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From Banking and Finance Law Daily, December 12, 2016

Fraud against customer can be fraud against bank: Supreme Court

By Richard A. Roth, J.D.

The Supreme Court has unanimously rejected a criminal prosecution defendant’s claim that he was not guilty of bank fraud because he intended to take money a bank customer had on deposit, not money belonging to the bank. In a point-by-point opinion written by Justice Breyer in Shaw v. U.S., the Court said that:

  1. The bank had a property interest in the customer’s deposits.
  2. The bank fraud statute requires neither proof that the bank suffered a loss nor that the defendant intended the bank to suffer a loss.
  3. The defendant’s ignorance of the application of property laws to bank deposits was not a defense.
  4. The bank fraud statute does not require the government to prove that the defendant intended that the bank would suffer a loss; rather, his knowledge that the bank likely would suffer a loss was sufficient.
  5. The two subsections of 18 U.S.C. §1344—one of which applies to schemes to defraud a bank and the other to schemes to obtain property of a bank by fraud—overlap, but only in part. A scheme that was prohibited by the second subsection also could violate the first.

However, the Court vacated the Ninth Circuit’s decision affirming the conviction and remanded it to the appellate court for consideration of whether a claimed defect in the jury instructions was properly preserved for appeal, whether the instructions were correct, and whether any error was harmless.

Fraudulent scheme. Simply put, the defendant, Lawrence Shaw, had access to Stanley Hsu’s Bank of America account statements. Using the information in the statements, Shaw was able to convince the bank that he was Hsu and to transfer money to his account at the Internet payment service provider PayPal. From there, he transferred the money to accounts at another bank. The Ninth Circuit opinion noted that the loss of more than $275,000 was borne by PayPal and Hsu. Bank of America lost nothing (U.S. v. Shaw).

Bank fraud. The bank fraud statute (18 U.S.C. §1344) says that whoever knowingly executes, or attempts to execute, a scheme or artifice—

  1. to defraud a financial institution; or
  2. 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 commits bank fraud.

The government prosecuted Shaw for violating 18 U.S.C. §1344(1), but not (2). Shaw was convicted, and his conviction was affirmed by the Ninth Circuit.

Claims on appeal. While the oral arguments in Shaw v. U.S. seemed to indicate some uncertainty over what position Shaw precisely intended to present, the question presented in his petition for certiorari was whether, under 18 U.S.C. §1344(1), the government had to prove "a specific intent not only to deceive, but also to cheat, a bank." According to Shaw, he had not violated 18 U.S.C. §1344(1) because he intended to take money from Hsu, not from Bank of America.

During the oral argument, Shaw’s counsel also raised a challenge to one aspect of the jury instructions. The questioned instruction told the jury that it needed to find that Shaw had the "intent to deceive, cheat, or deprive a financial institution of something of value." Bell attempted to convince the Court that, dues to the use of "or," "deceive" and "cheat" were separated improperly from "deprive," allowing a conviction for deception without proving deprivation.

Supreme Court analysis. Breyer’s opinion opened by saying Shaw "argues here that the provision [U.S.C. 18 U.S.C. §1344(1)] does not apply to him because he intended to cheat only a bank depositor, not a bank. We do not accept his arguments." Breyer then explained why those arguments were not accepted.

To begin with, a bank has property rights in a customer’s deposits, Breyer said. While a depositor retains the right to withdraw his money, the bank has the right to use the deposits to fund loans. In fact, even if the deposit contract provided that the depositor retained ownership, the bank would be a bailee that had the right to assert ownership of the funds against anyone in the world other than the depositor. As a result, a scheme to cheat a depositor of his deposits would be a scheme to deprive the bank of at least some property rights.

It was irrelevant that Shaw might not have intended to cause Bank of America any financial harm, Breyer wrote. The bank’s loss of the use of the deposits caused the bank harm, even if it later was reimbursed for the money it paid out.

Shaw’s lack of knowledge that Bank of America had a property interest in Hsu’s deposits was equally irrelevant, the opinion continued. Shaw knew the bank held the deposits, and he made false statements to the bank knowing that the statements would induce the bank to release the deposited funds to his PayPal account. That was enough to constitute a scheme to defraud the bank. It would be arbitrary to base a conviction or exoneration of a defendant based not on his actions but, rather, on his knowledge of "bank-related property law niceties."

The bank fraud law says that the knowing execution of a scheme to harm a bank’s property interests is illegal, the opinion pointed out. Requiring more than knowledge—such as requiring a specific purpose of inflicting such harm, as Shaw asserted was needed—would unnecessarily require different states of mind for the fraudulent scheme and the scheme’s fraudulent elements.

The Court’s analysis concluded by rejecting Shaw’s assertion that because the scheme he was accused of carrying out clearly would have violated 18 U.S.C. §1344(2), it could not be charged under 18 U.S.C. §1344(1). The two subsections did overlap, but not completely. If conduct would be banned by 18 U.S.C. §1344(1), it could be prosecuted under that subsection even if it also would have violated 18 U.S.C. §1344(2).

Jury instruction issue. Everyone agreed that the bank fraud statute requires both a scheme to defraud a bank and that the bank be deprived of property, Breyer then conceded. As a result, a jury instruction that could have permitted the jury to find Shaw guilty based on having carried out a scheme to defraud or depriving a bank of property could have been erroneous.

However, the Ninth Circuit opinion did not address that issue, the Court’s opinion noted. The appellate court was directed to decide whether Shaw had raised the issue on appeal and, if he had, whether there had been an error that could not be characterized as harmless.

The case is No. 15-5991.

Supreme Court docket. 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 action in the 2016 term. Issued opinions, granted petitions, pending petitions, and denied petitions are listed separately, along with a summary of the questions presented and the current status of each case.

Attorneys: Koren L. Bell, Deputy Federal Public Defender, for Lawrence Shaw. Anthony A. Yang, Assistant to the Solicitor General, for the United States.

Companies: Bank of America; PayPal

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