In the Courts

Based on these allegations, Bennett was charged and convicted, pursuant to a 12-count superseding indictment. Seven of the 12 counts were bank-fraud charges under 18 U.S.C. ' 1344, the federal statute proscribing the knowing execution of, or attempt 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.” Bennett was convicted on all 12 counts in January 2006.

Three of the ' 1344 counts against Bennett were based on victimization of Equicredit, a wholly owned subsidiary of Bank of America. On appeal, the government did not argue that Equicredit satisfied the statutory definition of a “financial institution” during the applicable time frame. As noted by the court in its decision, the definition of a financial institution was later expanded, by the Fraud Enforcement and Recovery Act of 2009, to incorporate mortgage lending businesses. See Fraud Enforcement and Recovery Act of 2009, Pub. L. No. 111-21, ' 2(a)(3). The court noted that “[h]ad this amendment been in effect at the time of Bennett's criminal activity, Bennett's bank fraud convictions involving Equicredit undoubtedly would stand.”

At the relevant time, the statute only included banks or savings associations with deposits insured by the Federal Deposit Insurance Corporation (FDIC). See 18 U.S.C. ' 20(1); 12 U.S.C. ' 1813(c)(2). Alternatively, the government argued that Bennett violated the second prong of ' 1344, by fraudulently obtaining funds “owned by” Bank of America, itself a financial institution.

The government contended that, as a matter of law, a parent corporation “owns” the assets of its wholly owned subsidiary. The government's argument failed to persuade the court, which noted that “[m]ore than a century of corporate law says otherwise.” In explaining its holding, the court added that “[a]s early as 1926, the Supreme Court recognized that '[t]he owner of the shares of stock in a company is not the owner of the corporation's property.' R.I. Hosp. Trust Co. v. Doughton, 270 U.S. 69, 81 (1926). While the shareholder has a right to share in corporate dividends, 'he does not own the corporate property.'” In reviewing more recent case law building upon this principle, the court stated that “[t]oday, it almost goes without saying that a parent corporation does not own the assets of its wholly-owned subsidiary by virtue of that relationship alone.”

The government did not argue that Bank of America had “custody or control” of Equicredit's funds for purposes of ' 1344(2), and the court saw “no reason to set aside fundamental principles of corporate law in the context of the federal bank fraud statute, particularly where Congress provided no indication that we should do so.” Accordingly, it vacated Bennett's convictions relating to Equicredit.

Lack of Fact-Finding By Jury Leads Second Circuit
to Vacate Fine

In United States v. Pfaff, No. 09-1702-cr(L), a three-judge panel of the United States Court of Appeals for the Second Circuit vacated the $6 million fine levied by a district court against former KPMG LLP senior tax manager John Larson, as the jury did not find the facts underlying the determination of a fine that exceeded the statutorily imposed limit. In a separate summary order the same day (Aug. 27, 2010), the Second Circuit affirmed Larson's convictions, along with his prison sentence, in addition to affirming the convictions of his co-defendants, Robert Pfaff and Raymond J. Ruble.

Along with Pfaff and Ruble, Larson faced a 10-week trial in 2008, in which he was convicted by a jury for his role in the highly publicized tax shelter scheme involving his former employer, which the Second Circuit noted had been labeled “the largest criminal tax case in American history,” quoting Stein v. KPMG, LLP, 486 F.3d 753, 756 (2d Cir. 2007). Specifically, Larson was alleged to have been involved in designing, implementing, and marketing the fraudulent tax shelters. Based on these allegations, he was charged with, and subsequently convicted on, 12 counts of tax evasion under 26 U.S.C. ' 7201.

Regarding fines generally, 18 U.S.C. ' 3571(b) establishes that, for each felony conviction (including tax evasion), the maximum fine for individuals is $250,000. Thus, application of ' 3571(b) would have yielded a maximum fine of $3 million for Larson's convictions. However, ' 3571(d) provides for a departure from this statutory maximum, in the form of an “alternative fine” based on the gross pecuniary loss suffered by the victim(s), or the gain derived by the defendant. Fines imposed under ' 3571(d) may not exceed twice the amount of whichever calculation, gain or loss, is greater.

In Apprendi v. New Jersey, the Supreme Court held that, “[o]ther than the fact of a prior conviction, any fact that increases the penalty for a crime beyond the prescribed statutory maximum must be submitted to a jury, and proved beyond a reasonable doubt.” 503 U.S. 466, 490 (2000). The court later held “the 'statutory maximum' for Apprendi purposes is the maximum sentence a judge may impose solely on the basis of the facts reflected in the jury verdict or admitted by the defendant.” Blakely v. Washington, 542 U.S. 296, 303 (2004).

