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Edward J. Mullins III, Esq. writes:

The Tenth Circuit recently held that a defendant’s operation of an internet website, which was uploaded, hosted, and accessed from different states, in furtherance of his fraudulent practice of law, was sufficient interstate to support a wire fraud conviction in United States v. Kieffer, No. 10-1391, slip op. at 20-21 (10th Cir. June 11, 2012). The federal wire fraud statute, 18 U.S.C. § 1343, requires proof of an intentional scheme to defraud and the use of interstate wire communications to further that scheme. Sparking this particular battle was the Tenth Circuit’s precedent that a person’s use of the internet, “standing alone,” was insufficient evidence that an item had “traveled across state lines in interstate commerce.” United States v. Schaefer, 501 F.3d 1197, 1200-01 (10th Cir. 2007). (In this regard, the Tenth Circuit departs from its sister circuits, which have held that use of the internet alone does satisfy an interstate commerce element. See United States v. Lewis, 544 F.3d 208, 214-16 (1st Cir. 2009) (transmitting child pornography); United States v. MacEwan, 445 F.3d 237, 244 (3d Cir. 2006) (same)).

Kieffer ran a nationwide unlicensed criminal law practice based in California, advertising his services through his website hosted in Virginia. He actually appeared on behalf of clients in state and federal trial and appellate courts throughout the country, including a murder for hire defendant in Colorado. The victim’s brother, who retained the defendant, viewed the website in Tennessee; the victim’s court-appointed public defender viewed it from Colorado. A jury convicted the defendant of making false statements in violation of § 1343, among other violations. The jury found that the defendant had used the website to promote his unauthorized practice of law, to convince the brother and public defender that he was authorized to practice law, and to swindle tens of thousands of dollars in counsel fees.

The court held that “[t]he presence of end users in different states, coupled with the very character of the internet” permitted the jury to infer transmission across state lines, satisfying the interstate commerce element. Kieffer, slip op. at 19. The court distinguished Schaefer, explaining that one individual’s use of the internet may not necessarily involve an interstate transmission because, arguendo, the content could be uploaded, hosted, and retrieved in the same state. Id. at 21. The identical content of the defendant’s website, accessed from both Colorado and Tennessee computers, without local hosts in either state, must have crossed state lines. Id. at 21-22. Thus, the use of the internet to promote fraudulent services or products continues to excite creative prosecutors and to broaden wire fraud liability for defendants.
 

(Edward J. Mullins III, Esq., the author of this entry, is an associate with Fox Rothschild LLP, based in our Roseland, NJ office. His practice concerns litigation in the areas of financial services and corporate governance, including white collar defense and securities).

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Alain Leibman writes:

I was privileged on Saturday, March 24th, to speak as part of a panel addressing the ABA Business Law Section's annual meeting in Las Vegas, Nevada on the subject of "New and Evolving Threats from the Responsible Corporate Officers Doctrine."  The RCO doctrine permits misdemeanor prosecutions without any proof of intent whatsoever, where the defendant corporate officer holds sway over an area of corporate activity in which there has been a violation of law by someone else in the company.

The RCO doctrine began its germination in the federal Food, Drug and Cosmetic Act, where its use was approved in an 1975 Supreme Court case to charge an officer with product misbranding, even though the officer had no culpable knowledge of the offending activity.  Its use has gained steam in the last five years and the Department of Justice has employed the doctrine in seeking prosecutions of corporate officers in the environmental area, as well.

While misdemeanor prosecutions might be thought of as a low-level threat, based on the assumption that misdemeanants do not go to jail, recent developments suggest otherwise.  First, a recent series of prosecutions of officers of a medical device company in the Eastern District of Pennsylvania, in which those officers pled guilty to misdemeanor violations under the RCO doctrine, led surprisingly to significant terms of jail for each of them, albeit no more than the 12 month maximum allowable for a misdemeanor conviction.  Second, the Department of Health and Human Services has recently handed down draconian periods of exclusion for corporate officers of another health care company who had pled guilty to misdemeanor violations pursuant to the doctrine and had not received jail sentences; these exclusions from the industry for periods of 10 years and more would effectively end the careers of those officers if upheld.

In short, defense counsel and in-house counsel need to be cognizant of the dangers posed by prosecutors' aggressive use of this vicarious criminal liability doctrine, which marks a radical departure from the usual requirements of finding criminal intent (or at least negligence in certain environmental areas) before prosecuting.

