A business man walked into a high-end night club filled with beautiful women seemingly eager to meet him. They flirted shamelessly with him all the while coyly encouraging him to buy enough alcohol to get himself drunk. The women, referred through the annals of time as Bar or B girls, were experts at teasing the men lured into the nightclub, flattering them into thinking that the more time and money they spent at the bar, the greater likelihood their “investment” would lead to sex. It was clear in hindsight, that whatever the B Girls said or signaled that sex was possible, they were being deceptive. Sex was out of the question.
By the end of the evening, the men were drunk and going home alone. A good time was had by all until the men got their credit card statements. Turns out that while they were drinking, partying, and ogling the girls, the night club owners and managers were hitting their credit cards for thousands of dollars. These men were all victims of a massive scheme to defraud that netted the nightclub millions of dollars. The police get involved, and everyone, including the B Girls were indicted in Federal Court for using the mail and interstate wires to perpetuate a “scheme to defraud” the men who had their credit cards fraudulently charged. The question was whether the B Girl’s, who’s role in getting the men drunk was essential to the scheme to defraud could be held criminally liable for the overall scheme, which was the fraudulent charges on the men’s’ credit cards? Put another way, was their admitted deception part of the credit card fraud or was holding them responsible for the night club’s fraud a fraud too far?
Now let’s go to a phone room, sometimes characterized as a “boiler room,” where salesmen sell stock over the telephone. A salesman cold called a potential investor touting a penny stock. Although tempted to hang up the phone, the man stayed on the line when the salesman described the innovative product the company manufactures as well as its endorsement and investment by recognized industry leaders. The salesman claimed that he works for the company, not a brokerage firm. He offered an opportunity to buy stock directly from the company at a 50% discount from the price listed on the Over the Counter (OTC) exchange, which could be easily verified. The money received from the sale of the stock would go directly to company operations increasing the chance that the company will prosper, and the stock price will skyrocket. The salesman sent the potential investor newsletters and articles from respected financial news websites before the decision to buy was made. Although the salesman believed that the material sent to the investor by the company was true and accurate, that was not the case and thus had made a number of deceptive claims during his pitch. For instance, sometimes he gave a false name, suggested that he worked directly with the company as an employee and falsely claimed he was not receiving a commission for the sale. Convinced that he is getting in on the ground floor of a great investment, the investor ponied up the money and buys the stock.
After a while, the listed price of the stock goes to zero and the investor lost all his money. It turned out that the owners of the company had set up the phone room to sell their stock, and they pocketed 90% of the proceeds from the sales. There was never any intention to invest the money in the company. To further their scheme, they and their confederates gave the salesmen false or exaggerated press releases that they would use to push the sale. The salesman was unaware of these facts at the time he made the sale. Nonetheless, he was indicted along with the owners of the company for participating in a mail and wire “scheme to defraud.” Admittedly, there was some deception in the sales pitch, and that deception may have induced the investor to buy. At the time of the sale, the salesman thought he was selling a valuable stock for a reasonable price with a good chance of increasing as the company grew into profitability and possibly was listed on the NASDAQ. The question here was whether the deceptions knowingly made by the salesmen, while important in inducing the investor to buy the stock, were part of the overall scheme to defraud by the owners, who stole the money when the salesmen did not know that the money was being stolen? Was holding the salesmen liable for the overall scheme by the owners based on their deceptions employed to get the investors to buy the stock at a time when it had a verifiable value, but that eventually tanked to huge losses a fraud too far?
I recently addressed these questions in a Federal case prosecuted in the Miami, and convinced the District Court to recognize that the two scenarios presented above stand for the same principle of law: While a scheme to defraud will always include a scheme to deceive, not every scheme to deceive is a scheme to defraud.
The case was United States vs. Matthew Wheeler, Case No. 16cr20715. My client was a salesman. Miami U.S. District Judge Marcia Cooke issued a Judgment of Acquittal Notwithstanding the Verdict, which the jury had rendered against Mr. Wheeler on the Conspiracy to Commit Mail and Wire Fraud surrounding the sale of Sanomedics, LLC and Fun Cool Free, LLC stock through telephone sales.
The B Girls case was also prosecuted in Miami, and the B Girls were convicted at trial. On appeal to the U.S. Court of Appeals for the Eleventh Circuit, their convictions were reversed because the District Court had refused to give a jury instruction that would have recognized that their admitted deception was not part of the overall scheme to defraud unless the Government could prove that they were aware of it. United States vs. Takhalov, 827 F.3d 1307 (11th Cir. 2016)
How could these two entirely different fact scenarios be relevant to each other when determining criminal liability? The answer lay when the deceptions of the B Girls was compared with the deceptions of the stock salesmen. The B Girls deceived the men into buying them drinks by suggesting sex. The men would not have bought the drinks if they had not thought it would increase their chances of having sex. However, the men got the alcoholic drinks that they paid for. Unless the Government could prove that the B Girls knew that the nightclub owners wanted the men drunk, so they would be less likely to notice their credit cards were being charged, their deceptions were not part of the overall scheme to defraud.
In the Wheeler case, the stock salesman was also using deception to sell a stock, but the investor likewise got what he paid for. The salesman did not know of the overall scheme to defraud, and thought he was selling something of value for a reasonable price. His scheme to deceive was not a part of the scheme to defraud unless the Government could prove he was aware of it. Judge Cooke recognized that if the Government could not prove that awareness, then the evidence was legally insufficient to convict him of a conspiracy to commit wire and mail fraud. The Government is appealing this decision.
The holdings in both of these cases are a welcome development in white collar cases. The law should protect people who unknowingly further a scheme to defraud, but may look bad because they did say or do things that could be said to have deceived the victims. It would only provide cover those lower level participants who were pawns in the larger scheme. Nonetheless, these principles will help people who get involved in questionable schemes where they find out after the fact that they were used to promote a much larger fraud.
In World War II, as the Allies were advancing through Holland to Germany, an ambitious mass paratrooper drop behind German lines was planned. The paratroopers were to take and hold the bridges for the tanks. The plan worked except at Arnhem, which was right at the German border. The tanks could not get there in time. It was a bridge too far.
In these types of mail and wire fraud cases, the Government typically casts a wide net. Ambitious prosecutors try to charge everyone, hoping that even the low-level participants will fold and cooperate if they think that any of their deceitful representations might nail them with liability for the larger scheme to defraud. If the development of a legal doctrine protecting salesmen, for instance, who might have practiced some deceit to sell a product they really believed was legitimate, and who were not fully aware of the scope of the real fraudulent scheme they were advancing, the Government might begin to refrain from trying to extend its reach all the way down to the bottom of the totem pole in order to attribute the fraudulent scheme to them. A useful way to see if an argument like this exists in any given case is to look at what the investor or whoever is determined to be the victim, got in return for their money. If the victim got something of value, or at least something who’s value could be reasonably ascertained, then the deceptions that convinced him to make the purchase, may not put the salesman in jeopardy for conspiracy to commit mail and wire fraud based on an overall scheme to defraud. Maybe this restraint will become the rule with prosecutors, particularly Federal prosecutors who bring these mail and wire fraud schemes to Indictment. They might realize that going after the little guys for their transgressions might be a fraud too far.