific intent to defraud, so that interpretation would not have been relevant to what Congress intended the bank fraud law to include.

Federalism. The defendant’s second argument, that accepting the government’s interpretation would federalize many fraud schemes that traditionally have been subject to state enforcement, also was rejected. Not every fraud would become bank fraud simply because the proceeds of the fraud were obtained by check rather than by cash, the Court said. For example, tricking an innocent victim into writing a valid check would not constitute bank fraud.

The bank fraud law included a “by means of” requirement, the opinion pointed out. Bank fraud was committed only if a bank was deprived of money or property “by means of” a misrepresentation. That would exclude fraudulent schemes that did not include making any misrepresentations to a bank. Bank fraud would occur only if “the defendant’s false statement is the mechanism naturally inducing a bank” to pay money.

Justice Scalia’s opinion. Justice Scalia, joined by Justice Thomas, concurred in the result and most of the majority opinion’s reasoning, but not with the “by means of” analysis. That part of the majority’s opinion, which Scalia characterized as having been included to respond to the federalism arguments, was not necessary and should have been omitted, he said.

However, if the “by means of” analysis were to be considered, the majority’s “crabbed” definition was too narrow, Scalia continued. To say that a swindler was indifferent to how he received the proceeds of his con—by check or in cash—is not the same as saying that by receiving a check he did not obtain money from the bank by means of his fraud. It was no more helpful to examine whether false statements were made to a bank directly or indirectly, he added.

Justice Alito’s opinion. Justice Alito also agreed with the result, but expressed concern with what he considered to be an erroneous statement about the mental state required by 18 U.S.C. §1344(a)(2). According to Alito, the majority opinion says the law requires the defendant to have a mental state of “purpose,” while the law actually requires only that he act “knowingly.” The difference is that, under the majority opinion’s formulation, the government is required to prove that the defendant had the objective of taking the bank’s money. In fact, according to Alito, the government needs to prove only that the fraudulent scheme had the objective of taking the bank’s money.

Of course the defendant and the scheme usually will have the same objective, Alito conceded. However, that might not always be true. In the case of a large, complex criminal conspiracy, a lower-level participant might be concerned only with his small part in the scheme and care little for the objective of the scheme itself.

The case is No. 13-316.

For details about this and other petitions and cases pending before the Supreme Court, please consult this list of selected banking and finance law cases awaiting decision in the 2013 term.

Attorneys: Dave Backman, Office of the US Attorney District of Utah, for USA. Bretta Pirie, Office of the Federal Public Defender District of Utah, for Kevin Loughrin.

Companies: Bank of America; Target; Wells Fargo

MainStory: TopStory CrimesOffenses EnforcementActions IdentityTheft

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