Mimesis Law
2 June 2020

Pantalones En Fuego: Appellate Court Rules On How Much Deception It Takes For Fraud Convictions

Apr. 25, 2016 (Mimesis Law) — For most learned minds, it’s a foregone conclusion that the federal criminal code casts a very wide net.  Too wide of a net, in fact, with over four thousand federal statutes in the books, ten thousand* if we throw in federal regulations.  All the more reason to check out three recent appellate decisions, which clarify just how much (and what type of) lying it takes for someone to be convicted of mail or wire fraud in federal court.  The New York Times’ DealB%k has the story:

How much imperfection is required to be convicted of the federal crimes of mail and wire fraud has been clarified, at least a little bit, by recent appeals court decisions recognizing that some lying is acceptable, and even expected, in the business world.

The United States Court of Appeals for the Seventh Circuit in Chicago overturned the conviction of David Weimert, a former vice president of AnchorBank in Wisconsin. He was charged with wire fraud for his role in the sale of the bank’s share of a commercial real estate development in Texas in which he took a minority position in the deal along with the buyers.

The other two decisions deal with people who were admittedly “misleading” those on the other side of the negotiating table, but whose conduct was nonetheless found not to run afoul of the fraud statute and a Securities and Exchange Commission’s regulation, respectively.  The defendants are, in essence, saying, “yes, there was some deception involved with these deals, but our conduct was not criminal when viewed in conjunction with the wire fraud or mail fraud statutes.” It’s as if the appellate courts are telling the trial judges, “you’ve got much worse stuff to deal with.”

The case from the Seventh Circuit dealt with someone who used some good old-fashioned chicanery to get the better part of a business deal:

It turns out that Mr. Weimert misled both sides about his role in the deal. He told the buyers that AnchorBank wanted him to take a piece of the transaction, while informing the bank that the buyers insisted he come in as a partner in the deal. When the sale closed, the bank got about a third more than it expected to make.

He was convicted of five counts of wire fraud at trial and sentenced to 18 months in prison. But the appeals court concluded there was not enough evidence to show any fraud despite his not telling the truth to either side, taking the rare step of ordering that Mr. Weimert be acquitted of the charges.

The back and forth negotiations involved some deception, some withholding of Weimert’s proverbial “hand,” but the court held that whatever concealment or misrepresentation occurred during the negotiations was not criminal conduct.  This is the classic case of the government using the criminal code to overreach, of getting involved in something it didn’t have to.  This is the anathema of laissez faire, regardless of someone’s political leanings.  And the appellate court determined that Weimert’s conduct was something that is commonplace in most business negotiations, and (most importantly) not criminal conduct:

We reverse and order judgment of acquittal. Federal wire fraud is an expansive tool, but as best we can tell, no previous case at the appellate level has treated as criminal a person’s lack of candor about the negotiating positions of parties to a business deal. In commercial negotiations, it is not unusual for parties to conceal from others their true goals, values, priorities, or reserve prices in a proposed transaction. When we look closely at the evidence, the only ways in which Weimert misled anyone concerned such negotiating positions. (Emphasis added.)

These kinds of prosecutions create the wrong kind of deterrent: negotiators will think thrice before engaging in any bluffing and puffery, possibly depriving her client of the best possible deal.  Just because you’ve got a bludgeon called the federal criminal code doesn’t mean that it has to be used in all circumstances.  This is where prosecutorial discretion and perspective come into play.  And this is not the only recent decision from an appellate court that has reminded us that the government must prove the pertinent mens rea requirement before it gets to convict.

Plus, in Weimert’s case, there was no actual victim, as Peter Henning points out:

Do these decisions give a judicial imprimatur to lying? No judge will ever take a position against telling the truth, but in a criminal fraud prosecution, the government must do more than just show a deception, even one that helps make money.

Fraud is a type of larceny, so there must be a victim who has been improperly deprived of something of value. If one side should expect to be lied to, then the message is to take any representations with a large dollop of salt, and not complain too much about somehow being deceived when trying to make a deal. (Emphasis in original.)

Weimert’s case reminds us that even the “bad” type of defendant, the kind we all  love to despise, can have a case that makes “good” law for everyone else.

*Ed. Note: By some calculations, the number is closer to 35,000.

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