By John F. Lauro
The federal criminal fraud statutes ― covering mail (18 U.S.C.A. § 1341 (West 2014)) and wire fraud (18 U.S.C.A. § 1343 (West 2014)), health care fraud (18 U.S.C.A. § 1347 (West 2014)), bank fraud (18 U.S.C.A. § 1344 (West 2014)), and securities fraud (18 U.S.C.A. § 1348 (West 2014)) ― create enormous potential liability for corporations and their employees. They also present considerable challenges for counsel representing those corporations. Each statute prohibits “schemes or artifices to defraud.” The problem is that Congress has never defined these terms, and the interpretation of the statutes has been left to the courts, with decidedly mixed and unclear results.
Indeed, during oral argument before the Seventh Circuit Court of Appeals, the Department of Justice conceded that a simple practical joke could be prosecuted under the mail fraud law. United States v. Walters, 997 F.2d 1219, 1224 (7th Cir. 1993). In another instance, a court held that the criminal law could be broken by violations of “moral uprightness” or “fair play” ― whatever that means. Gregory v. United States, 253 F.2d 104, 109 (5th Cir. 1958). The potential breadth of the federal fraud statutes gives prosecutors incredible discretion to prosecute alleged business crimes where companies and individuals have no reason to believe that their conduct is in any way “illegal.” Not surprising, one former federal prosecutor described the mail fraud statute (which is the mother of all of the fraud provisions) as “our Stradivarius, our Colt .45, our Louisville Slugger, our Cuisinart ― and our true love.” Jed S. Rakoff, The Federal Mail Fraud Statute (Part I), 18 DUQUESNE L. REV. 771 (1980).
The uncertainty and ambiguity of what conduct could be deemed “criminal” under federal law allows prosecutors to threaten and bring cases that fall well outside traditional common law notions of “fraud.” A criminal case might be brought where there has been no reliance upon alleged misrepresentations, no actual loss suffered, and no breach of a contract or other legal duty. Executives face substantial risk that ordinary business practices might one day be prosecuted as a “fraud.”
The potential scope of the fraud statutes also allows any administration to “regulate by prosecution.” In other words, the fraud statutes become powerful tools to achieve political objectives of the party that happens to be in office.
The Supreme Court, from time to time, has weighed in to limit the scope of the federal fraud statutes. See McNally v. United States, 107 S. Ct. 2875 (1987) (striking criminal prosecutions of “honest services” fraud absent clear direction from Congress); United States v. Skilling, 130 S. Ct. 2896 (2010) (limiting the scope of honest services fraud to traditional kickbacks and bribes). However, Congress has shown no interest in defining “schemes to defraud” with any clarity or giving guidance to the business community as to the conduct to be proscribed by the harshest penalties imposed by our society. The political use of the fraud statues is obviously too compelling.
Where does this leave corporate counsel? Sadly, with the understanding that criminal fraud is whatever 12 people (none of whom have any understanding of your business) in a jury box say it is.
