The 'Ordinary Prudence' Standard in Mail and Wire Fraud Cases

Courts Weigh in on 'Ordinary Prudence'

Appellate courts have occasionally interpreted this “ordinary” or “reasonable” prudence language to mean that if the victim of a scheme that was calculated to mislead could have uncovered the truth through the exercise of reasonable or ordinary diligence, then no criminal scheme to defraud was shown. In Goodman, for example, a divided Eighth Circuit panel reversed the defendants' convictions where it found that a careful parsing of all of the language of a promotional mailgram would have disclosed that the recipients were not actually receiving a guaranteed cash gift or discount coupon worth $1,000. 984 F.2d at 239-40. And in its now-reversed decision in United States v. Brown, 79 F.3d 1550 (11th Cir. 1996), an Eleventh Circuit panel held that the government failed to prove fraud charges against the officers of a real estate company that sold substantially overpriced homes in Florida to residents of distant states ' even though the purchasers generally only saw the properties on company-arranged trips that were deliberately designed to keep them from seeing and pricing comparable non'company-owned properties. The Brown panel asserted that “mail fraud requires the government to prove that a reasonable person would have acted on the representations,” and it found that it was unreasonable for the purchasers to rely solely on the company's representations as to the value or rental prospects of its homes. Id. at 1557-58.

In early 2009, however, the Eleventh Circuit, sitting en banc, overruled Brown. United States v. Svete, 556 F.3d 1157 (11th Cir. 2009). The full court reasoned that the Supreme Court's intervening decision in Neder v. United States, 527 U.S. 11, 25 (1999), established that justifiable reliance was not an element of the federal fraud statutes. Svete further stressed that the broadly worded text of the mail fraud statute ' which proscribes “any scheme or artifice to defraud” ' precludes a limitation based upon the victim's negligence or gullibility, while its legislative history reflects a concern for protecting those who might otherwise be deceived by mailed solicitations “which appeal to the cupidity of the ignorant.”

As the cases cited in Svete demonstrate, with the apparent exception of the Eighth Circuit, every other federal court of appeals has now held that a scheme to defraud can be established even where the defendant's misleading or deceitful representations would not have persuaded a person of reasonable or ordinary prudence. Nevertheless, this language persists, carelessly invoked by courts in passing as a familiar shibboleth, or simply accepted without question as part of pattern jury instructions.

A Meaningless Standard?

Are there any circumstances in which the ordinary prudence standard has value in assessing whether a defendant carried out a scheme to defraud? The Second Circuit, in United States v. Thomas, 377 F.3d 232, 242-43 (2d Cir. 2004), and the Seventh Circuit, in a cogent opinion by Judge Richard Posner in United States v. Coffman, 94 F.3d 330 334 (7th Cir. 1996), both suggest that this standard may have value in situations where the defendant's intent to deceive is unclear. This is most commonly so where the scheme at issue involves no outright false representations, but is arguably calculated to deceive by misdirection or implication, or where a defendant contends that he was merely puffing, or joking, or engaging in sharp practice. These cases reason that if a scheme is capable of deceiving persons of ordinary prudence, in addition to the exceptionally credulous, then that provides some evidence the scheme was calculated to defraud.

However, that is not what the jury instructions using the ordinary prudence standard actually say. Instead, they suggest that only those schemes that are “reasonably calculated to deceive persons of ordinary prudence” can be schemes to defraud. And as almost all of the federal appellate courts have now recognized, that position is inconsistent with the language, apparent intent, and longstanding interpretation of the federal fraud statutes.

As Judge Posner also concedes, the ordinary prudence standard at best “gestures ' clumsily” toward the line that separates criminal fraud from puffery or sharp dealing. If a defendant has disseminated a threadbare scheme broadly, calculating that the vast majority of those whom it reaches will immediately see through it, but that it will still generate enough positive responses from the gullible to generate an acceptable return, why should the fact that most of those who were exposed to the scheme dismissed it serve to preclude the defendant's conviction?

This was exactly the fact pattern in Silverman v. United States, the Fifth Circuit decision usually cited (e.g., by Judge Sand and his co-authors, and by the Second Circuit in Thomas) as the fountainhead of the ordinary prudence standard. Silverman engineered a mass mailing of some 30,000 solicitations that were carefully designed to mislead the unwary into believing they were invoices for existing listings in the yellow pages published by the local telephone company, although a careful scrutiny of the invoices would have disclosed that this was not the case. Only about 350 of those receiving the mailing fell for the ruse, but this still sufficed to net him $7,000.

