Beginning in March 2020, the Supreme Court and the Ninth Circuit have decided several significant fraud cases clarifying the contours and applicability of the federal fraud statutes. First, the Ninth Circuit decided United States v. Miller, holding that wire fraud requires an intent to deceive and cheat. Then, a few months later, the Supreme Court decided “Bridgegate,” holding that the federal wire fraud and federal program fraud statutes require the defendant to deprive the victim of property. Now the trend continues with the Ninth Circuit’s recent decision in United States v. Yates when the court held that depriving an employer of accurate information does not constitute bank fraud. Curious what this means for future federal fraud prosecutions? Keep reading to find out.
Up until 1987, federal law prohibited using mail or wires (e.g., the internet) to advance a scheme to defraud, as well as using mail or wires to obtain money or property. Appellate courts throughout the country “interpreted . . . scheme . . . to defraud to include deprivation . . . of intangible rights.” In other words, courts understood the mail and wire fraud statutes as criminalizing the taking of money, property, or intangible rights. In particular, “federal courts . . . treated the breach of a duty . . . to one’s employer as a form of fraud [because] it operated to defraud the employer of the intangible right to the employee’s honest services.”
And then the Supreme Court decided United States v. McNally. There, the Court held that the mail and wire fraud statutes only criminalized schemes to defraud others of money or property. The result? The mail and wire fraud statutes did not apply to cases when a defendant defrauded another of their right to honest services. In response, Congress enacted 18 U.S.C. § 1346 which states that “scheme or artifice to defraud includes a scheme or artifice to deprive another of the intangible right of honest services.”
The Court’s decision in United States v. Skilling further clarified that federal law does not criminalize “undisclosed self-dealing (“i.e., the taking of official action by the employee that furthers his own undisclosed financial interests while purporting to act in the interests of those to whom he owes a fiduciary duty.”).
Since Skilling, the Supreme Court, and the Courts of Appeals have continued to limit the reach of federal fraud. The Ninth Circuit’s recent decision in United States v. Yates builds upon the legal principles and theories of its predecessors, including Skilling, Miller, and Kelly (i.e., Bridgegate).
United States v. Yates: “Something of Value,” Property, and Bank Fraud
In a 2015 Indictment, federal prosecutors alleged that Dan Heine and Diana Yates, both bank executives with the Bank of Oswego, conspired to commit bank fraud, in violation of 18 U.S.C. § 1349, and bank fraud, in violation of 18 U.S.C. § 1005. (Two years later, prosecutors dropped several of the bank fraud charges.) In sum, prosecutors alleged that both defendants committed bank fraud because they “concealed and omitted . . . material information about loans, the status of foreclosed properties . . . [and] material information about the true status of loans and assets.”
At trial, prosecutors “told the jury that Heine and Yates conspired to deprive the bank of . . . accurate financial information in the bank’s books and records . . . the defendants’ salaries and bonuses, and . . . the use of bank funds.” The jury then convicted both defendants of conspiracy to commit bank fraud and bank fraud.
Accurate Information Theory: Does an Employee Commit Fraud if They Provide Inaccurate Information to Their Employer?
On appeal, the defendants argued that the government’s closing argument was improper because, while discussing “something of value,” the government told the jury that “the defendants sought to deprive the bank and the board of directors of accurate financial information in the bank’s books and records.” The Ninth Circuit agreed that accurate information is not something of value and therefore, the “accurate-information theory is legally insufficient” to support a fraud conviction. In turn, the court vacated the defendants’ two conspiracy and twelve bank fraud convictions.
The Yates court reasoned the accurate information theory cannot support a fraud conviction because “[t]here is no cognizable property interest in the ethereal right to accurate information.” Although “a property right in trade secrets or confidential business information can constitute something of value,” employers’ “right to make an informed business decision and the intangible right to make an informed lending decision cannot.” The court continued, explaining that “[r]ecognizing accurate information as property would transform all deception into fraud.”
The Ninth Circuit’s Treatment of United States v. Skilling and the Salary Maintenance Theory
The court also rejected the government’s argument that the defendants committed bank fraud because they deprived their employer of “something of value” when they misrepresented the bank’s financial condition “to look better . . . so that they could get their own salaries and compensation. . .” The court explained, “there is a difference between a scheme whose object is to obtain a new or higher salary and a scheme whose object is to deceive an employer while continuing to draw an existing salary—essentially, avoiding being fired.”
In support of their holding, the Yates court looked to the Supreme Court’s 2010 Skilling decision, explaining the “[Supreme] Court … expressly rejected the suggestion that section 1346 [honest services fraud] covers undisclosed self-dealing by a . . . private employee.” [Undisclosed self-dealing is “the taking of official action by the employee that furthers [their] undisclosed financial interests” while working for an employer “to whom [they] owe a fiduciary duty.”] For example, in Skilling, the government argued that Jeffrey Skilling, the then-CEO of Enron, conspired “to defraud Enron’s shareholders by misrepresenting the company’s fiscal health” by “artificially inflating its stock price.” According to the government, Skilling “profited from the fraudulent scheme” when he sold his stock and received his salary and bonuses. However, because Skilling did not solicit or accept “side payments from a third party in exchange for . . . these misrepresentations,” he did not commit honest services fraud. Said another way, because Skilling acted to ensure he continued to get his salary and the associated financial perks, he did not violate § 1346.
The Yates court explained the “rejection of the salary-maintenance theory is persuasive” in the bank fraud context because otherwise, the government could “recharacterize schemes to defraud an employer of one’s honest services—thereby profiting through the receipt of salary and bonuses —as schemes to deprive the employer of a property interest in the employee’s continued receipt of a salary.” This “would [be] an impermissible” runaround of Skilling’s holding and therefore, is improper.
Invoking the Supreme Court’s decision in McDonnell v. United States, the Ninth Circuit warned the salary maintenance theory would also “criminalize a wide range of commonplace conduct,” such as “an employee who wastes time on the Internet but then, to avoid being fired, falsely claims to have been working productively.” [In McDonnell, the Supreme Court observed “prosecution, without fair notice, for the most prosaic interactions” raised significant due process concerns.] After all, “[e]xtending the fraud statutes [this] way” potentially triggers concerns “about whether the offense is defined with sufficient definiteness that ordinary people can understand what conduct is prohibited . . . in a manner that does not encourage arbitrary and discriminatory enforcement.”
The Ninth Circuit’s holding in Yates represents a broadening of federal courts’ interest and commitment to clarifying and confining the scope of the federal fraud statutes. While previous courts have addressed “property” in both the honest services and wire fraud context, the application of these principles to bank fraud is sure to trigger changes in fraud prosecutions, trials, and sentencing, as well as general federal white collar criminal defense.