While a jury convicted Larson, it never made corresponding findings addressing the monetary gain he derived or the pecuniary loss suffered as a result of his actions; rather, during Larson's subsequent sentencing hearing, the district court calculated the gross pecuniary loss at an amount exceeding $100 million ' leading to a maximum fine of more than $200 million. The district court then levied a $6 million against Larson, an amount double the statutory maximum. Despite the lack of a jury finding for these calculations, Larson failed to object during his sentencing hearing.

As Larson did not object at the district court level, the Second Circuit reviewed his appeal for plain error. In doing so, the court rejected the government's contention that more recent precedent validated Larson's $6 million fine.

The court distinguished the cases cited by the government, which included criminal restitution and forfeiture based on court-determined gains or losses, as “indeterminate schemes without statutory maximums.” The court viewed these indeterminate schemes as analytically distinct from the alternative fines provision, stating that “[a]lthough ' 3571(d) is uncapped like the restitution and forfeiture provisions ' and is fashioned as an 'alternative fine' ' the fact remains that, absent a pecuniary gains or loss finding, a district court may not impose a fine greater than that provided for in [the applicable subsection].” For that reason, the Second Circuit found that Apprendi and Blakely applied. Holding that the lack of a jury finding to support the $6 million fine met the plain error standard, the Court vacated the fine and remanded the case.

In the Courts and Business Crimes Hotline were written by Matthew J. Alexander, an associate at Kirkland & Ellis LLP, Washington, DC.

Ninth Circuit Vacates Bank Fraud Convictions

On Sept. 10, in United States v. Bennett, No. 06-50580, the United States Court of Appeals for the Ninth Circuit vacated convictions on three counts of bank fraud against defendant James Bennett. In an opinion by Judge Kim McLane Wardlaw, the court found that mortgages by Bank of America subsidiary Equicredit were not funds “owned by” a “financial institution” for purposes of a federal bank fraud statute, 18 U.S.C. ' 1344, at the time of Bennett's activities.

Bennett, described by the court as a mortgage broker, real estate appraiser and escrow agent, was alleged to have orchestrated and carried out a complex property-flipping scheme in Los Angeles and Long Beach, CA. As part of the mechanics of the scheme, Bennett allegedly recruited family members to purchase properties based on listed prices, using Bennett's funds. After this initial purchase, Bennett would facilitate subsequent acquisition of the properties, at improperly inflated prices, by straw purchasers. To accomplish this, Bennett appraised the properties at inflated levels, submitted false buyer information to secure mortgages, and falsified documents in his role as escrow agent. Many of the straw purchasers defaulted on their mortgages shortly thereafter.

Based on these allegations, Bennett was charged and convicted, pursuant to a 12-count superseding indictment. Seven of the 12 counts were bank-fraud charges under 18 U.S.C. ' 1344, the federal statute proscribing the knowing execution of, or attempt 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.” Bennett was convicted on all 12 counts in January 2006.

Three of the ' 1344 counts against Bennett were based on victimization of Equicredit, a wholly owned subsidiary of Bank of America. On appeal, the government did not argue that Equicredit satisfied the statutory definition of a “financial institution” during the applicable time frame. As noted by the court in its decision, the definition of a financial institution was later expanded, by the Fraud Enforcement and Recovery Act of 2009, to incorporate mortgage lending businesses. See Fraud Enforcement and Recovery Act of 2009, Pub. L. No. 111-21, ' 2(a)(3). The court noted that “[h]ad this amendment been in effect at the time of Bennett's criminal activity, Bennett's bank fraud convictions involving Equicredit undoubtedly would stand.”

At the relevant time, the statute only included banks or savings associations with deposits insured by the Federal Deposit Insurance Corporation (FDIC). See 18 U.S.C. ' 20(1); 12 U.S.C. ' 1813(c)(2). Alternatively, the government argued that Bennett violated the second prong of ' 1344, by fraudulently obtaining funds “owned by” Bank of America, itself a financial institution.

