Supreme Court To Decide Whether Government Must Prove That A Bank Fraud Defendant Intended To Defraud A Bank, As Opposed To Just Someone

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On April 6, 2011, a jury convicted Kevin Loughrin of bank fraud and a number of other crimes relating to a scheme that he and an accomplice hatched in Utah to defraud some unsuspecting citizens and Target, the retail store.[1]  Loughrin and his accomplice dressed up like Mormon missionaries, went around to various homes, stole checks from people’s mailboxes, altered the checks, purchased items at Target, then returned the items to Target for cash.[2]  Loughrin made about $1,200 and was ultimately sentenced to 36 months in prison.[3]

At trial, his attorney tried to convince the Court that it should issue a jury instruction explaining to the jury that he could not be found guilty of bank fraud pursuant to 18 U.S.C. § 1344 unless the jury concluded that Loughrin had intended to defraud a financial institution, as opposed to simply intending to defraud someone.[4]  The trial court disagreed, citing precedent from the Tenth Circuit Court of Appeals, and issued an instruction requiring the Government to prove that Loughrin acted with “an intent to defraud” someone (e.g., Target, the account holders, etc.).  As noted above, the jury convicted Loughrin of bank fraud.  On appeal, the Court of Appeals upheld the trial court’s decision not to instruct the jury that, in order to convict under § 1344, the Government had to prove that Loughrin intended to defraud a bank.[5]

On December 13, 2013, the Supreme Court agreed to hear the case, Loughrin v. United States, in order to resolve a split among the federal circuit courts as to whether the U.S. Government must prove that a defendant intended to defraud a bank in order to secure a conviction for bank fraud under 18 U.S.C. § 1344(2).[6]  Specifically, the majority of federal circuit courts require the Government to prove beyond a reasonable doubt that the defendant intended to defraud a financial institution under both subsections of § 1344.[7]  The minority position, which is shared by the appeals court that decided the Loughrin case, is that the Government need only prove that the defendant intended to defraud someone for a § 1344(2) (obtaining property owned by, or under the control of, a bank) conviction.[8]

The Supreme Court will likely hear a variety of arguments in support of and against the majority position.  One rationale for that position is that the purpose of the statute is to “protect[] the federal government’s interest” in the financial integrity of federally chartered or insured banks. [9]  “Where the victim is not a bank and the fraud does not threaten the financial integrity of a federally controlled or insured bank, there seems no basis in the legislative history for finding coverage under [the statute].”[10]

Another rationale is that the expansive interpretation sought by the Government would federalize areas of crime normally prosecuted by state authorities.  This is a federalism argument rooted in an interpretation of the statute.  However, as seen in decisions across different topical areas and different Supreme Court eras, the appeal of such federalism arguments depends almost entirely on the composition and politics of the Supreme Court bench at a given point in time.

By contrast, a rationale for the Government’s position – that the state of mind required for a § 1344(2) conviction is an intent to defraud someone, bank or otherwise – is that the plain language of the two subsections of § 1344 show an intent to create two separate crimes: “[C]lause (1) focuses on the conduct as it affects the financial institution, while clause (2) emphasizes the conduct of the defendant.”[11]  “Indeed, the latter extends to any knowingly false representation by the defendant.”[12]  For liability under clause (2), the Government need only show that the defendant obtained or attempted to obtain bank property or property held by a bank with an intent to defraud someone else.[13]  Relatedly, because the target of the fraud need not be a bank, the Government need not prove that a bank was “at risk” for a loss.[14]

Whether Loughrin or the Government will carry the day and on which specific issues remains to be seen.  For example, the record is a bit unclear as to whether the issue of intent to defraud a bank is the only issue properly before the Court.  The Government has devoted a lot of its briefing to arguing that the issue of risk of loss to a bank was not preserved on appeal.  At a minimum, the Court will likely wrangle with the issue of resolving the circuit split on the issue of whether the Government need prove an intent to defraud, generally, or an intent to defraud a financial institution for subsection 2 liability.

