In the Courts

Green obtained clients by offering to help the schools avoid their portion of the co-payment for the equipment and by getting contractors to donate additional items outside the scope of the award. Green then approached contractors to identify those who would supply the appropriate materials and free “bonus” items. Once the application was in, those contractors would submit bids to the schools based on the specifications they had already agreed to with Green. These bids were inflated to cover the extra costs. Green then adjusted materials supplied to the FCC to conceal the extras and instructed the schools to tell the FCC that they planned to pay the additional co-payment, even though they did not.

Green was indicted and convicted on 22 counts of wire fraud, bid rigging, and conspiracy. The district court sentenced her to 90 months in prison.

On appeal, Green argued that her conviction should be overturned because the E-Rate rules and regulations did not specifically prohibit her conduct. The Ninth Circuit reviewed the relatively few cases addressing similar questions and found that the government need not show that the defendant violated some other statute or regulation, in addition to proving the elements of wire fraud (which it did). The court rejected Green's attempts to analogize to honest services fraud, finding that, “where, as here, financial harm to the victim is an integral part of the offense, there has never been any suggestion that a further limitation on the fraud statutes is required.”

Reviewing the facts in some detail, the Ninth Circuit also rejected the defendant's claim that there was insufficient evidence to convict. The panel also rejected Green's challenges to her jury instructions, finding that a “mailing” need not be sent by a co-schemer to provide a predicate for mail fraud. Although the court's instruction on foreseeability of co-schemer actions was incorrect ' and the Ninth Circuit found that vicarious liability under the fraud statutes required a showing that the co-schemer's action was foreseeable to the defendant ' such error was harmless.

Fax Sent by Victim Sufficient To Establish Wire Fraud

The Fifth Circuit has affirmed the district court's conviction of James Ray Phipps for mail fraud, wire fraud, aiding and abetting, corrupt endeavoring to obstruct and impede the internal revenue laws, and income tax evasion. United States v. Phipps, 2010 WL 254983, (5th Cir. 2010).

Phipps operated Life Without Debt, a pyramid scheme that convinced investors to provide thousands of dollars and recruit other investors, while providing them with anti-tax literature and telling them that the proceeds from the program did not need to be reported to the IRS. Overall, Phipps made approximately $4.6 million from the scheme, while less than one-tenth of his investors made any profit. After a jury convicted Phipps, he was sentenced to 210 months in prison.

On appeal, Phipps challenged the sufficiency of the government's evidence against him, specifically the evidence of intent. The Fifth Circuit found significant evidence of intent because Phipps had been warned by law enforcement on a number of occasions that his conduct (both in this and in prior, similar schemes) was illegal and fraudulent.

The Fifth Circuit also found that the only wire communication at issue in the case ' a change-of-address fax sent to Phipps by a victim ' was “caused” by Phipps because he provided the fax number. Even though the fax occurred after the alleged fraud, it was sufficiently “incident” to the scheme because a jury could find that getting updated address information was part of lulling a victim into the belief that there would be future payments.

Convictions Based on $40 Million Ponzi Scheme Affirmed

The Ninth Circuit has upheld the convictions and sentences of Randall Treadwell, Ricky Sluder, and Larry Saturday for wire fraud and conspiracy to commit wire fraud based on their involvement in an extensive Ponzi scheme. United States v. Treadwell, 2010 WL 309027, *1 (9th Cir. 2010).

The defendants made a variety of claims to investors about the sources of their investments and the potential returns, all of which were false. At trial the government showed that the defendants' accounts had no income other than from investors' funds and that the defendants undertook a number of measures to evade detection by authorities, including moving the operation off-shore and attempting to pay investors not to talk to the FBI. After trial, the defendants were convicted on conspiracy and multiple wire fraud counts.

On appeal, two defendants claimed that the district court's failure to define “intent to defraud” as requiring an intent to cause financial loss violated their due-process rights. The Ninth Circuit rejected that argument, finding that the wire fraud language required only an intent to deprive, not an intent to cause loss. Further, that intent could be present even where the defendant intended to restore the property later.

Precedent, in the Ninth Circuit and elsewhere, supported that stance. Ultimately, depriving the victims of the opportunity to make their own investment decisions through misrepresentations was sufficient to establish an intent to defraud for purposes of the wire fraud statute.

The Ninth Circuit also dismissed the defendants' claim that the lower court erred in not finding the amount of fraud loss by clear and convincing evidence. The panel made clear that the loss need only be determined by the preponderance of the evidence. In addition, the panel found that the district court properly applied a two-level upward adjustment for fraud based on representations of acting on behalf of a charitable organization even though the defendants did not name a specific charity; their representations that investments would be used for “humanitarian causes” and to “help those in need” were sufficient. The defendants also claimed that their sentences exceeded what would be reasonable under 18 U.S.C. ' 3553(a) based solely on the facts found by the jury, and thus violated the Sixth Amendment. The Court of Appeals found that the maximum sentence was defined by the statute. The review for reasonableness did not lower that statutory maximum; therefore the sentence did not violate the Sixth Amendment.

In the Courts was written by Associate Editor Kenneth S. Clark, an Associate at Kirkland & Ellis LLP, Washington, DC.

Ninth Circuit: Wire Fraud Conviction Need Not Include Showing of Conduct Violating Other Statute or Regulation

The Ninth Circuit recently affirmed the district court's conviction of Judy Green on wire fraud, bid rigging, conspiracy to commit bid rigging, and conspiracy to commit wire fraud. United States v. Green, 2010 WL 200280, (9th Cir. 2010).

