Does the term “defraud” in 18 U.S.C. § 1344(1) require proof of a specific intent to target the financial institution’s property, in addition to intent to deceive a financial institution?
This case presents the Supreme Court with an opportunity to decide whether the plain language of the federal bank fraud statute requires proof of, in addition to intent to deceive a financial institution, a specific intent to target the financial institution’s property. The case arises out of Lawrence Eugene Shaw’s conviction of bank fraud under 18 U.S.C. § 1344(1), after Shaw withdrew funds from a Taiwanese businessman’s Bank of America account, albeit without any harm to Bank of America. Shaw argues the plain language of § 1344(1) requires proof of intent to deprive that institution of its own property. The government responds that because the Congressional intent behind the statute was to target all forms of bank fraud, the statute must be interpreted broadly: without concern for schemers’ mental states as to whose property they sought to defraud. Potentially at stake is the balance between federal and state police power, with federal police power increasing the broader the Supreme Court interprets a statute.
Questions as Framed for the Court by the Parties
Does the bank-fraud statute, 18 U.S.C. § 1344, subsection (1)’s “scheme to defraud a financial institution” require proof of a specific intent not only to deceive, but also to cheat, a bank, as nine circuits have held?
Lawrence Eugene Shaw was convicted under 18 U.S.C. § 1344(1) for executing a scheme to obtain funds from a Bank of America (“BoA”) account belonging to Stanley Hsu, a Taiwanese businessman. Hsu, while working in the United States, opened an account with BoA. Upon returning to Taiwan, he had BoA send his statements to his employee’s daughter, who would then forward the statements to Hsu. Shaw lived with the employee’s daughter and regularly collected her mail. He thus stumbled upon Hsu’s BoA statements and used them to plan and execute a scheme to defraud Hsu.
First, Shaw opened a PayPal account in Hsu’s name and linked it to the BoA account. Then, on June 4, 2007, Shaw opened two savings accounts with Washington Mutual Bank (“WaMu”) in his father’s, Richard Shaw’s, name without his permission. Shaw then requested PayPal to link these accounts to the fake PayPal account. Shaw bypassed PayPal security by sending PayPal a copy of Hsu’s BoA statement, falsified driver’s license, and WaMu statements altered to list Hsu as an owner of the WaMu accounts.
Shaw then opened a WaMu checking account, linking it with the WaMu savings account. He transferred funds from Hsu’s real BoA account to the PayPal account, from the PayPal account to the WaMu savings accounts, and from the WaMu savings accounts to the WaMu checking account. Shaw used the WaMu checking account to write checks to himself and pay his expenses. Since initiating this fraud in June 2007 until October 15, 2007, Shaw withdrew over $307,000 from Hsu’s BoA account. In October, Hsu discovered the fraud and reported it to BoA. BoA closed the compromised account and reversed 16 transfers, recovering about $131,000. In reimbursing BoA, PayPal suffered a net loss of $106,000. Hsu, in turn, suffered a loss of over $170,000. BoA did not suffer any financial loss.
A federal grand jury indicted Shaw on 17 counts of bank fraud, which 18 U.S.C. § 1344(1) defines as “knowingly execut[ing], or attempt[ing] to execute, a scheme or artifice . . . to defraud a financial institution.” At trial, Shaw argued that he could not be convicted under § 1344(1) because the object of his fraud was Hsu and not BoA. He requested a jury instruction that § 1344(1) requires intent to expose the bank to monetary loss. The district court rejected Shaw’s proposed instructions, holding that risk of loss was not an element of § 1344(1). The jury convicted Shaw on December 13, 2012.
Shaw appealed to the Ninth Circuit, arguing that he was prosecuted under the wrong section, and that § 1344(2) should have applied. Section 1344(2) prosecutes individuals for “obtain[ing] any of the moneys . . . owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses.” The Ninth Circuit rejected Shaw’s argument and affirmed the conviction on March 27, 2015.
DOES INTENT TO DEFRAUD INVOLVE MORE THAN INTENT TO DECEIVE?
