[A] Intent to Defraud
The mail and wire fraud statutes do not define the required “scheme to defraud,” and there is little legislative history on the issue. Courts therefore have struggled to provide a precise definition of the term. In general, the defendant must have engaged in a deception or deceit — a false or misleading statement or omission intended to trick the victim.25
[1] The Durland Decision
The Supreme Court first interpreted an earlier version of the mail fraud statute in its 1896 decision in Durland v. United States.26 The government alleged that the defendants had used the mail to sell bonds on which they never intended to make payments. The defendants argued that this did not amount to fraud because, at that time, the common law crime of obtaining property by false pretenses only applied when a defendant had misrepresented past or present facts. Here, the defendants had instead merely lied about their intent to make payments in the future.
definition of false pretenses. In its analysis, the Supreme Court assumed that the defendants acted with an intent to defraud. The Court further found that the
[69/70]statutory language “any scheme or artifice to defraud” was broader than the
common law of false pretenses. The Court concluded that the statute “includes everything designed to defraud by representations as to the past or present, or suggestions and promises as to the future. The significant fact is the intent and purpose.”27 Because such intent was present, the convictions were affirmed.
The Durland decision foreshadowed much of the debate over the mail and wire fraud statutes that has followed. By expanding the federal fraud statute beyond existing common law crimes, the Court ensured that the government would have a broad anti- fraud weapon that would overlap with and even expand upon state fraud statutes.
[2] Deception Relating to the Economic Bargain
There are limits on mail fraud prosecutions, however. In the context of business transactions, courts have found that the defendant must have intended that the deception go to the substance of the bargain between the defendant and the intended victim. The economic substance requirement means that mere “puffing” will not support a mail or wire fraud charge.28 Take a car salesperson who tells a customer, “This is the world’s greatest car.” Even if the car turns out to be a mediocre product, the salesperson has simply engaged in hyperbole and has committed no fraud. But if the salesperson says, “This car has never been wrecked and runs fine,” when the car had been in a serious crash and barely operates, then the misstatement goes to the economic bargain itself.
Further, assume that an office supply salesperson speaks with a potential customer’s receptionist. The salesperson falsely says, “I’m a friend of the president of the company, and I’d like to speak with the purchasing agent.” After accurately describing the cost and quality of the products to the purchasing agent, the salesperson sells the supplies to the company by using the mail or wires. Does this amount to fraud? In United States v. Regent Office Supply,29 the Second Circuit framed the issue as whether “solicitation of a purchase by means of false representations not directed to the quality, adequacy or price of goods to be sold, or otherwise to the nature of the bargain, constitute[s] a ‘scheme to defraud.’”30 The court held that such a solicitation does not amount to mail fraud.
[3] Literally True and Misleading Statements
On the other hand, literally true statements designed to deceive a party concerning the essential economic bargain will support mail fraud charges. In Lustiger v. United States,31 the defendant was convicted of mail fraud based upon Arizona property sales. As part of the marketing campaign, Lustiger mailed to potential buyers advertising materials containing misleading representations concerning [70/71]the
availability of water for recreational and home use. On appeal from his conviction, the defendant argued that there was insufficient proof that the representations — including statements, photographs, and maps — were false or misleading.
The Ninth Circuit disagreed, finding that “[w]hile the statements in the advertising materials may not have been literally false, taken as a whole they were fraudulently misleading and deceptive.”32 For example, although the materials accurately said that a large recreational lake was only five miles from the property, the materials did not say that the actual driving distance was from fifteen to forty miles on roads not generally useable by passenger cars. The court found substantial evidence that the materials contained numerous statements that were either false or deceptive, and that went beyond mere sales “puffing.” The court concluded, “If a scheme is devised with the intent to defraud, and the mails are used in executing the scheme, the fact that there is no misrepresentation of a single existing fact is immaterial.”33
[4] Omissions and Concealment
Material acts of omission or concealment can give rise to mail or wire fraud charges. For example, in United States v. Siegel,34 the defendants engaged in a scheme to misuse proceeds from the sales of their employer’s products. The Second Circuit affirmed the convictions, finding that the government had proven that the defendants used some of the proceeds for personal gain. Thus, the defendants breached their fiduciary duties to the corporation and its shareholders by failing to reveal their scheme to the company and its auditors. This omission satisfied the deception element of the wire fraud statute.35
The finding of an intent to defraud is the key, and all deceptions may not amount to fraud. Thus, when a corporate employee encouraged a corporate agent to mislead the company, the agent was not guilty of mail fraud. This situation arose in United States v. D’Amato.36 In that case, the defendant had been hired by Gardner, who was an employee of Unisys, a defense contractor. The defendant was an attorney who was also the brother of a sitting United States senator. The senator sat on the Senate Appropriations Committee, which funded government defense programs.