Silverman's scheme therefore was clearly not “reasonably calculated to deceive persons of ordinary prudence,” since only about 1% of those solicited fell for it. Still, the Fifth Circuit readily affirmed his conviction. It pointed to evidence suggesting that Silverman had not seriously intended to establish a competing business directory, but only to gull the unwary while still providing him with grounds to defend against any subsequent criminal prosecution. In doing so, the court simply mentioned the ordinary prudence standard in passing, which it derived from a single Ninth Circuit decision dating to 1916 (Oesting v. United States, 234 F. 304 (9th Cir. 1916), without attempting to demonstrate why or how Silverman's scheme could be deemed to have met it. It seems clear that the “ordinary prudence” language was originally borrowed from civil fraud cases, with no consideration being given to the significantly broader scope and remedial purpose of the mail fraud statute.

Attorneys Need to Be Aware

Today, the pattern jury instructions approved for use by most of the federal courts of appeals ' as well as the updated Devitt & Blackmar instructions ' do not employ the ordinary prudence standard. These instructions instead define a “scheme to defraud” by focusing either on the use of false or fraudulent pretenses, representations, or promises without the additional gloss of “ordinary prudence,” or by asking the jury to consider whether the defendant intended “to deceive or cheat” another. Most of the approved circuit instructions define material representations as those with “a natural tendency to influence, or [that are] capable of influencing, the decision of the person or entity to which it is addressed” ' a standard cited in Neder itself (527 U.S. at 16, 22) and used in relation to other federal criminal statutes as well (e.g., 18 U.S.C. ' 1001). In contrast, the definition of materiality used in the instructions authored by Judge Sand and his colleagues is drawn from Affiliated Ute Citizens v. United States, 406 U.S. 128, 153-54 (1972). But this was a case interpreting Rule 10b-5, which employs a more stringent standard for materiality than that applicable to mail and wire fraud.

Prosecutors should therefore be careful about relying on apparently well-established instructions that may not actually match the circuit case law or the recommended instructions in their circuits. In places like the Third Circuit, where the approved pattern instructions actually contradict the circuit's case law, or the Sixth Circuit, where the case law reflects both approaches and the pattern instructions continue to use the “ordinary prudence” language, prosecutors should work to educate the courts by asking for instructions (such as that approved in United States v. Brien, 617 F.2d 299, 311 (1st Cir. 1980)) stressing that the victim's credulity is irrelevant. Defense counsel should also be alert to the variations among the pattern instructions used by the various circuits, and should recognize that an alert prosecutor will always be able to produce a lengthy list of authorities, together with arguments based upon practical good sense, to undercut the force of the “ordinary prudence” language.

Jefferson M. Gray ([email protected]), a member of this newsletter's Board of Editors, is an Assistant U.S. Attorney in the District of Maryland. This article reflects only his individual analysis and conclusions, and does not purport to speak for the Department of Justice or any of its divisions.

To the average layperson (and even to most criminal lawyers), it probably seems self-evident that the federal mail and wire fraud statutes (18 U.S.C. ” 1341 and 1343) protect not only the financially or commercially astute, but also the most credulous, na've, and unsophisticated members of our society. Federal prosecutors regularly file fraud charges in cases involving transparently suspect representations and promises, and these cases typically end with guilty pleas or convictions at trial. The federal courts of appeal have long emphasized that “the monumental credulity of the victim is no shield for the accused,” Deaver v. United States , 155 F.2d 740, 744-45 (D.C. Cir. 1946), or, indeed, that “the lack of guile on the part of those generally solicited may itself point with persuasion to the fraudulent character” of the scheme. Norman v. United States , 100 F.2d 905, 907 (6th Cir. 1939). The circuit courts therefore routinely uphold fraud convictions arising out of schemes that could be readily detected by anyone applying the maxim caveat emptor.