Green, a former school teacher, ran a business that helped low-income schools apply for and obtain a certain type of technology subsidy (“E-Rate”) provided by the FCC. As a part of the program, schools applied for a grant and, if successful, were awarded a portion of the total cost of their technology program. Even with the award, each school had to pay a portion of the costs. Once awarded, the school received bids from third parties and selected a winner.

Green obtained clients by offering to help the schools avoid their portion of the co-payment for the equipment and by getting contractors to donate additional items outside the scope of the award. Green then approached contractors to identify those who would supply the appropriate materials and free “bonus” items. Once the application was in, those contractors would submit bids to the schools based on the specifications they had already agreed to with Green. These bids were inflated to cover the extra costs. Green then adjusted materials supplied to the FCC to conceal the extras and instructed the schools to tell the FCC that they planned to pay the additional co-payment, even though they did not.

Green was indicted and convicted on 22 counts of wire fraud, bid rigging, and conspiracy. The district court sentenced her to 90 months in prison.

On appeal, Green argued that her conviction should be overturned because the E-Rate rules and regulations did not specifically prohibit her conduct. The Ninth Circuit reviewed the relatively few cases addressing similar questions and found that the government need not show that the defendant violated some other statute or regulation, in addition to proving the elements of wire fraud (which it did). The court rejected Green's attempts to analogize to honest services fraud, finding that, “where, as here, financial harm to the victim is an integral part of the offense, there has never been any suggestion that a further limitation on the fraud statutes is required.”

Reviewing the facts in some detail, the Ninth Circuit also rejected the defendant's claim that there was insufficient evidence to convict. The panel also rejected Green's challenges to her jury instructions, finding that a “mailing” need not be sent by a co-schemer to provide a predicate for mail fraud. Although the court's instruction on foreseeability of co-schemer actions was incorrect ' and the Ninth Circuit found that vicarious liability under the fraud statutes required a showing that the co-schemer's action was foreseeable to the defendant ' such error was harmless.

Fax Sent by Victim Sufficient To Establish Wire Fraud

The Fifth Circuit has affirmed the district court's conviction of James Ray Phipps for mail fraud, wire fraud, aiding and abetting, corrupt endeavoring to obstruct and impede the internal revenue laws, and income tax evasion. United States v. Phipps, 2010 WL 254983, (5th Cir. 2010).

Phipps operated Life Without Debt, a pyramid scheme that convinced investors to provide thousands of dollars and recruit other investors, while providing them with anti-tax literature and telling them that the proceeds from the program did not need to be reported to the IRS. Overall, Phipps made approximately $4.6 million from the scheme, while less than one-tenth of his investors made any profit. After a jury convicted Phipps, he was sentenced to 210 months in prison.

On appeal, Phipps challenged the sufficiency of the government's evidence against him, specifically the evidence of intent. The Fifth Circuit found significant evidence of intent because Phipps had been warned by law enforcement on a number of occasions that his conduct (both in this and in prior, similar schemes) was illegal and fraudulent.

The Fifth Circuit also found that the only wire communication at issue in the case ' a change-of-address fax sent to Phipps by a victim ' was “caused” by Phipps because he provided the fax number. Even though the fax occurred after the alleged fraud, it was sufficiently “incident” to the scheme because a jury could find that getting updated address information was part of lulling a victim into the belief that there would be future payments.

Convictions Based on $40 Million Ponzi Scheme Affirmed

The Ninth Circuit has upheld the convictions and sentences of Randall Treadwell, Ricky Sluder, and Larry Saturday for wire fraud and conspiracy to commit wire fraud based on their involvement in an extensive Ponzi scheme. United States v. Treadwell, 2010 WL 309027, *1 (9th Cir. 2010).

The defendants made a variety of claims to investors about the sources of their investments and the potential returns, all of which were false. At trial the government showed that the defendants' accounts had no income other than from investors' funds and that the defendants undertook a number of measures to evade detection by authorities, including moving the operation off-shore and attempting to pay investors not to talk to the FBI. After trial, the defendants were convicted on conspiracy and multiple wire fraud counts.

On appeal, two defendants claimed that the district court's failure to define “intent to defraud” as requiring an intent to cause financial loss violated their due-process rights. The Ninth Circuit rejected that argument, finding that the wire fraud language required only an intent to deprive, not an intent to cause loss. Further, that intent could be present even where the defendant intended to restore the property later.

Precedent, in the Ninth Circuit and elsewhere, supported that stance. Ultimately, depriving the victims of the opportunity to make their own investment decisions through misrepresentations was sufficient to establish an intent to defraud for purposes of the wire fraud statute.

The Ninth Circuit also dismissed the defendants' claim that the lower court erred in not finding the amount of fraud loss by clear and convincing evidence. The panel made clear that the loss need only be determined by the preponderance of the evidence. In addition, the panel found that the district court properly applied a two-level upward adjustment for fraud based on representations of acting on behalf of a charitable organization even though the defendants did not name a specific charity; their representations that investments would be used for “humanitarian causes” and to “help those in need” were sufficient. The defendants also claimed that their sentences exceeded what would be reasonable under 18 U.S.C. ' 3553(a) based solely on the facts found by the jury, and thus violated the Sixth Amendment. The Court of Appeals found that the maximum sentence was defined by the statute. The review for reasonableness did not lower that statutory maximum; therefore the sentence did not violate the Sixth Amendment.

In the Courts was written by Associate Editor Kenneth S. Clark, an Associate at Kirkland & Ellis LLP, Washington, DC.