The government contended that, as a matter of law, a parent corporation “owns” the assets of its wholly owned subsidiary. The government's argument failed to persuade the court, which noted that “[m]ore than a century of corporate law says otherwise.” In explaining its holding, the court added that “[a]s early as 1926, the Supreme Court recognized that '[t]he owner of the shares of stock in a company is not the owner of the corporation's property.' R.I. Hosp. Trust Co. v. Doughton , 270 U.S. 69, 81 (1926). While the shareholder has a right to share in corporate dividends, 'he does not own the corporate property.'” In reviewing more recent case law building upon this principle, the court stated that “[t]oday, it almost goes without saying that a parent corporation does not own the assets of its wholly-owned subsidiary by virtue of that relationship alone.”

The government did not argue that Bank of America had “custody or control” of Equicredit's funds for purposes of ' 1344(2), and the court saw “no reason to set aside fundamental principles of corporate law in the context of the federal bank fraud statute, particularly where Congress provided no indication that we should do so.” Accordingly, it vacated Bennett's convictions relating to Equicredit.

Lack of Fact-Finding By Jury Leads Second Circuit
to Vacate Fine

In United States v. Pfaff, No. 09-1702-cr(L), a three-judge panel of the United States Court of Appeals for the Second Circuit vacated the $6 million fine levied by a district court against former KPMG LLP senior tax manager John Larson, as the jury did not find the facts underlying the determination of a fine that exceeded the statutorily imposed limit. In a separate summary order the same day (Aug. 27, 2010), the Second Circuit affirmed Larson's convictions, along with his prison sentence, in addition to affirming the convictions of his co-defendants, Robert Pfaff and Raymond J. Ruble.

Along with Pfaff and Ruble, Larson faced a 10-week trial in 2008, in which he was convicted by a jury for his role in the highly publicized tax shelter scheme involving his former employer, which the Second Circuit noted had been labeled “the largest criminal tax case in American history,” quoting Stein v. KPMG, LLP , 486 F.3d 753, 756 (2d Cir. 2007). Specifically, Larson was alleged to have been involved in designing, implementing, and marketing the fraudulent tax shelters. Based on these allegations, he was charged with, and subsequently convicted on, 12 counts of tax evasion under 26 U.S.C. ' 7201.

Regarding fines generally, 18 U.S.C. ' 3571(b) establishes that, for each felony conviction (including tax evasion), the maximum fine for individuals is $250,000. Thus, application of ' 3571(b) would have yielded a maximum fine of $3 million for Larson's convictions. However, ' 3571(d) provides for a departure from this statutory maximum, in the form of an “alternative fine” based on the gross pecuniary loss suffered by the victim(s), or the gain derived by the defendant. Fines imposed under ' 3571(d) may not exceed twice the amount of whichever calculation, gain or loss, is greater.

In Apprendi v. New Jersey, the Supreme Court held that, “[o]ther than the fact of a prior conviction, any fact that increases the penalty for a crime beyond the prescribed statutory maximum must be submitted to a jury, and proved beyond a reasonable doubt.” 503 U.S. 466, 490 (2000). The court later held “the 'statutory maximum' for Apprendi purposes is the maximum sentence a judge may impose solely on the basis of the facts reflected in the jury verdict or admitted by the defendant.” Blakely v. Washington , 542 U.S. 296, 303 (2004).

While a jury convicted Larson, it never made corresponding findings addressing the monetary gain he derived or the pecuniary loss suffered as a result of his actions; rather, during Larson's subsequent sentencing hearing, the district court calculated the gross pecuniary loss at an amount exceeding $100 million ' leading to a maximum fine of more than $200 million. The district court then levied a $6 million against Larson, an amount double the statutory maximum. Despite the lack of a jury finding for these calculations, Larson failed to object during his sentencing hearing.

As Larson did not object at the district court level, the Second Circuit reviewed his appeal for plain error. In doing so, the court rejected the government's contention that more recent precedent validated Larson's $6 million fine.

The court distinguished the cases cited by the government, which included criminal restitution and forfeiture based on court-determined gains or losses, as “indeterminate schemes without statutory maximums.” The court viewed these indeterminate schemes as analytically distinct from the alternative fines provision, stating that “[a]lthough ' 3571(d) is uncapped like the restitution and forfeiture provisions ' and is fashioned as an 'alternative fine' ' the fact remains that, absent a pecuniary gains or loss finding, a district court may not impose a fine greater than that provided for in [the applicable subsection].” For that reason, the Second Circuit found that Apprendi and Blakely applied. Holding that the lack of a jury finding to support the $6 million fine met the plain error standard, the Court vacated the fine and remanded the case.

In the Courts and Business Crimes Hotline were written by Matthew J. Alexander, an associate at Kirkland & Ellis LLP, Washington, DC.