Shaw argues that Congress intended for knowing execution of a scheme “to defraud a financial institution” to mean not only intending to deceive a bank, but also intending to cheat the bank by taking bank-owned property. Shaw notes that the focus of the statute is the scheme itself, rather than its result, which he argues is an indication that the schemer’s intent is central to the statute. Shaw contends that the Supreme Court has a long-standing precedent of interpreting “defraud” to involve schemes aimed at depriving victims of their property rights through deception. Thus, Shaw argues that the wording of the statute requires the Court to hold that convictions under § 1344(1) require not only intent to deceive a financial institution, but also intent to deprive the financial institution of its own property.
The government counters that intent to defraud a bank can be proven by mere evidence of intent to deceive the bank, citing the common law interpretation of the word “defraud.” While the government admits that intent to cause harm is often an element of “defraud” at common law, it argues that this intent is only applicable to determining punishment rather than culpability. As for Congress’s purpose for the bank-fraud statute, the government maintains that Congress discussed requiring intent to harm the bank itself in § 1344(1), but ultimately discarded that idea in favor of a broader provision. The government also argues that Shaw’s interpretation of “defraud” would create an unsound rule because it would distinguish between schemes in which the schemer aimed to deprive a bank of property and schemes in which the schemer did not care whose property he took, thereby punishing the former while allowing the latter.
IS IT NECESSARY FOR THE DEFENDANT TO INTEND TO DEPRIVE THE BANK OF THE BANK’S OWN PROPERTY?
Shaw maintains that the plain meaning of the bank-fraud statute supports his position that a conviction for intent to defraud a bank must be based upon a scheme that was directed at bank-owned property. Shaw argues that the rules of grammar support his interpretation of the statute by noting that the verb “defraud” should be directly applied to its object, “a financial institution.” Shaw also compares the two clauses of the bank-fraud statute, noting that the second clause of the statute, unlike the first, lists both bank-owned and bank-held property. . He argues that this indicates the legislature was aware of a difference and chose to have the first clause target only those individuals whose schemes were designed to take bank-owned property. Shaw contends that the existence of the second clause of the statute, which his behavior would arguably fall under, provides further support for his argument that the Court should not interpret § 1344(1) to regulate schemes targeting money the bank possesses but does not own. Beyond the text of the statute, Shaw argues that his position is aligned with Supreme Court precedent interpreting “defraud” as an act of depriving a person of his own property by deceit. He also contends that the legislative history of the bank-fraud statute indicates Congressional intent to adopt this established interpretation of “defraud.” Finally, Shaw notes that even if the Court found the statute to be unclear, any ambiguity should be resolved in his favor according to the rule of lenity, which the Court has used in interpreting other federal fraud statutes. He uses these arguments to further his case by maintaining that the money of bank customers, which he targeted in his scheme, is under the custody and control of banks but does not actually belong to the banks as property.
The government counters that the bank-fraud statute was based upon mail- and wire-fraud statutes, which have been interpreted broadly to address not only ownership interests but also other types of property interests, such as possessory interests. The government argues that the wording differences between the two clauses of the bank-fraud statute do not indicate a Congressional intent to limit application of the first clause to bank-owned property. On the contrary, the government maintains that the wording difference reflects Congress’s decision to mirror the structure of mail-and wire-fraud statutes in the first clause, which indicates that the clause is meant to apply beyond ownership interests. Further, the government asserts that Shaw’s interpretation of the bank fraud statute’s legislative history fails to account for the nature of real-world allocation of loss from bank-fraud schemes. Because a bank’s financial integrity can be put at risk by fraudulent schemes regardless of a schemer’s intention to target the bank or one of its customers, the government argues that reading § 1344(1) to only protect banks from schemes targeting the bank’s own property does not align with the Congressional intent to generally protect banks from being defrauded. The government argues that the disconnect between a schemer’s belief about who will bear the cost of a fraudulent scheme and the actual allocation of loss indicates that Congress would not have written the bank-fraud statute to rely upon whom the schemer intended to target. Accordingly, the government contends that no intent element should apply with respect to the property that the schemer targets. Beyond these responses, the government challenges Shaw’s argument that bank deposits are not bank-owned property by noting that legal precedent supports the argument that banks have an ownership interest in deposits from their customers.
