Sunday, March 26, 2006

Third Circuit Bank Fraud Decision

In United States v. Leahy, the Third Circuit issued a decision (here) on the merits of the defendants' bank fraud convictions, after an earlier opinion considered the effect of Booker on forfeiture and restitution.  The defendants, a corporation and two senior managers, were convicted of defrauding ten banks that had the corporation conduct auctions of repossessed cars.  The defendants, through Carriage Trade Auto Auction, took possession of 311 vehicles and resold them at higher prices than the amount reported to the banks.  Two issues considered on appeal were whether the defendants had to intend to cause harm to the banks, and whether an instruction defining fraud as involving "moral uprightness" and "fundamental honesty" was improper.

The defendants argued that the true victims of the scheme were the original owners of the cars who were liable for any difference between the auction price and the remaining loan amount.  In most instances, the amount received at the auction of a repossessed vehicle is less than the amount of the remaining loan, and the borrower would be responsible for any difference.  The defendants argued that they did not intend to cause harm to the bank, which they argued is an element of the bank fraud offense.  The Third Circuit rejected their position, holding:

In our view, where the bank is the "target of the deception," it makes no difference whether the perpetrator had an intent to harm the bank. Indeed, any conduct that causes loss or harm to a bank is likely to undermine the public’s confidence in the integrity of a bank, or otherwise adversely affect the bank’s public image, regardless of whether the loss or harm was so intended. In these circumstances, imposing an intent to harm requirement where the bank is the "target of deception" would leave an unnecessary gap in the reach of the bank fraud statute, which we think would contradict Congress’ purpose as well as undermine the broad federal interest in protecting financial institutions. Rather, proof of a specific intent to defraud the bank is sufficient * * * . However, where the bank is not the "target of deception," but rather merely an "unwitting instrumentality," there is the additional concern that § 1344 may be applied in a manner that reaches conduct that falls well beyond the scope of what the statute was intended to regulate.

The Third Circuit noted the split in the circuits on the issue, and adopted the view that intent to harm is not necessary where the bank is the direct victim of the scheme.

The district court's instruction on fraud included the following: "The fraudulent nature of a scheme is not defined according to any technical standards. Rather, the measure of a fraud in any fraud case is whether the scheme shows a departure from moral uprightness, fundamental honesty, fair play and candid dealings in a general light of the community."  The Third Circuit noted that references to morality and fairness involve ambiguous terms, and in the past the court had cautioned against such language, but it held that the jury instructions, considered as a whole, were not defective:

We continue to have concerns regarding the definition of fraud with reference to such abstract terms as morality and fairness. However, we do not believe that this matter presented any real risk that the District Court’s instruction invoking concepts of morality and fairness, when read with the rest of the instructions, allowed for conviction solely based on this formulation of fraud. Accordingly, we find no error.

The court seems to be playing a bit fast-and-loose with language it had earlier criticized, as Circuit Judge Becker pointed out in his dissenting opinion: "In my view, the standard of 'moral uprightness' has no place in jury instructions defining fraud, as it broadens the federal fraud statute in a manner that 'give[s] inadequate notice of criminality and delegate[s] to the judiciary impermissibly broad authority to delineate the contours of criminal liability.'" (ph)

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Comments

How if the original owners of the cars are liable for the difference between the fraudulent auction price rather then what it was sold for then that's just plain not fair. If the bank conducts the auction it would have to be responsible for any different between the winning bid and what was reported.

Posted by: Doug Smith - Government Auctions | Sep 18, 2008 5:55:41 PM

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