In the Courts

In December 2007, Wallace introduced Phillips to Feel Good Watches, a fine watch retailer in Arizona. Wallace agreed to purchase two $30,000 Breguet watches from Feel Good Watches, one to be paid off upon delivery and the second to be paid off in three installments of $10,000 each. After receiving the first Breguet watch in the mail in January 2008, Phillips had his girlfriend send him an invoice from her company, Wallace Black, for alleged “Consultant/Contract Services” she had provided MOD. Phillips, fearing MOD would not agree to pay a company owned by his girlfriend, altered the invoice to read “W-Black” and used the false invoice to convince MOD to pay $30,000 to Wallace Black. At Phillips' direction, Wallace then wired the $30,000 to Feel Good Watches as payment for the Breguet watch that Phillips had received in January 2008. Id. at 2-3.

Phillips repeated this fraudulent scheme in March 2008 (submitting a fake W-Black invoice to MOD for $60,000) and May 2008 (submitting a fake W-Black invoice for $10,000), using the proceeds to pay for the second Breguet watch, to invest in a startup company, and to place an earnest money deposit on a $2.3 million condominium he was purchasing in Seattle. In April 2008, Phillips also convinced MOD's Vice President of Finances, Ken Gordon, to wire him $1.5 million by falsely telling Gordon that the MOD Board of Directors had approved this as pre-payment for an intellectual property license owned by a company that Phillips had started. Phillips then used some of these funds to make a $1 million down payment on his condominium. Id.

When the MOD Board of Directors discovered that Phillips had ordered the transfer of $1.5 million to his account without the Board's permission, they demanded that Phillips return the money, which he did. The United States Attorney for the Western District of Washington also brought criminal charges against Phillips: four counts of wire fraud, two counts of money laundering, as well as one count of mail fraud based on the mailing of the first Breguet watch in January 2008. The Superseding Indictment also contained a forfeiture notice stating that the Government would seek an in personam forfeiture judgment of $100,000 based on the total amount obtained by the first three counts of wire fraud (totaling $100,000). Id. at 3-4.

In reviewing the mail fraud conviction for plain error, the Ninth Circuit outlined the standard set forth in Carter v. United States, 530 U.S. 255 (2000), as one requiring that the Government prove that Phillips: “(1) devised or intended to devise a scheme to defraud (or to perform specified fraudulent acts); and (2) that he used ' the mail for the purpose of executing, or attempting to execute, the scheme (or specified fraudulent acts).” Id. at 6 (internal quotation marks omitted). The court then identified the scheme at issue as one “to defraud MOD and to obtain money from MOD.” Id. As for the second prong of the test, the court found that the only use of the mails was Feel Good Watches' mailing of the first Breguet watch to Phillips in January 2008. Although this mailing was undoubtedly related to Phillips' scheme to defraud MOD, the Ninth Circuit noted that federal mail fraud under 18 U.S.C. ' 1341 requires a stronger nexus between the scheme to defraud and the use of the mails. Id. at 6-7.

In analyzing the second prong, the Ninth Circuit looked to the Supreme Court's analysis in United States v. Maze, 414 U.S. 395 (1974), a case in which the defendant used a stolen bank card to obtain food and lodging at motels, which then mailed invoices for the goods and services to the defendant. The Maze court found that the defendant had caused the mails to be used, but noted that the “more difficult question is whether these mailings were sufficiently closely related to [Maze's] scheme to bring his conduct within the statute.” 414 U.S. at 399. The Maze court then determined that the defendant's scheme did not depend on use of the mails and reversed the conviction.

After reviewing the Maze decision, the Ninth Circuit explained that the required nexus between the mails and the fraudulent scheme is that use of the mails be “part of the scheme to defraud.” Phillips, 2012 WL 6700220 at 7 (emphasis in original). It then found that Phillips' scheme to defraud did not depend on use of the mails, but rather that his use of the mails to receive an expensive watch was merely a “byproduct” of his fraudulent scheme. Id. In this way, the Ninth Circuit placed limits on the scope of the federal mail statute by requiring that the use of the mails be specifically intended to further the fraudulent scheme.

The Phillips opinion is also a notable reminder of the general rule that a mandatory criminal forfeiture cannot be reduced or eliminated and, further, that a defendant can be required to make restitution and forfeiture based on the same criminal conduct.

