Wednesday, April 01, 2015

Bank Fraud, PayPal and "Loss"

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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