Bank Fraud Defined

The charges in the case were based on six altered or forged checks that Loughrin had presented to Target stores. The checks related to accounts at six different federally insured financial institutions. At the close of the government's case, the district court refused to let the government proceed under subsection (1) of the bank fraud statute, holding that the government had not established an intent to defraud the banks (as opposed to Target) or that the banks (as opposed to Target) were exposed to a risk of loss. The district court allowed the government to proceed, however, under subsection (2) of the statute, which the court held required only intent to defraud someone and obtaining money from a financial institution. Loughrin objected to this holding and argued that subsection (2) of the statute also requires intent to defraud a financial institution. Loughrin was convicted on all counts and was sentenced to 36 months' imprisonment.

On appeal, the Tenth Circuit agreed with the district court that a bank fraud prosecution under 18 U.S.C. ' 1344(2) requires only intent to defraud someone and the obtaining of money from a financial institution. The court explained that, by its text, subsections (1) and (2) of the bank fraud statute define “separate offenses.” Subsection (1) explicitly requires proof that the defendant “intended to defraud a bank,” while subsection (2) does not. The court noted that its reading was dictated by Tenth Circuit precedent and recognized that its interpretation was in conflict with other circuits and cast a “wide net for bank fraud liability.”

Conflicting Views

The circuits in conflict with the Tenth Circuit had held that an intent to harm a bank, or at least expose it to risk, was required by the statute's purpose and legislative history. See United States v. Nkansah, 699 F.3d 743,748-49 (2d Cir. 2012); United States v. Davis, 989 F.2d 244, 246-47 (7th Cir. 1993). According to the Second Circuit, “[w]here the victim is not a bank and the fraud does not threaten the financial integrity of a federally controlled or insured bank, there seems no basis in the legislative history for finding coverage under section 1344(a)(2).” United States v. Blackmon, 839 F.2d 900, 906 (2d Cir. 1988). The cited purpose of the statute, noted by the Second Circuit, is to “'assure a basis for federal prosecution of those who victimize these banks through fraudulent schemes.'” Id. (quoting S. Rep. No. 98-225, at 377 (1983), reprinted in 1984 U.S.C.C.A.N. 3182, 3517). Judge Richard Posner of the Seventh Circuit echoed this view: “the purpose [of the bank fraud statute] is not to protect people who write checks to con artists but to protect the federal government's interest as an insurer of financial institutions.” Davis, 989 F.2d at 247.

Other circuits had held similarly, with slightly different conclusions as to the precise intent required. For example, the Third Circuit had held that the statute requires “an intent to victimize the bank by exposing it to loss or liability” (United States v. Leahy, 445 F.3d 634, 647 (3d Cir. 2006)); while the First Circuit held that the statute requires intent to defraud a bank, but not intent to harm a bank (United States v. Kenrick, 221 F.3d 19, 26-29 (1st Cir. 2000)).

Other circuits had agreed with the Tenth Circuit's holding that the statute does not require intent to defraud, intent to harm, nor a risk of loss to a bank. See United States v. McNeil, 320 F.3d 1034, 1038 (9th Cir. 2003); United States v. De la Mata, 266 F.3d 1275, 1298 (11th Cir. 2001); United States v. Everett, 270 F.3d 986, 991 (6th Cir. 2001).

Before the High Court

In his Supreme Court briefs, Loughrin argued that the text of the bank fraud statute requires intent to defraud. The text of the bank fraud statute, in Loughrin's view, defines a single offense, the elements of which are set forth in subsection (1) proscribing schemes “to defraud.” According to Loughrin, the Supreme Court had held the same with regard to the mail fraud statute, which was the model for the bank fraud statute and is the source of the statute's disjunctive two-clause structure. In McNally v. United States, 483 U.S. 350 (1987), the Supreme Court explained that the second clause of the mail fraud statute did not establish a second offense, but rather simply modifies the first clause. McNally was reaffirmed in Cleveland v. United States, 531 U.S. 12 (2000), where the Court again rejected the government's argument that the two clauses of the mail fraud statute defined two separate offenses.

Accordingly, Loughrin argued, Supreme Court precedent requires reading the bank fraud statute as setting forth only one offense. The government responded that the bank fraud statute was passed before the Supreme Court's interpretation of the mail fraud statute and that every court that had looked at the issue before the bank fraud statute was passed had determined that the mail fraud statute set forth two separate offenses.

Loughrin also argued that the Tenth Circuit's reading of the statute gives it “enormous breadth, effectively federalizing state law crimes that are admittedly 'tangential to the banking system' which the statute was designed to protect,” in conflict with the principles of lenity. The Tenth Circuit's and the government's interpretation of the bank fraud statute would encompass state-law crimes, Loughrin argued, such as “the roofing contractor who takes the check and never returns to do the work.”

The government sought to limit the concerns about the statute being overly broad. In its brief, it argued that the language “by means of” in subsection (2) should be read to require proof that the means selected to execute the scheme involve false or fraudulent representations that would foreseeably or inherently be directed to the bank. This, the government contended, would alleviate concerns about subsection (2)'s breadth without imposing an intent-to-defraud-the-bank requirement.