On its cross-appeal, the Government sought a $100,000 in personam forfeiture judgment against Phillips. Id. at 1. After first determining that mandatory criminal forfeiture was required under 18 U.S.C. ' 981 and 28 U.S.C. ' 2461(c), the Ninth Circuit addressed Phillips' argument that he had already repaid MOD for the funds he had stolen and thus forfeiture could not apply. Id. at 12, 14. In rejecting this argument, the Ninth Circuit looked to United States v. Newman, 659 F.3d 1235 (9th Cir. 2011), which held that, in contrast to a fine (which a court may reduce or eliminate in its discretion), a “district court has no discretion to reduce or eliminate mandatory criminal forfeiture.” Id. at 12 (citing Newman, 659 F.3d at 1240) (emphasis added in Phillips opinion).

The Ninth Circuit went on to explain that forfeiture applies even when a defendant has already been required to make restitution, noting that forfeiture is meant to serve as punishment for the commission of a crime whereas restitution is meant to make a victim whole again. Id. at 14. The court further noted that “in the absence of a statute authorizing a reduction in forfeiture, the district court may not reduce forfeiture because of an order of restitution to a victim or because the victim already has been made whole.” Id. (citing Newton, 659 F.3d at 1241). As such, forfeiture applied and Phillips was not entitled to credit for the funds that he repaid to MOD.

In the Courts and Business Crimes Hotline were written by Roxana Mondrag'n and Editor-in-Chief Janice G. Inman, respectively. Ms. Mondrag'n is an Associate at Kirkland & Ellis LLP, Washington, DC.

Ninth Circuit Clarifies Scope of Federal Mail Fraud Statute

On Dec. 26, 2012, the U.S. Court of Appeals for the Ninth Circuit issued its opinion in United States v. Phillips, —F.3d.—, 2012 WL 6700220 (2012), in which the defendant, Mark Phillips, had appealed his conviction on four counts of wire fraud, one count of mail fraud, and two counts of money laundering. In its cross-appeal, the Government had argued that that the district court erred in rejecting its application to enter a $100,000 in personam forfeiture judgment against the defendant. The Ninth Circuit's decision is notable in that it clarifies the limited scope of the mail fraud statute, 18 U.S.C. ' 1341, as well as the applicability of forfeiture even in cases where a defendant has made full restitution to his/her victims.

The case involved Mark Phillips, the former CEO of MOD Systems, Inc. (MOD), who stole money from MOD over the course of approximately a year and used the money to buy expensive Breguet watches, invest in a startup company, and to partially pay off a $2.3 million condominium in Seattle. Phillips relied on the assistance of his girlfriend, Jan Wallace, to successfully execute this scheme. Phillips, 2012 WL 6700220 at 1.

In December 2007, Wallace introduced Phillips to Feel Good Watches, a fine watch retailer in Arizona. Wallace agreed to purchase two $30,000 Breguet watches from Feel Good Watches, one to be paid off upon delivery and the second to be paid off in three installments of $10,000 each. After receiving the first Breguet watch in the mail in January 2008, Phillips had his girlfriend send him an invoice from her company, Wallace Black, for alleged “Consultant/Contract Services” she had provided MOD. Phillips, fearing MOD would not agree to pay a company owned by his girlfriend, altered the invoice to read “W-Black” and used the false invoice to convince MOD to pay $30,000 to Wallace Black. At Phillips' direction, Wallace then wired the $30,000 to Feel Good Watches as payment for the Breguet watch that Phillips had received in January 2008. Id. at 2-3.

Phillips repeated this fraudulent scheme in March 2008 (submitting a fake W-Black invoice to MOD for $60,000) and May 2008 (submitting a fake W-Black invoice for $10,000), using the proceeds to pay for the second Breguet watch, to invest in a startup company, and to place an earnest money deposit on a $2.3 million condominium he was purchasing in Seattle. In April 2008, Phillips also convinced MOD's Vice President of Finances, Ken Gordon, to wire him $1.5 million by falsely telling Gordon that the MOD Board of Directors had approved this as pre-payment for an intellectual property license owned by a company that Phillips had started. Phillips then used some of these funds to make a $1 million down payment on his condominium. Id.