[1] See U.S. v. Loughrin, 10-cr-00478-TC, Dkt. Nos. 3, 115 (D. Utah).

[2] See id.

[3] See id. at Dkt. Nos. 3, 150.

[4] See U.S. v. Loughrin, 710 F.3d 1111, 1115 (10th Cir. 2013) (discussing trial court decision).  Specifically, the Court found that there was no need to prove intent to defraud a bank with respect to subsection 2 of § 1344.  Section 1344 provides that it is a felony to knowingly execute, or attempt to execute, a scheme or artifice: (1) to defraud a financial institution; or (2) to obtain any … property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises.  18 U.S.C. § 1344.

[5] See id. at 1116.

[6] Loughrin v. United States, Dkt. No. 13-316.

[7] See e.g., U.S. v. Kendrick, 221 F.3d 19, 29 (1st Cir. 2000).

[8] See, e.g., Loughrin, 710 F.3d at 1116.

[9] See United States v. Rodriguez, 140 F.3d 163, 168 (2d Cir. 1998).

[10] See id.

[11] See Loughrin, 710 F.3d at 1116 (citations omitted).

[12] See id. (citation and internal quotations omitted).

[13] See id.

[14] In addition, the Government will likely argue before the Court that there is substantial case law across the federal circuits where convictions under § 1344(2) were upheld even though the bank in question is not the primary victim.

Massachusetts Fines Citigroup $30 Million for Selectively Releasing Apple Research to SAC Capital and Others

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On October 2, 2013, the Securities Division of the Massachusetts Secretary of State (“Securities Division”) entered into a consent order with Citigroup in which Citigroup admitted to the facts alleged in the Order, but neither admitted nor denied it violated any laws.[1]  Specifically, the Order states that Citigroup, through its former employee Kevin Chang, violated securities laws by passing unpublished analyst research about Apple to a handful of clients, including indicted hedge fund SAC Capital, giving those select clients the opportunity to trade in Apple stock before the information was widely disseminated.  Under the Order, Citigroup agreed to pay a $30 million fine and to implement a raft of internal review, training, reporting and other programs.  The money is to come out of Citigroup’s treasury without the possibility of insurance reimbursement.

Mr. Chang, a Taipei-based former Citigroup analyst, was responsible for coverage of technology companies and suppliers, including Hon Hai Precision Industry, a supplier to Apple.  The Order states that the day before Citigroup publicly released Mr. Chang’s research on iPhone orders, which forecasted a drastic reduction of orders, Mr. Chang provided certain select Citigroup customers with the unpublished research, permitting them to trade ahead of the public.  The next day, after the research was publicly disseminated, Apple’s share price fell 5.2%.

There are a few notable aspects to this matter that jump out.  First, this is the second time the Securities Division reprimanded Citigroup for selective disclosure of company research.  Last year, the Division fined Citigroup $2 million for the selective dissemination of an analyst’s research note on the Facebook IPO.[2]

Second, because Citigroup already had one strike against it, the Division was probably more emboldened to seek big concessions.  Apart from the $30 million fine, which cannot be paid using insurance, Citigroup agreed to certify annually for a three-year period that it has implemented a wide array of new training and internal review programs under the Order.  This includes reviewing and improving internal e-mail surveillance policies to make sure they are up to snuff and instituting new training programs for all publishing equity analysts.

Finally, even though the Order is heavily weighted in favor of the Division’s wish list, Citigroup was able to work in a couple of things to its own benefit.  As noted above, Citigroup neither admitted nor denied the conclusions of law.  Relatedly, the Division agreed that nothing in the Order is intended to disqualify Citigroup from relying on any state or federal exemptions, such as registration exemptions or safe harbor provisions.

Such concessions, however, may not be available to Citigroup should it have a “third strike” at the plate in Massachusetts in the future.