After a jury in a federal prosecution convicted Lawrence
Shaw of “17 counts of bank fraud in violation of” 18 U.S. Code § 1344(1), he
appealed. U.S. v. Shaw, 2015 WL 1379731 (U.S. Court of Appeals for the 9th Circuit 2015). The Court of Appeals begins its opinion in the case by outlining
how the prosecution arose:
The charges . . . arose from a scheme
Shaw devised to take money from bank accounts belonging to Stanley Hsu, a
Taiwanese businessman. Hsu opened a Bank of America account while working in
the United States. When he returned to Taiwan, he arranged for the daughter of
one of his employees to receive his mail in the States and forward it to him in
Taiwan. Shaw was living with the daughter and routinely checked her mail. When
Hsu's Bank of America statements began to arrive, Shaw opened them and learned
Hsu's account and personal information.
Shaw used the information from Hsu's
statements to execute the following scheme: he opened an email account in Hsu's
name, then used this email account and Hsu's personal information to open a
PayPal account. Shaw `linked’ the PayPal account to Hsu's account with Bank of
America. He was able to circumvent PayPal's security measures because of his
access to the information in Hsu's bank statements.
On June 4, 2007, Shaw opened two
accounts with Washington Mutual under the name of his father, Richard Shaw,
without his father's knowledge or permission. One account was a savings account
(`Tier 1’ account), which Shaw linked to the fake Hsu PayPal account. During
the process of linking the Tier 1 account with the Hsu PayPal account, PayPal
identified the request as suspicious. PayPal sent an email to the fake Hsu
email account asking for additional information. In response, Shaw faxed PayPal
a copy of Hsu's Bank of America account statement, and a bank statement he had
altered to appear as if Hsu owned the Richard Shaw accounts. He also sent a
copy of Hsu's driver's license, which he had altered to have a younger birth
date. On the basis of these falsified documents, Washington Mutual and PayPal
allowed the savings account in the name of Shaw's father and the PayPal account
in Hsu's name to be linked.
The second account Shaw opened in his
father's name was a checking account (`Tier 2’ account). This account was
linked to the Tier 1 savings account. Shaw's scheme ultimately siphoned the
funds into a third Washington Mutual account, a joint account which Shaw had
previously opened in his and the daughter's name, although without her
knowledge.
U.S. v. Shaw, supra.
The court goes on to explain that
[o]nce the accounts were set up and
linked, Shaw began to withdraw money from Hsu's Bank of America account through
a series of online transfers and checks written to himself. He would transfer
money from the Hsu Bank of America account first to the Hsu PayPal account,
then transfer it from the Hsu PayPal account to the Tier 1 savings account with
Washington Mutual. Then, Shaw would transfer money from the Tier 1 account to
the Tier 2 checking account, which allowed him to write checks to himself,
signing his father's name. Finally, he would deposit those checks into the
Washington Mutual joint account that he controlled.
Using this scheme, Shaw was able to
convince the banks to transfer and release approximately $307,000 of Hsu's
money to Shaw between June and October 2007. Hsu's son discovered the missing
money in October 2007, reported the fraud and closed the Bank of America
account.
Bank of America returned approximately
$131,000 to Hsu, covering the fraudulent activity that occurred within 60 days
of the reported fraud. PayPal reimbursed Bank of America for this amount. In
the end, PayPal bore approximately $106,000 of the loss and Hsu over $170,000,
because Hsu did not notify the banks of the losses within 60 days of many of
the fraudulent transactions, as the parties all agree was required by standard
banking practice.
U.S. v. Shaw, supra.
The dispute between the parties centered on the instructions
the U.S. District Court Judge who had the case gave the jury. U.S. v. Shaw, supra. As Wikipedia
explains, in the United States the judge decides questions of law while the jury is the
trier of fact, i.e., they determine what facts were, and were not, proven
beyond a reasonable doubt in criminal trials. The
trial judge instructs the jury on the applicable law before excusing them so
they can deliberate on their verdict
At Shaw’s trial, the defense’s theory of the case was that
a bank fraud conviction under [18
U.S. Code § 1344(1)] requires fraudulent intent to expose the bank itself
to monetary loss, and Shaw intended only to expose PayPal and Stanley Hsu to
any monetary loss. Shaw argued that `intent to defraud means intent to deceive
and cheat the bank. Shaw therefore asked for jury instructions which would
require the government to prove that Shaw had intended the bank to be not only
the target of the deception, but to suffer an actual loss or risk of loss as
the financial victim of the fraud.
U.S. v. Shaw, supra.
The District Court Judge declined to give Shaw’s
instructions because he “concluded that risk of loss was an element that the
bank fraud statute did not require, and that the bank need not be an intended financial
victim of the fraud.” U.S. v. Shaw, supra. He therefore gave the
jury these instructions:
`[f]or the defendant to be found guilty
of bank fraud, the government must prove each of the following elements beyond
a reasonable doubt:
First, the defendant knowingly executed
a scheme to defraud a financial institution as to a material matter;
Second, the defendant did so with the
intent to defraud the financial institution; and
Third, the financial institution was
insured by the Federal Deposit Insurance Corporation. . . .