When the MOD Board of Directors discovered that Phillips had ordered the transfer of $1.5 million to his account without the Board's permission, they demanded that Phillips return the money, which he did. The United States Attorney for the Western District of Washington also brought criminal charges against Phillips: four counts of wire fraud, two counts of money laundering, as well as one count of mail fraud based on the mailing of the first Breguet watch in January 2008. The Superseding Indictment also contained a forfeiture notice stating that the Government would seek an in personam forfeiture judgment of $100,000 based on the total amount obtained by the first three counts of wire fraud (totaling $100,000). Id. at 3-4.

In reviewing the mail fraud conviction for plain error, the Ninth Circuit outlined the standard set forth in Carter v. United States , 530 U.S. 255 (2000), as one requiring that the Government prove that Phillips: “(1) devised or intended to devise a scheme to defraud (or to perform specified fraudulent acts); and (2) that he used ' the mail for the purpose of executing, or attempting to execute, the scheme (or specified fraudulent acts).” Id . at 6 (internal quotation marks omitted). The court then identified the scheme at issue as one “to defraud MOD and to obtain money from MOD.” Id. As for the second prong of the test, the court found that the only use of the mails was Feel Good Watches' mailing of the first Breguet watch to Phillips in January 2008. Although this mailing was undoubtedly related to Phillips' scheme to defraud MOD, the Ninth Circuit noted that federal mail fraud under 18 U.S.C. ' 1341 requires a stronger nexus between the scheme to defraud and the use of the mails. Id. at 6-7.

In analyzing the second prong, the Ninth Circuit looked to the Supreme Court's analysis in United States v. Maze , 414 U.S. 395 (1974), a case in which the defendant used a stolen bank card to obtain food and lodging at motels, which then mailed invoices for the goods and services to the defendant. The Maze court found that the defendant had caused the mails to be used, but noted that the “more difficult question is whether these mailings were sufficiently closely related to [Maze's] scheme to bring his conduct within the statute.” 414 U.S. at 399. The Maze court then determined that the defendant's scheme did not depend on use of the mails and reversed the conviction.

After reviewing the Maze decision, the Ninth Circuit explained that the required nexus between the mails and the fraudulent scheme is that use of the mails be “part of the scheme to defraud.” Phillips, 2012 WL 6700220 at 7 (emphasis in original). It then found that Phillips' scheme to defraud did not depend on use of the mails, but rather that his use of the mails to receive an expensive watch was merely a “byproduct” of his fraudulent scheme. Id. In this way, the Ninth Circuit placed limits on the scope of the federal mail statute by requiring that the use of the mails be specifically intended to further the fraudulent scheme.

The Phillips opinion is also a notable reminder of the general rule that a mandatory criminal forfeiture cannot be reduced or eliminated and, further, that a defendant can be required to make restitution and forfeiture based on the same criminal conduct.

On its cross-appeal, the Government sought a $100,000 in personam forfeiture judgment against Phillips. Id. at 1. After first determining that mandatory criminal forfeiture was required under 18 U.S.C. ' 981 and 28 U.S.C. ' 2461(c), the Ninth Circuit addressed Phillips' argument that he had already repaid MOD for the funds he had stolen and thus forfeiture could not apply. Id. at 12, 14. In rejecting this argument, the Ninth Circuit looked to United States v. Newman , 659 F.3d 1235 (9th Cir. 2011), which held that, in contrast to a fine (which a court may reduce or eliminate in its discretion), a “district court has no discretion to reduce or eliminate mandatory criminal forfeiture.” Id . at 12 (citing Newman , 659 F.3d at 1240) (emphasis added in Phillips opinion).

The Ninth Circuit went on to explain that forfeiture applies even when a defendant has already been required to make restitution, noting that forfeiture is meant to serve as punishment for the commission of a crime whereas restitution is meant to make a victim whole again. Id. at 14. The court further noted that “in the absence of a statute authorizing a reduction in forfeiture, the district court may not reduce forfeiture because of an order of restitution to a victim or because the victim already has been made whole.” Id. (citing Newton, 659 F.3d at 1241). As such, forfeiture applied and Phillips was not entitled to credit for the funds that he repaid to MOD.

In the Courts and Business Crimes Hotline were written by Roxana Mondrag'n and Editor-in-Chief Janice G. Inman, respectively. Ms. Mondrag'n is an Associate at Kirkland & Ellis LLP, Washington, DC.