week six case analysis

Reference pg. 167

Browne, N.K.K.B.A.B.M. N. (2017). The Legal Environment of Business: A Critical Thinking Approach. [VitalSource Bookshelf]. Retrieved from https://online.vitalsource.com/#/books/9781323829264/

Eleventh Circuit Court of Appeals 367 F.3d 1263 (2004)

The appellant, Kevin Gray, was found guilty of mail fraud. He had attempted to convince a businessman, Frank Patti, who was on trial for tax evasion and faced substantial jail time, that for $85,000 he would bribe the jury, thus avoiding the threat of jail for the businessman. The methods used by the appellant were, however, at times hardly believable. As a result, the appellant seeks a judgment of acquittal on the ground that his fraudulent scheme was “so absurd” that a person of ordinary prudence would not have believed it; the scheme, therefore, fell outside the realm of conduct proscribed by the mail fraud statute.

Circuit Judge Tjoflat

On May 8, 2002, a federal grand jury in the Northern District of Florida returned an indictment charging the appellant on one count of mail fraud. He pled not guilty, and the case proceeded to trial before a jury. The jury, having received evidence establishing the facts set forth above, found the appellant guilty, and the district court sentenced him to prison for 28 months. This appeal followed.

The appellant’s initial attack on his conviction is that the evidence was insufficient to make out a case of mail fraud. He argues that to prove the crime of mail fraud, the Government must establish that the defendant “intended to create a scheme ‘reasonably calculated to deceive persons of ordinary prudence and comprehension.’” Additionally, it must show that the defendant took some action in furtherance of his scheme—to bring it to fruition—in the form of a material misrepresentation made to the would-be victim that “a reasonable person would have acted on.” It is on this peg that the appellant hangs his hat, contending that a reasonable person would not have acted on his representations when considered as a whole. In bolstering his argument, he draws attention to his statement to Patti that $85,000 would be needed to bribe three of the jurors who would be trying his case: $35,000 for J-1, and $25,000 each for J-2 and J-3. The appellant contends that a reasonable person would know that since the pool from which these jurors would be selected would not be known until April 15—when the pool assembled at the courthouse for the trial—the representation had to be phony.

While it is true that statements like the one he cites would seem absurd or fanciful to a reasonable person, the mail fraud statute does not require that every representation a defendant utters while executing his scheme must be credible. Instead, the statute requires proof that the defendant’s scheme to defraud involved the use of material, false representations or promises. The initial representations the appellant made to Patti satisfy this requirement.

In the letter to Patti, the appellant made a false promise: “we can assure you . . . no imprisonment but you must pay the agreed tax settlement issued by the court.” In addition, he falsely represented that an undisclosed number of sympathizers—including “our mutual friend” and “our associates in Pensacola”—would work to extricate Patti from his legal predicament if the businessman would agree to follow certain instructions. True, the letter did not identify precisely how the writer and these sympathizers would help Patti, but this omission did not render the letter devoid of any material misrepresentations that were capable of prompting a reasonable person to act as Patti did. What the appellant overlooks is that the mail fraud statute “punishes unexecuted, as well as executed, schemes. This means that the government can convict a person for mail fraud even if his targeted victim never encountered the deception—or, if he encountered it, was not deceived.” All that the Government needs to show to establish the mens rea element of the offense is that the defendant anticipated the intended victim’s reliance, and the appellant’s anticipation of Patti’s reliance can be inferred from, among other things, the fact that he was prepared to call Patti at the pay phone at the time and location specified in the letter.

Because the letter received by Patti contained false material representations from the appellant as part of an effort to receive cash payments from the desperate businessman, the crime of mail fraud was complete when the appellant delivered the letter via FedEx to Patti.*

* United States v. Gray Eleventh Circuit, Court of Appeals 367 F.3d 1263 (2004).

Affirmed in favor of the Prosecution.

Critical Thinking About The Law

The defendant in this case seems to misunderstand the law. His contention is that his offer to bribe is an absurdity and that Patti should have recognized it as such. His logic is that there can be no fraud unless the person who is allegedly being helped by the fraud reasonably believes the promised act will occur. In other words, the more outrageous the promise, the more the person charged with fraud can escape liability. The court in this case makes it clear that it is the act of the person initiating the fraud that is the key to the offense, not the response of the person being defrauded.