Loughrin rejected this construction as having no grounding in the text of the statute, as importing principles of negligence into a criminal statute, and as “pointless,” because the existing altered check statute, 18 U.S.C. ' 513, already covers such crimes. Rather, Loughrin argued, if the Supreme Court is to reject the intent-to-defraud a bank requirement, the “more sensible narrowing construction” is to require proof that the scheme knowingly exposed a bank to a risk of loss.

The Decision

The Supreme Court unanimously affirmed the Tenth Circuit's decision and held that the government need not prove intent to defraud a bank nor exposure of a bank to a risk of loss for prosecutions under subsection (2) of the 18 U.S.C. ' 1344. The Court pointed to the text of the statute, which plainly required proof of intent for subsection (1) and plainly did not require proof of intent under subsection (2).

The Court also rejected Loughrin's arguments under McNally, holding that the bank and mail fraud statutes have notable textual differences and that Congress passed the bank fraud statute three years before the Court decided McNally, during a time when every circuit court had concluded that the two phrases of the mail fraud statute should be read independently.

Finally, in order to prevent the Court's reading of the bank fraud statute from effectively federalizing state law crimes that are tangential to the banking system, the Court (except for Justices Scalia and Thomas, who would have left this issue “for another case”) adopted the government's argument that the language “by means of” in subsection (2) requires that the false statement “is the mechanism naturally inducing a bank (or custodian of bank property) to part with money in its control.” Accordingly, subsection (2) does not apply to a situation where someone defrauds another person and the victim happens to pay by check. This reading, the Court noted, allows for prosecutions of paradigmatic fraud cases, but avoids the assumption “that Congress has meant to effect a significant change in the sensitive relation between federal and state criminal jurisdiction.”

Stanley A. Twardy Jr. , a member of this newsletter's Board of Editors, is a partner at Day Pitney LLP and is a former U.S. Attorney for the District of Connecticut. Elizabeth A. Latif is a counsel in the firm and is a former Assistant U.S. Attorney.

The U.S. Supreme Court recently held that the provision of the federal bank fraud statute which makes it a crime to “knowingly execut[e] a scheme ' to obtain” property owned by, or under the custody of, a bank “by means of false or fraudulent pretenses,” does not require the government to prove that a defendant intended to defraud a bank into paying him or her money nor that a risk of loss was posed to a bank. 18 U.S.C. ' 1344. The Court was careful to hold, however, that the bank fraud statute does not reach “every fraudulent transaction in the economy whenever a check is involved,” a concern of Justice Anthony Kennedy at oral argument on the case.

The Case

In Loughrin v. United States, the petitioner employed several different schemes to fraudulently obtain money from retail stores. In one scheme, Loughrin stole checks from residential mailboxes and altered them by crossing out or erasing the existing writing or by washing, bleaching, ironing and drying the checks. He also stole convenience checks from mailboxes and forged signatures on them. Loughrin then used the altered or forged checks to purchase items at retail stores and, on occasion, returned the items he had purchased at the retail stores in exchange for cash.

The charges in the case were based on six altered or forged checks that Loughrin had presented to Target stores. The checks related to accounts at six different federally insured financial institutions. At the close of the government's case, the district court refused to let the government proceed under subsection (1) of the bank fraud statute, holding that the government had not established an intent to defraud the banks (as opposed to Target) or that the banks (as opposed to Target) were exposed to a risk of loss. The district court allowed the government to proceed, however, under subsection (2) of the statute, which the court held required only intent to defraud someone and obtaining money from a financial institution. Loughrin objected to this holding and argued that subsection (2) of the statute also requires intent to defraud a financial institution. Loughrin was convicted on all counts and was sentenced to 36 months' imprisonment.

On appeal, the Tenth Circuit agreed with the district court that a bank fraud prosecution under 18 U.S.C. ' 1344(2) requires only intent to defraud someone and the obtaining of money from a financial institution. The court explained that, by its text, subsections (1) and (2) of the bank fraud statute define “separate offenses.” Subsection (1) explicitly requires proof that the defendant “intended to defraud a bank,” while subsection (2) does not. The court noted that its reading was dictated by Tenth Circuit precedent and recognized that its interpretation was in conflict with other circuits and cast a “wide net for bank fraud liability.”

Conflicting Views

The circuits in conflict with the Tenth Circuit had held that an intent to harm a bank, or at least expose it to risk, was required by the statute's purpose and legislative history. See United States v. Nkansah , 699 F.3d 743,748-49 (2d Cir. 2012); United States v. Davis , 989 F.2d 244, 246-47 (7th Cir. 1993). According to the Second Circuit, “[w]here the victim is not a bank and the fraud does not threaten the financial integrity of a federally controlled or insured bank, there seems no basis in the legislative history for finding coverage under section 1344(a)(2).” United States v. Blackmon , 839 F.2d 900, 906 (2d Cir. 1988). The cited purpose of the statute, noted by the Second Circuit, is to “'assure a basis for federal prosecution of those who victimize these banks through fraudulent schemes.'” Id. (quoting S. Rep. No. 98-225, at 377 (1983), reprinted in 1984 U.S.C.C.A.N. 3182, 3517). Judge Richard Posner of the Seventh Circuit echoed this view: “the purpose [of the bank fraud statute] is not to protect people who write checks to con artists but to protect the federal government's interest as an insurer of financial institutions.” Davis, 989 F.2d at 247.