The government claimed that the defendant, with Gardner’s help, had defrauded Unisys in two ways.37 First, in his bills to the company, the defendant created the misleading impression that he was being paid to perform legal services for the company rather than the lobbying services he actually performed. According to the
[71/72]government, this scheme defrauded Unisys by depriving it of the “right to
control” how its funds would be used. Second, the defendant was under a contract to write reports for Unysis. At Gardner’s direction, however, the defendant never wrote the reports. The government believed this scheme constituted “false pretenses.”
On appeal from his mail fraud convictions, the defendant argued that the government had failed to prove that he had intended to cause economic harm to Unisys. The Second Circuit agreed. As to the right to control theory, there was no evidence that the misleading bills were intended to cause economic harm to the company. As to the false pretenses theory, there was no such proof because Gardner, a Unisys employee, had told the defendant that he was not required to write the reports.
[5] Good Faith and Reliance on Counsel Defenses
Mail fraud requires proof of a specific intent to defraud. Thus, a finding that the defendant acted in good faith — i.e., acted with good will and without intent to harm — will provide a complete defense to the charge.38 A specific type of good faith defense is that the defendant acted in honest reliance on counsel. If the fact-finder determines that the defendant fully disclosed the material facts to the attorney, and honestly relied upon the attorney’s advice in an attempt to conform with the law, then a good faith defense has been shown.39
[B] Materiality
[1] The Neder Decision
Under the Supreme Court’s decision in Neder v. United States,40 the mail and wire fraud statutes require that the scheme to defraud involve a material deception. In that case, the defendant was charged with multiple counts of mail and wire fraud based upon fraudulent bank loans applications. The defendant argued on appeal that the trial judge committed reversible error by failing to require that the jury find that the defendant’s misstatements were material to the transactions. The Supreme Court unanimously agreed. Conceding that the statutes on their face do not contain such a requirement, the Court nonetheless found that Congress incorporated the common law definition of “defraud,” which includes a “misrepresentation or concealment of material fact.”41 The Court went on, however, to affirm [72/73]the conviction on the
ground that the jury instruction error did not affect the verdict and was therefore harmless.42
[2] The “Reasonable Reliance” Issue
Some circuits courts have suggested that, in order for a deception to be material, it must have been one upon which a reasonable person would have relied.43 These courts reasoned that, without such a requirement, even the most implausible deception would fall within the statute.44 Thus, the statutes’ reach would be unduly expansive.
For example, in United States v. Brown,45 the defendants were accused of defrauding home buyers by selling homes at above-market prices. The alleged misrepresentations included statements that the investments were safe, that rental income would exceed mortgage payments, and that the homes could be sold for a profit after a year. The Eleventh Circuit reversed the convictions, holding that a reasonable person would not have relied on these misrepresentations. Market
information was freely available to potential buyers, and a reasonable person thus would not have been deceived. The court expressed concern that a contrary holding would intrude into ordinary business dealings and result in over-criminalization.
In a later en banc decision, however, the Eleventh Circuit overturned Brown and aligned itself with the circuits that hold that mail fraud exists even if the person relying upon the deception is unusually gullible.46 The Seventh Circuit adopted a middle approach in United States v. Coffman.47 In that case, the defendants claimed on appeal that there was insufficient evidence of intent to defraud because the intended victim would never have fallen for their far-fetched scheme. In rejecting the argument, Judge Posner opined that the “reasonable reliance” requirement is simply a way of drawing the distinction, discussed above, between mere “puffing” and fraudulent behavior. Moreover, he noted, the victim’s level of gullibility may be relevant to prove the defendant’s intent to deceive; the greater the victim’s vulnerability, the more likely it is that the defendant made a highly implausible deceptive statement with the intent to defraud. The court concluded that “there is [73/74]a difference between lies so
small that they are discounted in advance, as part of the language of business, and so are harmless, and lies so large that the sophisticated see through them.”