Does the rule of law in mail fraud cases require any particular action or belief on the part of the person being defrauded?

Clue: Study the quote in the next-to-last paragraph of the decision.

What ethical norm is being emphasized by the rule of law with respect to mail fraud?

Clue: Look back at the list of alternative ethical norms and make a determination about which of them is being advanced by the rule of law as it applies to mail fraud.

Fraud can range from a single act that victimizes one individual to a long-term scheme that victimizes thousands. In the corporate setting, fraud is sometimes committed by managers to make themselves look better so that they can secure promotions at the expense of others who perhaps deserve the promotions. Fraudulent entries in corporate records may result in artificially inflating the purchase price of stock at the expense of its purchasers. Fraud may also be committed against the corporation, and thus against the shareholders, as when an employee on a bonus system fraudulently reports sales before they have been completed to collect an early bonus or “pads” his or her expense account. The more autonomy employees have, and the fewer people overseeing their actions, the greater the likelihood of their committing fraud.

Consumers may also be victims of corporate fraud, as when businesspersons make false representations in advertising and labeling. Consumers may also be victimized by the fraudulent substitution of inferior goods for higher-quality ones. These substitutions even have the potential to give rise to fraud claims.

Even student loans can provide the opportunity for fraud. In 2010, Rachel Yould, a former beauty queen, Stanford graduate, and Rhodes Scholar pled guilty to fraud charges after having defrauded lenders out of over $680,000 in fraudulent student loans. She borrowed the maximum amount of student loan money allowed, and then was able to obtain a new Social Security number through a domestic violence protection program, and used that new number to fraudulently obtain more student loan money, which she used to purchase a condominium, start a journal, and invest in the stock market.26

26 To read more about this white-collar crime, see Jeffrey Toobin, “The Scholar,” New Yorker Magazine (Oct. 4, 2010), available at http://www.newyorker.com/reporting/2010/10/04 /101004fa_fact_toobin.

One of the fastest-growing forms of fraud over the last decade has been identity theft, whereby one’s credit card, Social Security number, driver’s license number, and other personal information are used for fraudulent purposes. According to Javelin Strategy & Research, a financial research company that has been tracking identity theft for the past decade, approximately 13.1 million Americans were victims of at least one identity theft in 2013, costing consumers more than $18 billion.27 And in 2014, the IRS estimated that it mistakenly paid approximately $5 billion to identity thieves who filed fraudulent tax returns on behalf of unsuspecting citizens, and identified and stopped another $24.2 billion in attempted fraud.28

27 “Every Two Seconds Another American Becomes a Victim of Identity Theft,” Money (Feb. 26, 2014), available at http://money.cnn.com/2014/02/06/pf/identity-fraud/.

28 Kara Brandeisky and Susie Poppick, “How Identity Thieves Stole $5.2 Billion from the IRS,” Money (Sept. 23, 2014), available at http://time.com/money/3419136/identity-theft-social -security-number-tax-return/.

To combat this costly form of fraud, Congress passed the Identity Theft and Assumption Deterrence Act of 1998, making identity theft a federal felony punishable by up to 25 years in prison. The act also requires the FTC to help victims restore their credit. In addition, the FTC and other federal agencies suggest methods for reducing the likelihood of identity theft, including restricting the use of your Social Security number to occasions when it is legally required, reviewing your credit report at least twice a year, and proceeding with caution before giving out personal information over the Internet.

Larceny

Another frequently occurring type of white-collar crime is larceny. Larceny is a matter of state criminal law, so the definition may vary slightly by state, but it can generally be defined as the secretive and wrongful taking and carrying away of the personal property of another with the intent to permanently deprive the rightful owner of its use or possession. The means of carrying out this crime is stealth: Larceny is not carried out by means of fear or force, which is the means of committing a robbery, and it is not carried out by means of false representation, which is one means of committing fraud. Larceny is commonly called theft by persons without legal training.

larceny

The secretive and wrongful taking and carrying away of the personal property of another with the intent to permanently deprive the rightful owner of its use or possession.