(Alain Leibman, Esq., the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office. A former decorated federal prosecutor, he practices both criminal defense and commercial litigation in federal and state courts)

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New York state has in recent years increased its efforts to crack down on contractors who violate the state’s employment, wage and hour, and tax laws. For instance, in October 2010, New York’s “Construction Industry Fair Play Act” took effect, codified as Section 861-C of the Labor Law; the Act provides tools with which to prosecute construction industry contractors who misclassify employees as independent contractors. Evidently, the State seeks to recoup hundreds of millions of dollars it believed it was losing as a result of employers failing to remit the correct payroll taxes to the State.

New York more recently ramped up its efforts to target contractors in all industries, as well as other entities that do business with the state. On January 27, 2011, New York State Attorney General Eric Schneiderman announced the creation of a “Taxpayer Protection Unit” within his office to investigate and prosecute corrupt government contractors and the bolstering of an existing Medicaid Fraud Control Unit. The new unit will seek to enforce New York’s False Claims Act, a statute originally enacted in 2007 and recently amended, that -- like the long-standing federal False Claims Act, 31 U.S.C. §§ 3729-3733 -- incentivizes whistle-blowers to come forward with evidence of fraud by offering them up to 30% of the proceeds recovered and also allows the government to recover up to three times the losses associated with the fraud. 

The federal statute is widely considered to be a model of a successful fraud-fighting enactment, especially in areas such as health care fraud, because of the incentives afforded whistle-blowers to come forward and the publicity accorded the resulting prosecutions and civil settlements.  It remains to be seen if New York's version approaches that level of success over time.
 

(Alain Leibman, Esq., the author of this entry, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office.  A former decorated federal prosecutor, he practices both criminal defense and commercial litigation in federal and state courts)

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In the wake of the subprime crisis and economic crisis, Senator Patrick Leahy (D-Vt.) and Senator Chuck Grassley (R-Iowa) have recently introduced the Fraud Enforcement and Recovery Act of 2009 (“FERA”) to provide the federal government with more tools to investigate and prosecute financial fraud in the mortgage industry. See Fraud Enforcement and Recovery Act, S.386, 111th Cong. § 2 (2009). Section 2(a) and 2(b) of FERA broadens the definition in Title 18 of “financial institution” to include “mortgage lending business,” which is defined as “an organization … which finances or refinances any debt secured by an interest in real estate, including private mortgage companies and any subsidiaries” whose activities affect interstate commerce. Id.

The amendments assure that private mortgage brokers and companies are held accountable under federal fraud laws. Without the amendments, for example, the financial institution bribery statute would not extend beyond traditional banks and financial institutions. See 18 U.S.C. § 215; see also 18 U.S.C. § 1344 (bank fraud statute); 18 U.S.C. § 225 (continuing financial crimes enterprise); 18 U.S.C. § 1005 (false statement, entry or record). The new definitions would also provide for greater sentences for institutions affected by mail and wire fraud.
Similarly, Section 2(c) of FERA would amend the false loan application statute (18 U.S.C. § 1014) to include making materially false statements or to willfully overvalue a property in order to influence any action by a “mortgage lending business.” Other changes proposed by the Section 2 of FERA include amending the federal major fraud statute (18 U.S.C. § 1031) and its enhanced penalties to include fraud associated with the Troubled Asset Relief Program (“TARP”) or any economic stimulus package and amending the securities fraud statute (18 U.S.C. § 1348) to include commodities fraud. See Fraud Enforcement and Recovery Act, S.386, 111th Cong. § 2(d)-(e) (2009).

Critics of Section 2 of FERA may argue that the bill is unnecessary and counterproductive. For example, the mail and wire fraud statutes already reach all fraud perpetuated against a “mortgage lending business” because those statutes are not limited to crimes involving financial institutions. See 18 U.S.C. §§ 1341, 1343. Also, any fraud associated with the TARP funds and any other economic relief can presently be prosecuted under the mail and wire fraud statutes. Id. The penalties under both statutes are severe, up to $1 million in fines and 30 years in prison.
With respect to Section 2(c) of FERA, the critics argue that amending § 1014 is unnecessary because the mortgage lending businesses do not operate in a vacuum, and any false statement made on a mortgage application to a mortgage lending business will eventually influence another organization along the financial or real estate spectrum. Critics also argue that amending the securities fraud statute to include commodities fraud is unnecessary because commodities fraud can be prosecuted under many statutes, like theft, embezzlement, mail and wire fraud statutes, and violations of the Commodities Futures Trading Commission regulations.

FERA is still in its initial stages of the legislative process. On February 11, 2009, a hearing took place in the Senate regarding the “The Need for Increased Fraud Enforcement in the Wake of the Economic Downturn.” While it remains to be seen whether the current version Section 2 of FERA actually becomes law, given the current economic crisis and political climate, some changes are likely to come, even if, as the critics claim, they are redundant and unnecessary.
 

(With appreciation to Amit Shah, Esq., for contributing this entry)

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