Co-existing with these decisions, however, is another line of authority which holds that to establish the required element of a scheme to defraud, it is necessary for federal prosecutors to prove that the scheme was “reasonably calculated to deceive persons of ordinary prudence and comprehension.” Silverman v. United States , 213 F.2d 405, 407 (5th Cir. 1954). See also, e.g., United States v. Jamieson , 427 F.3d 394, 415-16 (6th Cir. 2005); United States v. Shepard , 396 F.3d 1116, 1124 (10th Cir. 2005); United States v. Goodman , 984 F.2d 235, 240 (8th Cir. 1993).

The widely used pattern jury instructions authored by Judge Leonard Sand and his co-authors likewise define a “scheme to defraud” as a plan or course of action that involves the use of “false or fraudulent pretenses, representations or promises reasonably calculated to deceive persons of average prudence.” See L. Sand, J. Siffert, et al., Modern Federal Jury Instructions: Criminal, Instruction 44-4. This instruction ' which has also been adopted by the Third Circuit ' further defines material facts and statements as those “which would reasonably be expected to be of concern to a reasonable and prudent person ' in making a decision.” The Eighth and Tenth Circuits' pattern jury instructions defining a scheme to defraud also respectively use the “reasonable person” and “ordinary prudence” language, while the Sixth Circuit's pattern instructions use this language when defining a “material” misrepresentation.

Courts Weigh in on 'Ordinary Prudence'

Appellate courts have occasionally interpreted this “ordinary” or “reasonable” prudence language to mean that if the victim of a scheme that was calculated to mislead could have uncovered the truth through the exercise of reasonable or ordinary diligence, then no criminal scheme to defraud was shown. In Goodman, for example, a divided Eighth Circuit panel reversed the defendants' convictions where it found that a careful parsing of all of the language of a promotional mailgram would have disclosed that the recipients were not actually receiving a guaranteed cash gift or discount coupon worth $1,000. 984 F.2d at 239-40. And in its now-reversed decision in United States v. Brown , 79 F.3d 1550 (11th Cir. 1996), an Eleventh Circuit panel held that the government failed to prove fraud charges against the officers of a real estate company that sold substantially overpriced homes in Florida to residents of distant states ' even though the purchasers generally only saw the properties on company-arranged trips that were deliberately designed to keep them from seeing and pricing comparable non'company-owned properties. The Brown panel asserted that “mail fraud requires the government to prove that a reasonable person would have acted on the representations,” and it found that it was unreasonable for the purchasers to rely solely on the company's representations as to the value or rental prospects of its homes. Id. at 1557-58.

In early 2009, however, the Eleventh Circuit, sitting en banc, overruled Brown . United States v. Svete , 556 F.3d 1157 (11th Cir. 2009). The full court reasoned that the Supreme Court's intervening decision in Neder v. United States , 527 U.S. 11, 25 (1999), established that justifiable reliance was not an element of the federal fraud statutes. Svete further stressed that the broadly worded text of the mail fraud statute ' which proscribes “any scheme or artifice to defraud” ' precludes a limitation based upon the victim's negligence or gullibility, while its legislative history reflects a concern for protecting those who might otherwise be deceived by mailed solicitations “which appeal to the cupidity of the ignorant.”

As the cases cited in Svete demonstrate, with the apparent exception of the Eighth Circuit, every other federal court of appeals has now held that a scheme to defraud can be established even where the defendant's misleading or deceitful representations would not have persuaded a person of reasonable or ordinary prudence. Nevertheless, this language persists, carelessly invoked by courts in passing as a familiar shibboleth, or simply accepted without question as part of pattern jury instructions.

A Meaningless Standard?

Are there any circumstances in which the ordinary prudence standard has value in assessing whether a defendant carried out a scheme to defraud? The Second Circuit, in United States v. Thomas , 377 F.3d 232, 242-43 (2d Cir. 2004), and the Seventh Circuit, in a cogent opinion by Judge Richard Posner in United States v. Coffman , 94 F.3d 330 334 (7th Cir. 1996), both suggest that this standard may have value in situations where the defendant's intent to deceive is unclear. This is most commonly so where the scheme at issue involves no outright false representations, but is arguably calculated to deceive by misdirection or implication, or where a defendant contends that he was merely puffing, or joking, or engaging in sharp practice. These cases reason that if a scheme is capable of deceiving persons of ordinary prudence, in addition to the exceptionally credulous, then that provides some evidence the scheme was calculated to defraud.