Other circuits had held similarly, with slightly different conclusions as to the precise intent required. For example, the Third Circuit had held that the statute requires “an intent to victimize the bank by exposing it to loss or liability” ( United States v. Leahy , 445 F.3d 634, 647 (3d Cir. 2006)); while the First Circuit held that the statute requires intent to defraud a bank, but not intent to harm a bank ( United States v. Kenrick , 221 F.3d 19, 26-29 (1st Cir. 2000)).

Other circuits had agreed with the Tenth Circuit's holding that the statute does not require intent to defraud, intent to harm, nor a risk of loss to a bank. See United States v. McNeil , 320 F.3d 1034, 1038 (9th Cir. 2003); United States v. De la Mata , 266 F.3d 1275, 1298 (11th Cir. 2001); United States v. Everett , 270 F.3d 986, 991 (6th Cir. 2001).

Before the High Court

In his Supreme Court briefs, Loughrin argued that the text of the bank fraud statute requires intent to defraud. The text of the bank fraud statute, in Loughrin's view, defines a single offense, the elements of which are set forth in subsection (1) proscribing schemes “to defraud.” According to Loughrin, the Supreme Court had held the same with regard to the mail fraud statute, which was the model for the bank fraud statute and is the source of the statute's disjunctive two-clause structure. In McNally v. United States , 483 U.S. 350 (1987), the Supreme Court explained that the second clause of the mail fraud statute did not establish a second offense, but rather simply modifies the first clause. McNally was reaffirmed in Cleveland v. United States , 531 U.S. 12 (2000), where the Court again rejected the government's argument that the two clauses of the mail fraud statute defined two separate offenses.

Accordingly, Loughrin argued, Supreme Court precedent requires reading the bank fraud statute as setting forth only one offense. The government responded that the bank fraud statute was passed before the Supreme Court's interpretation of the mail fraud statute and that every court that had looked at the issue before the bank fraud statute was passed had determined that the mail fraud statute set forth two separate offenses.

Loughrin also argued that the Tenth Circuit's reading of the statute gives it “enormous breadth, effectively federalizing state law crimes that are admittedly 'tangential to the banking system' which the statute was designed to protect,” in conflict with the principles of lenity. The Tenth Circuit's and the government's interpretation of the bank fraud statute would encompass state-law crimes, Loughrin argued, such as “the roofing contractor who takes the check and never returns to do the work.”

The government sought to limit the concerns about the statute being overly broad. In its brief, it argued that the language “by means of” in subsection (2) should be read to require proof that the means selected to execute the scheme involve false or fraudulent representations that would foreseeably or inherently be directed to the bank. This, the government contended, would alleviate concerns about subsection (2)'s breadth without imposing an intent-to-defraud-the-bank requirement.

Loughrin rejected this construction as having no grounding in the text of the statute, as importing principles of negligence into a criminal statute, and as “pointless,” because the existing altered check statute, 18 U.S.C. ' 513, already covers such crimes. Rather, Loughrin argued, if the Supreme Court is to reject the intent-to-defraud a bank requirement, the “more sensible narrowing construction” is to require proof that the scheme knowingly exposed a bank to a risk of loss.

The Decision

The Supreme Court unanimously affirmed the Tenth Circuit's decision and held that the government need not prove intent to defraud a bank nor exposure of a bank to a risk of loss for prosecutions under subsection (2) of the 18 U.S.C. ' 1344. The Court pointed to the text of the statute, which plainly required proof of intent for subsection (1) and plainly did not require proof of intent under subsection (2).

The Court also rejected Loughrin's arguments under McNally, holding that the bank and mail fraud statutes have notable textual differences and that Congress passed the bank fraud statute three years before the Court decided McNally, during a time when every circuit court had concluded that the two phrases of the mail fraud statute should be read independently.

Finally, in order to prevent the Court's reading of the bank fraud statute from effectively federalizing state law crimes that are tangential to the banking system, the Court (except for Justices Scalia and Thomas, who would have left this issue “for another case”) adopted the government's argument that the language “by means of” in subsection (2) requires that the false statement “is the mechanism naturally inducing a bank (or custodian of bank property) to part with money in its control.” Accordingly, subsection (2) does not apply to a situation where someone defrauds another person and the victim happens to pay by check. This reading, the Court noted, allows for prosecutions of paradigmatic fraud cases, but avoids the assumption “that Congress has meant to effect a significant change in the sensitive relation between federal and state criminal jurisdiction.”

Stanley A. Twardy Jr. , a member of this newsletter's Board of Editors, is a partner at Day Pitney LLP and is a former U.S. Attorney for the District of Connecticut. Elizabeth A. Latif is a counsel in the firm and is a former Assistant U.S. Attorney.