PROTECTION OF BANKS VERSUS PROTECTION OF CITIZENS
The National Association of Criminal Defense Lawyers, in support of Shaw, asserts that § 1344(1) must be interpreted narrowly to ensure fair notice and uniform punishment. The NACDL cites to a general principle that, regardless of a defendant’s culpability, a defendant can only be convicted under a statute that clearly encompasses his conduct. The NACDL argues that because § 1344(1) does not clearly encompass Shaw’s conduct, convicting him under this statute would be improper. Accordingly, the NACDL urges against adopting an interpretation that subjects more defendants to liability. Additionally, the NACDL notes that the broad interpretation of § 1344(1) may result in disparate convictions for the same conduct. That is, Shaw’s fraud would be punishable not only by § 1344(1), but also by state laws. Thus, the NACDL contends that Shaw’s punishment and the punishment of those similarly situated would depend on which governing body filed charges first. Therefore, the NACDL concludes that only a narrow interpretation of § 1344(1) would adequately provide defendants fair notice and uniform punishment.
The government asserts that Congress, in passing 18 U.S.C. § 1344, sought to protect banks through prosecution of a broad range of fraudulent financial representations. The government alleges that this goal would not be achieved if the government were required to prove a schemer intended to expose the bank to monetary loss. For example, under Shaw’s interpretation, even if the bank suffered a financial loss, the government would not be able to prosecute the schemer if he did not intend the bank to suffer a loss. Thus, fraud that harmed a bank would go unpunished. According to the government, therefore, banks would not be fully protected from fraud if § 1344(1) required proof of intent to expose banks to monetary loss.
FOILING PROSECUTION THROUGH BANKING LAW INTRICACIES
The government also asserts that adopting Shaw’s argument would cause trials to turn on technical intricacies of banking laws. ,The government contends that inferring an intent-to-harm-the-bank would require determining how loss from fraud is allocated according to banking laws. The allocation of loss varies with the type of fraud committed, with few professionals fully understanding the nuances of banking law. The government argues that should § 1344(1) trials depend on the interpretation of the banking laws, the complexities involved would render administration of a general criminal prohibition impracticable.
Shaw argues that his position would not lead the courts to consider banking laws at all. Shaw asserts that the prosecution would only need to show what mental state a defendant in a § 1344(1) trial had at the time the defendant committed the crime. As this burden is common in criminal prosecutions, Shaw asserts that his position would not implicate banking law.
BALANCE OF FEDERAL AND STATE POWER
The NACDL argues that adopting a broad interpretation of § 1344(1) would diminish state power. The NACDL contends that as the general police power is reserved for the states, allowing the federal government to prosecute crimes punishable under state law would centralize police power in the federal government. The NACDL fears that the balance of power between the federal government and the states would thus be disrupted. The NACDL references the constitutional balance as stated in Gregory v. Ashcroft, 501 U.S. 452, 458 (1991) as a way to “reduce the risk of tyranny and abuse from either front.” Moreover, the NACDL maintains that as the police power centralizes in the federal government, the role of the district courts would also change by no longer adjudicating only federal interests. Accordingly, the NACDL asserts that proper federal-state power balance warrants a narrow interpretation of § 1344(1).
The authors would like to thank Professor Stephen P. Garvey for his insight into this case.
- Lyle Denniston, Another Look at Proof of Bank Fraud, SCOTUS Blog (Apr. 25, 2016).
- Tony Mauro, Justices to Take Up ‘Criminal Intent’ Challenge to Bank-Fraud Statute, The National Law Journal (Apr. 25, 2016).
- Dietrich Snell and Jonathan Siegelaub, Supreme Court to Resolve Circuit Split Over Bank Fraud Statute, Corporate Defense Disputes (Apr. 27, 2016).