However, that is not what the jury instructions using the ordinary prudence standard actually say. Instead, they suggest that only those schemes that are “reasonably calculated to deceive persons of ordinary prudence” can be schemes to defraud. And as almost all of the federal appellate courts have now recognized, that position is inconsistent with the language, apparent intent, and longstanding interpretation of the federal fraud statutes.

As Judge Posner also concedes, the ordinary prudence standard at best “gestures ' clumsily” toward the line that separates criminal fraud from puffery or sharp dealing. If a defendant has disseminated a threadbare scheme broadly, calculating that the vast majority of those whom it reaches will immediately see through it, but that it will still generate enough positive responses from the gullible to generate an acceptable return, why should the fact that most of those who were exposed to the scheme dismissed it serve to preclude the defendant's conviction?

This was exactly the fact pattern in Silverman v. United States, the Fifth Circuit decision usually cited (e.g., by Judge Sand and his co-authors, and by the Second Circuit in Thomas) as the fountainhead of the ordinary prudence standard. Silverman engineered a mass mailing of some 30,000 solicitations that were carefully designed to mislead the unwary into believing they were invoices for existing listings in the yellow pages published by the local telephone company, although a careful scrutiny of the invoices would have disclosed that this was not the case. Only about 350 of those receiving the mailing fell for the ruse, but this still sufficed to net him $7,000.

Silverman's scheme therefore was clearly not “reasonably calculated to deceive persons of ordinary prudence,” since only about 1% of those solicited fell for it. Still, the Fifth Circuit readily affirmed his conviction. It pointed to evidence suggesting that Silverman had not seriously intended to establish a competing business directory, but only to gull the unwary while still providing him with grounds to defend against any subsequent criminal prosecution. In doing so, the court simply mentioned the ordinary prudence standard in passing, which it derived from a single Ninth Circuit decision dating to 1916 ( Oesting v. United States, 234 F. 304 (9th Cir. 1916), without attempting to demonstrate why or how Silverman's scheme could be deemed to have met it. It seems clear that the “ordinary prudence” language was originally borrowed from civil fraud cases, with no consideration being given to the significantly broader scope and remedial purpose of the mail fraud statute.

Attorneys Need to Be Aware

Today, the pattern jury instructions approved for use by most of the federal courts of appeals ' as well as the updated Devitt & Blackmar instructions ' do not employ the ordinary prudence standard. These instructions instead define a “scheme to defraud” by focusing either on the use of false or fraudulent pretenses, representations, or promises without the additional gloss of “ordinary prudence,” or by asking the jury to consider whether the defendant intended “to deceive or cheat” another. Most of the approved circuit instructions define material representations as those with “a natural tendency to influence, or [that are] capable of influencing, the decision of the person or entity to which it is addressed” ' a standard cited in Neder itself (527 U.S. at 16, 22) and used in relation to other federal criminal statutes as well (e.g., 18 U.S.C. ' 1001). In contrast, the definition of materiality used in the instructions authored by Judge Sand and his colleagues is drawn from Affiliated Ute Citizens v. United States , 406 U.S. 128, 153-54 (1972). But this was a case interpreting Rule 10b-5, which employs a more stringent standard for materiality than that applicable to mail and wire fraud.

Prosecutors should therefore be careful about relying on apparently well-established instructions that may not actually match the circuit case law or the recommended instructions in their circuits. In places like the Third Circuit, where the approved pattern instructions actually contradict the circuit's case law, or the Sixth Circuit, where the case law reflects both approaches and the pattern instructions continue to use the “ordinary prudence” language, prosecutors should work to educate the courts by asking for instructions (such as that approved in United States v. Brien , 617 F.2d 299, 311 (1st Cir. 1980)) stressing that the victim's credulity is irrelevant. Defense counsel should also be alert to the variations among the pattern instructions used by the various circuits, and should recognize that an alert prosecutor will always be able to produce a lengthy list of authorities, together with arguments based upon practical good sense, to undercut the force of the “ordinary prudence” language.

Jefferson M. Gray ([email protected]), a member of this newsletter's Board of Editors, is an Assistant U.S. Attorney in the District of Maryland. This article reflects only his individual analysis and conclusions, and does not purport to speak for the Department of Justice or any of its divisions.