Most states distinguish petty larceny from grand larceny, with the distinction based on the value of the item. Grand larceny involves items of higher value than those involved in petty larceny. It is usually considered a felony and, thus, is punishable by either a more severe fine or a longer term of imprisonment, or both.

In the corporate context, larceny generally involves employees taking the employer’s property. Common instances of larceny include an employee’s taking home stationery or supplies from the office.

Embezzlement

Another white-collar offense is embezzlement. This crime is commonly defined as the wrongful conversion of the property of another by one who is lawfully in possession of that property. In some states, by statute, the crime may be committed only by certain classes of people, such as fiduciaries, attorneys, and public officials. As the reader might guess, larceny and embezzlement sometimes overlap. Like larceny, embezzlement is usually divided into degrees based on the value of the property embezzled. Some states also treat different kinds of embezzlers differently; that is, those embezzling from different types of institutions or those holding different types of positions may be distinguished.

embezzlement

The wrongful conversion of the property of another by one who is lawfully in possession of that property.

Computer Crimes

As technology evolves, so do ways of committing corporate crime. With the arrival of the computer and the increasing automation of many facets of business, an area of crime has developed that society has not yet found an effective means of handling. No one knows the exact cost of computer crime each year, but estimates range from $300 million to $67 billion.

For the most part, computer crime, rather than being a new type of crime, is a means of making traditional crimes easier to commit. See Exhibit 6-7 for examples of some typical computer-crime techniques. Think about how many employees have access to a computer at work. When the number of individuals with home computers is added, there are myriad opportunities available for computer crime. Computer systems must now be protected from management, lower-level employees, and outsiders, sometimes known as hackers. With all these individuals having access to computers, a continuing increase in the amount of computer crime seems highly likely. Not only do computers make crime easier, but it appears that computers also make crime more profitable. According to federal officials, the average loss in a bank robbery is $10,000, and the average loss in a nonelectronic embezzlement is $23,500. But in a computer fraud, the average loss is $24,000.

Computer crimes are also not frequently prosecuted; some analysts estimate that less than 1 percent of those who engage in computer fraud are

PIGGYBACKING—A nonauthorized person gaining access to a terminal when an authorized person failed to sign off, or an unauthorized person discovering an authorized user's password and signs on using that password

IMPOSTER TERMINAL—Using a home computer with a telephone modem to gain access to a mainframe computer by cracking the password code and then using the computer free of charge

TROJAN HORSE—Covertly placing instructions in a computer program that will generate unauthorized functions

SALAMI SLICING—Stealing tiny amounts of money off large numbers of inputs (such as taking a penny off each entry) and transferring them into one's personal account

Exhibit 6-7 Common Computer-Crime Techniques

actually prosecuted. One reason these criminals are so successful is that many computer crimes are extremely difficult to detect. Even if the crime is detected, if the victim is a business, it will often not prosecute because it does not want its competitors to know that its system was vulnerable. A final problem with convicting people of computer crimes is that the crimes sometimes do not fit precisely within the statutory definitions of traditional crimes.

Applying The Law To The Facts . .

Let’s say that Katie is a computer hacker, and hacks into the supposedly well-protected network system of a large corporation. Katie hacks into the corporation’s financial accounts and withdraws a moderate sum of money. When the corporation’s executives find out about the withdrawal, they fix the network so that Katie cannot reenter the network in the same way she did before, but they do not report the crime. Why might the corporation not report the crime?

Partially in response to this lack of adequate statutes under which to prosecute computer crime, Congress passed the Counterfeit Access Device and Computer Fraud and Abuse Act of 1984. The act not only imposes criminal sanctions, but also allows parties injured by a violation to bring a civil action to recover compensatory damages for the losses they incurred because of the violation. This act was subsequently amended by passage of the Computer Fraud and Abuse Act of 1986 (CFAA), which expanded the coverage of the original act. Congress continued to expand the scope of the law in 1989, 1990, 1994, 1996, and 2001. The most recent amendment to CFAA was passed as part of the USA PATRIOT Act to provide broader scope for prosecution of computer crimes. Under the latest version of the act, seven categories of activities are regulated:

The unauthorized use of or access to a computer to obtain classified military or foreign policy information with the intent to harm the United States or to benefit a foreign country

