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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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An argument often made, and almost invariably lost, by defense counsel seeking to dismiss charges under the mail fraud statute, 18 U.S.C. § 1341, and analogous wire fraud statute, 18 U.S.C. § 1343, is that the mailing (which can be intrastate or interstate) or wiring (which must be interstate) was so attenuated from the underlying scheme that it could not be said to “further” the execution or attempted execution of the scheme, as is required. United States v. Maze, 414 U.S. 395, 400 (1974). For example, in an embezzlement from an employer by which manual T&E checks are obtained by the employee through his submission of hand-completed expense reimbursement requests, the prosecution would argue -- likely with success -- that the scheme was furthered by a foreseeable interstate wiring, because the employer’s reimbursement check is drawn on an account at a bank with offices in other states, or whose checks clear through a regional institution. So an offense whose every meaningful activity appears to lack any interstate wiring, or any wiring at all, would arguably fall under the wire fraud statute.

But the recent case of United States v. Fiorito, 640 F.3d 338 (8th Cir. 2011) may have set a particularly low bar for the government to hurdle in proving mail fraud. Fiorito was convicted at trial of defrauding homeowners, who were behind on their mortgages, by convincing them to refinance or sell their homes, and then cheating them out of their equity, reflected in the proceeds of a refi or sale. Fiorito persuaded one charged victim to sell her house at a below-market price, so that he could resell it for full value; he even caused the victim-seller to give him, without her knowledge, a second mortgage to finance the purchase. However, Fiorito’s effort to resell the home and realize its full value was thwarted by the second mortgage of record.

So, Fiorito brought a quiet title action against the victim of his scheme, maintaining that the second mortgage had been paid off, in order to clear his fraudulently-obtained title of that encumbrance. In the course of the quiet title action, Fiorito’s attorney served discovery requests by mail to the victim’s attorney. The mailing of the discovery requests in the quiet title action was charged as one count in a multi-count indictment, and Fiorito was convicted of that mail fraud.

On appeal, Fiorito argued that the routine mailing by his attorney of discovery requests was not “in furtherance” of the fraud, which had seemingly been completed earlier when the victim unwittingly gave him a second mortgage and a below-market price on her house. The Eighth Circuit upheld the conviction, holding that the discovery requests -- not described in the opinion, so assumed to be routine interrogatories or document requests -- were mailed in furtherance of the fraud. The quiet title action was necessary to eliminate the obstacle to his resale of the house and so was undertaken in furtherance of the fraud, the court defensibly held. However, it is difficult to understand the further holding that the routine mailing of discovery requests advanced the fraud perpetrated on the victim or was meaningfully incidental to the scheme’s execution. Presumably, then, Fiorito’s attorney writing to a judge regarding a status conference or mailing in a notice of appearance would have “furthered” the fraud to the same extent, no matter how counterintuitive that may seem. The reasoning of Fiorito draws all meaning out of the phrase “in furtherance” and renders it instead as “mailings of indifferent importance which occurred at some point during the continuation of the underlying scheme.” That verbal attenuation from the Supreme Court’s formulation seems highly doubtful and at odds with controlling precedent.
 

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A consultant assisting local schools in obtaining federally-distributed funds intended to facilitate Internet connectivity at the schools was charged with defrauding the program, even though the funding applications which she prepared did not violate any of the regulations of the program. The jury rejected this defense and so, on appeal, did the Ninth Circuit.  United States v. Green, 592 F.3d 1057 (9th Cir. 2010).

Judy Green, a long-time teacher, retired to form a consulting business to guide local schools in applying for, and obtaining, grants under a Federal Communications Commission program which distributed funds to wire schools for the Internet. The schools were obliged to bear a small portion of the cost themselves and to secure through other means the computers and fax machines to be connected thereby. Green aggressively approached interested contractors to secure their agreement both to absorb the schools’ portion of the cost and to provide “bonus” computers and equipment. Once an application -- which apparently was not required to disclose such side arrangements -- was approved, the projects were put out for bid and the schools were permitted to select the winning, but not necessarily the lowest, bidder. As a result of her energetic efforts, the government paid more than would have been the case if contractors had not bid up their quotes to account for the extras.

Convicted of various conspiracy, fraud, and bid-rigging charges, Green argued on appeal that the government’s failure to prove that her actions were explicitly prohibited meant that no fraud had been proven. The court of appeals was unable to locate any case in which actions not expressly violative of law nonetheless were sufficient to constitute a violation of the fraud statutes. However, drawing upon cases which had rejected the defense that actions in compliance with state law could not form the basis of a federal fraud conviction, the Ninth Circuit held that the government need only prove a scheme to defraud, not that the scheme or its components actually violated any federal regulation or rules.

To be sure, this case did not present the most appealing circumstances for a defense of technical compliance with regulations. With better facts, there may be a more compelling argument than Green could muster in light of her wheeling and dealing and the resulting overcharges to the government.

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The Ninth Circuit recently reversed wire fraud convictions on the ground that the wire transfers upon which the 18 U.S.C. § 1343 charges were based occurred so long after the underlying activity was completed that the transfers could not be said to be "in furtherance" of a fraud. United States v. Lazarenko, No. 06-10592 (9th Cir., April 10, 2009).

In Lazarenko, the defendant, a Ukrainian official, had allegedly used his position to receive money and ownership interests in various entities, and allegedly had caused millions of dollars in such monies to be deposited into United States bank accounts. In 1993 and 1994, the evidence showed, Lazarenko had received some $14 million which ended up in this country. Years later, in 1997 and 1998 the defendant caused wire transfers of a portion of those funds to be made, and was charged with wire fraud, among other charges. But the Ninth Circuit held that the intervening three or four years, during which time the monies simply remained on deposit, was too long a period of time to conclude that the later transfers were "in furtherance" of the original scheme which led to the deposits:

"If the government's theory were correct, then it would be possible for an ordinary fraud to be converted into wire fraud simply by the perpetrator picking up the telephone three years later and asking a friend if he can store some fraudulently-obtained property in his garage before the police execute a search warrant or later taking the proceeds of fraud and transferring them to another bank." No rational trier of fact could conclude that the later transfers were "in furtherance" of the earlier fraud, and the convictions on those counts were reversed.
 

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