The phrase `scheme to defraud means any
deliberate plan of action or course of conduct by which someone intends to
deceive, cheat, or deprive a financial institution of something of value. It is
not necessary for the government to prove that a financial institution was the
only or sole victim of the scheme to defraud. It is also not necessary for
the government to prove that the defendant was actually successful in
defrauding any financial institution. Finally, it is not necessary for the
government to prove that any financial institution lost any money or property as
a result of the scheme to defraud. . . .
An intent to defraud is an intent to
deceive or cheat.’
U.S. v. Shaw, supra.
As noted above, the jury convicted Shaw and he appealed. U.S. v.
Shaw, supra.
The District Court Judge then analyzed the issues, noting that
in Loughrin v. U.S., 134 S. Ct. 2384 (2014), the
Supreme Court construed the second clause, and held that it does not require
the government to prove the defendant intended to defraud the bank.
Section 1344(2) targets schemes to
obtain property held by the bank via misrepresentation to a third party,
while § 1344(1) penalizes schemes to defraud the bank itself. See Loughrin
v. U.S., supra. The Supreme Court effectively required courts to treat the
two clauses separately, holding that while they overlap substantially, the
clauses are disjunctive and establish distinct offenses. See Loughrin
v. U.S., supra.
In holding that the clauses create
separate offenses, the Court rejected the reasoning of the Third Circuit. See Loughrin
v. U.S., supra. The [U.S. Court of Appeals for the 3rd Circuit] held
that clauses 1 and 2 conjunctively create only one offense, and thus all
violations of the statute require both the intent to defraud the bank and that
the bank be exposed to a risk of loss under the relevant law. U.S. v.
Thomas, 315 F.3d 190 (2002) (holding that under both clauses, `a
defendant must intend to cause a bank a loss or potential liability, whether by
way of statutory law, common law, or business practice’). . . . The Supreme
Court expressly held that § 1344(2) does not require either intent to
defraud a bank or a risk of loss to a bank. Loughrin v. U.S., supra.
In doing so, it emphasized that intent to defraud a bank is the essence
of § 1344(1). Loughrin v. U.S., supra.
U.S. v. Shaw, supra.
The Court of Appeals then applied these principles to this
case, noting that Shaw’s
argument . . .
therefore focuses on the difference between the two clauses. He points out that
the second clause covers schemes intended to obtain a third party's property.
He argues that the first clause, under which he was convicted, therefore must
require that a defendant intend to obtain the bank's property. Thus, he asks us
to conclude that a conviction under § 1344(1)
a showing that the defendant intended to expose the
bank to the principal risk of loss. Such a requirement was not satisfied since,
in this case, Shaw intended his principal target to have been the bank's
customer, Hsu.
U.S. v. Shaw, supra.
The court goes on to explain that Shaw therefore
seeks to characterize the difference
between the two clauses as involving the intended financial victim of the
fraud, i.e., the intended bearer of the loss. The language of neither clause of
the statute, however, refers to monetary loss or to the risk of such loss. The
statutory language focuses on the intended victim of the deception, not the
intended bearer of the loss. Section 1344(1) requires the intent to
deceive the bank. Section 1344(2) requires false or fraudulent
representations or pretenses to third parties.
The Supreme Court made this point
in Loughrin when it noted that the second clause was intended
to broaden the scope of bank fraud to include schemes that did not involve
deception of the bank directly, such as schemes to use stolen credit
cards. Loughrin v. U.S., supra. Section 1344(1) thus covers
schemes to deceive the bank directly. Neither clause requires the government to
establish the defendant intended the bank to suffer a financial loss.
U.S. v. Shaw, supra.
Finally, Shaw “stress[ed]” that under
the applicable law, the bank, in the
end, did not actually lose anything. The losses ultimately fell on Hsu for
failing to spot much of the fraud within the legally required 60 days, and on
PayPal, which had to reimburse the bank for the rest. Shaw therefore asks us to
conclude that he could not have intended to defraud the bank.
A similar argument with respect to
clause 2 was dismissed summarily in Loughrin on the ground
that the federal statute was intended to avoid having cases turn on the
technical ramifications of banking law. Loughrin v. U.S., supra. In
characterizing § 1344(2), the Court said the language `appears calculated
to avoid entangling courts in technical issues of banking law about whether the
financial institution or . . . a depositor would suffer the loss from a
successful fraud.’ Loughrin v. U.S., supra.
We conclude that the same legislative
intent must be ascribed to § 1344(1). There is no reason to believe
Congress wanted courts to become more entangled in such technical issues under
the first clause than under the second clause.
U.S. v. Shaw, supra.
The Court of Appeals therefore held that the District Court
Judge “correctly refused [jury] instructions” that added the element of an
intent to defraud a bank to the 18 U.S. Code § 1344(1) crime. U.S. v.
Shaw, supra. It affirmed Shaw’s
conviction. U.S. v. Shaw, supra.
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