Accessing a protected computer (government computers, computers in financial institutions, or those used in interstate commerce) without authority or in excess of authority

The intentional, unauthorized access to a federal computer and the use, modification, destruction, or disclosure of data it contains or the prevention of authorized persons’ use of such data

Accessing a protected computer without or in excess of authority with the intent to obtain something of value

Knowingly causing the transmission of a program, code, or command, and as a result causing damage to a protected computer

The fraudulent transfer of computer passwords or other similar data that could aid unauthorized access that either (a) affects interstate commerce or (b) permits access to a government computer

Transmitting in interstate or foreign commerce any threat that could cause damage to a protected computer with the intent to extort something of value

One important issue that had to be clarified under this act was whether the act would be violated if persons knowingly accessed a computer without permission but did so not knowing what damage they would cause by their action. This issue was settled by U.S. v. Tappen,29 in which the court held that the intent goes to the intent to access the computers because Congress added the intent element to ensure that people who inadvertently got into someone else’s computer systems were not punished under the act.

29 Second Circuit Court of Appeals, 928 F.2d 504 (1991).

Although it may seem as if the federal statute is fairly comprehensive, there are still a number of computer crimes that do not really violate that act. Those crimes must be prosecuted, if at all, under one of the state computer- crime statutes, which now exist in every state in some form, or under one of the traditional crime statutes.

As society attempts to find ways to respond to computer crimes, we have initially attempted to categorize the crimes. Following is just one way to categorize and think about these crimes.

Destruction of Data

 Destruction of data is one of the biggest problems facing business today. A person with expertise in programming can create what is commonly referred to as a virus, a program designed to rearrange, replace, or destroy data. Once a virus is planted in a computer’s instructions, it can spread to other systems or programs by rapidly copying itself. Hence, if a computer virus is not caught early, it can be extremely destructive.

virus

A computer program that destroys, damages, rearranges, or replaces computer data.

A number of software programs have been developed to detect and destroy viruses. These programs, however, are reactive, not proactive. Every time a new type of virus is discovered, a new antiviral program must be developed. By 2006, there were more than 100,000 known viruses; hence, keeping antivirus software current is no easy task, though it is essential. In 2003, it was estimated that computer viruses and worms cost businesses more than $67 billion in damages.

worm

A program that travels from one computer to another but does not attach itself to the operating system of the computer it “infects.” It differs from a “virus,” which is also a migrating program but one that attaches itself to the operating system of any computer it enters and can infect any other computer that uses files from the infected computer.

Destruction of data may also be more limited. For example, a disgruntled employee who is fired might program his computer to destroy a section of data every time a file is saved. Before anyone realizes what has occurred, valuable data may be lost.

Unlawful Appropriation of Data or Services

 Employees at work are often provided with expensive computer systems and software. They have access to vast amounts of data. When employees use their work computers or data accessed through these computers in a manner not authorized by their employer, they have engaged in theft of computer services or data.

Entering of Fraudulent Records or Data into a Computer System

 Entering fraudulent records includes altering a person’s credit rating electronically and breaking into a university’s computer system and changing someone’s course grades. For example, in 2007, 34 people, including former student employees, were charged with computer fraud and conspiracy charges regarding a six-year-long cash-for-grades scheme at Diablo Valley College in California. Allegedly, some of the students charged with the crimes illegally gained access to records of student grades and would take cash payments to alter grades for other students. By 2008, two of the ringleaders agreed to cooperate with prosecutors in exchange for sentences of one year in jail and four years’ probation. Three others who were involved in changing grades were found guilty and charges against one were dropped because of a lack of evidence. The cases have not yet all been resolved. In May of 2010 another student implicated in the fraud was arrested, leaving four of those named in the scheme still at large.

Financial Crimes

 Fraud, embezzlement, and larceny are now easier to accomplish by computer. An employee could electronically transfer ownership of funds from a corporate account to a personal account. Any object subject to lawful transfer electronically can also be stolen electronically.

Keeping these differences in mind, it is easy to see why, when fraud is suspected, the wise manager may wish to hire a fraud examiner, rather than simply rely on either an internal or external audit, to settle the question of whether fraud has occurred.