Ninth Circuit Eases Burden on Government to Win a Bank Fraud Conviction

May 30, 2015

business concept. money with hand

By: Sara Kropf

The Ninth Circuit Court of Appeals just made it easier for the government to win a conviction in a bank fraud case. It recently ruled that the government need prove only that the defendant intended to deceive the bank, and not that he intended for the bank to bear the loss of the fraud.

Lawrence Shaw was charged with bank fraud after siphoning money out of a stranger’s bank account using a phony PayPal account. During his trial, Mr. Shaw asked for a jury instruction that a conviction under the federal bank fraud statute required two elements of intent: (1) intent to deceive the bank, and (2) intent that the bank would bear the loss from the fraudulent scheme. The district court instructed the jury only as to the first type of intent, and Mr. Shaw appealed. He lost in the Ninth Circuit as well.

What is Bank Fraud?

Bank fraud can cover a whole range of activity. We’ve recently seen former Speaker of the House Dennis Hastert face indictment for “structuring” withdrawals from his own bank account to avoid detection.

The bank fraud in this case isn’t structuring but rather your run-of-the-mill type of bank fraud. The statute is 18 U.S.C. § 1344. Here it is:

Whoever knowingly executes, or attempts to execute, a scheme or artifice—

(1) to defraud a financial institution; or

(2) to obtain any of the moneys, funds, credits, assets, securities, or other property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises;

shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.

Did you notice the penalty? 30 years.

The Target of the Fraudulent Scheme

The stranger who had his money stolen was a Taiwanese businessman named Stanley Hsu. While working in the United States, Mr. Hsu opened a bank account with Bank of America. After returning to Taiwan, Mr. Hsu arranged for one of his colleague’s daughters to receive his mail.

At that time, Mr. Shaw was living with the daughter and could check her mail. According to the government, at some point Mr. Shaw collected Mr. Hsu’s bank statements along with the daughter’s mail. Mr. Shaw then pulled Mr. Hsu’s account numbers and personal information from these statements.

The Scheme Using PayPal

Armed with this information, Mr. Shaw opened a new email address in Mr. Hsu’s name. Using the email address, he opened a PayPal account linked to Mr. Hsu’s Bank of America account. Once Mr. Shaw had Mr. Hsu’s Bank account linked to PayPal, he opened up two other bank accounts at Washington Mutual bank. These two accounts were in Mr. Shaw’s father’s name.

The government argued that Mr. Shaw then tied the PayPal account to the Washington Mutual accounts. PayPal tried to investigate this red flag. However, it sent the inquiry email to the email address for Mr. Hsu that was under Mr. Shaw’s control. Mr. Shaw responded by faxing a number of altered documents to PayPal, such as a falsified Bank of America statement. PayPal then gave the linkage a green light.

Makes you rethink using PayPal, doesn’t it? I hope that PayPal has now beefed up its investigation into similar red flags.

After linking these bank accounts, Mr. Shaw allegedly drained the money from Mr. Hsu’s account. Mr. Shaw would siphon the money from Bank of America, through PayPal, and into his father’s accounts. From there, he would write checks from his father to himself and deposit those checks into a final bank account that he also controlled.

Mr. Hsu’s Losses

It was a profitable (though fairly minor) scheme. The government stated that between June and October of 2007, Mr. Shaw drained $307,000 from Mr. Hsu’s account. The scheme finally came to an end when Mr. Hsu’s son discovered the missing money. He reported the fraud and closed the Bank of America account.

According to standard banking practice, Bank of America returned the more than $130,000 that had been stolen within 60 days of the reported fraud. PayPal indemnified Bank of America for that sum, but Mr. Hsu bore $170,000 in losses as a result of Mr. Shaw’s alleged scheme.

In the end, then, Bank of America lost nothing.

Mr. Shaw’s Trial

In 2012, Mr. Shaw stood trial. The government brought 17 counts of bank fraud against Mr. Shaw, claiming that his scheme violated 18 U.S.C. § 1344(1).

One of the issues at trial, as always, was jury instructions. Mr. Shaw asked the court to instruct the jury that a conviction under § 1344(1) requires two types of intent. The first was that a conviction requires proof that Mr. Shaw intended to defraud the bank. This is well-settled law and the judge instructed the jury as to this element.

The second type of intent was the sticking point. Mr. Shaw wanted the court to instruct the jury that to return a conviction they must also find that Mr. Shaw intended to expose the bank to monetary loss not just Mr. Hsu.

The district court refused to give this proposed instruction.

After the jury found him guilty of 14 counts of bank fraud, Mr. Shaw appealed. His last hope was not a bad one—the Ninth Circuit has issued some of the most liberal, defendant-friendly decisions in the last two decades.

The Ninth Circuit’s Opinion

Circuit courts are split on the issue of whether a conviction under 18 U.S.C. § 1344(1) requires proof of intent to expose a bank directly to risk of loss. For example, the First and Fifth Circuits have held that the intent that a bank bear the loss of the fraud is necessary for a conviction under § 1344(1). See, e.g., United States v. Brandon, 17 F.3d 409, 426 (1st Cir.); United States v. Barakett, 994 F.2d 1107, 1110-11 (5th Cir. 1993). Other courts have held that the government need not prove this type of intent.

In 2014, the Supreme Court interpreted § 1344(2). In Loughrin v. United States, 134 S. Ct. 2384 (2014), the Court held that § 1344(2) does not require Government to prove that a defendant charged with violating that provision intended to defraud a bank.

The Supreme Court, however, did not address the intent necessary to prove a violation of   § 1344(1) (which covers a scheme to “to defraud a financial institution” rather than obtaining assets owned by a bank through “false or fraudulent pretenses, representations, or promises.”).

The Ninth Circuit found that the Supreme Court’s reasoning supported its own pre-Loughrin precedent and held that intent that a bank bears the risk of loss is not required for a conviction under §1344(1). According to the court:

Loughrin confirms our conclusion that the difference between the two clauses is which entity the defendant intended to deceive, not which entity the defendant intended to bear the financial loss.

The Ninth Circuit held that a conviction under § 1344(1) hinges on not on the intended victim, but rather only on the entity the defendant intended to defraud. Fraud can be executed through a bank even if the bank was not the direct target of the fraudulent scheme. As a result, the fact that Mr. Shaw used the bank to defraud Mr. Hsu was sufficient to support his conviction under § 1344(1).

Supreme Court Review?

Given the circuit split on the issue, it is possible that this case (or a similar one) could reach the Supreme Court. Given the Supreme Court’s approach to criminal cases these days, Mr. Shaw doesn’t stand much of a chance. If you can’t convince the Ninth Circuit to reverse your conviction, then I wouldn’t hold out hope for the Supreme Court to fix things.

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