The White Collar Appeal: Seventh Circuit Reverses Bank Fraud Convictions under Plain-Error Standard

• Bank fraud requires submission of a false or misleading statement to a bank itself—not merely a separate fraud that results in disbursement of funds from a bank—according to the Seventh Circuit’s decision in United States v. Robinson.
• Robinson involved an embezzlement scheme in which administrators of a government housing program submitted false invoices on behalf of vendors who then paid a kickback to the administrators.  The fact that the vendors received checks that they cashed at a bank did not transform this wire fraud scheme into a bank fraud under 18 U.S.C. § 1344(2).   
• The court’s reversal—on plain-error review no less—provides important guidance for practitioners defending bank fraud charges.  Moreover, Judge Easterbrook authored a concurrence suggesting that appellate courts should apply a more stringent standard of review where, as here, a defendant fails to raise a sufficiency-of-the-evidence argument at trial.

Background

Tonya Robinson and Albert Smith worked at the Housing Authority of South Bend, an affordable housing agency funded by HUD.   Robinson and Smith allegedly orchestrated a kickback scheme that involved four steps: (1) contractors submitted invoices for work they never performed; (2) Robinson and Smith approved the fraudulent invoices for payment; (3) the Housing Authority—unaware of the scheme—issued checks to the contractors; (4) the contractors cashed those checks at banks; and (5) they split the proceeds with Robinson and Smith.

The government got wind of the schemes and charged Robinson and Smith with wire fraud under 18 U.S.C. § 1343, bank fraud under Section 1344(2), federal program theft under Section 666, and conspiracy under Section 1349.  The jury convicted both of all six bank fraud counts, and neither defendant moved for judgment of acquittal on those counts under Rule 29 of the Federal Rules of Criminal Procedure.

Holding

Both defendants raised a number of arguments on appeal, including that there was insufficient evidence to support the bank fraud convictions—an argument they never made at trial.  The Seventh Circuit thus applied plain-error review, under which reversal is appropriate only where the error is plain in the record, it affected the defendant’s substantial rights, and it “seriously affected the fairness, integrity, or public reputation of the proceedings.”  It’s a difficult standard to meet.

Yet notwithstanding the high burden, the court reversed the bank fraud convictions because the government never identified a false statement that went to any bank.  The only false statements were the invoices the defendants submitted to the Housing Authority.  There was nothing false about the checks the Housing Authority issued on the basis of those phony invoices, so when the contractors submitted them to the bank, there was no fraud.

The facts (and thus the result) of Robinson closely parallel Loughrin v. United States, where the Supreme Court held that, to commit bank fraud, “[t]he criminal must acquire (or attempt to acquire) bank property ‘by means of’ the misrepresentation,” meaning that “the defendant’s false statement [be] the mechanism naturally inducing a bank … to part with its money.”  573 U.S. 351, 362–63 (2014).  “[W]here no false statement will ever go to a financial institution, the fraud is not the means of obtaining bank property.”  Id. at 365.

Less straightforward, however, was the standard of review.  In a separate concurrence, Judge Easterbrook argued that something more stringent than plain-error review should apply where, as here, a defendant fails to move to dismiss the indictment and fails to seek a judgment of acquittal on those counts under Rule 29.  Citing decisions from the Fourth and Fifth Circuits, Judge Easterbrook noted that they require a “manifest miscarriage of justice” or that the record be “devoid of evidence,” respectively, to justify reversal on appeal.  By those standards, the court might well have affirmed the bank fraud convictions, given that it affirmed the wire fraud convictions and the custodial aspect of the wire and bank fraud sentences were concurrent.  As a result, reversal of the bank fraud convictions in Robinson did little more than save the defendants from paying $100 special assessments on the six bank fraud counts.  Would an additional $600 be a “manifest miscarriage of justice?”  Probably not, Judge Easterbrook suggested.  Ultimately, however, because the government itself argued for plain-error review, the court had no occasion to reconsider the applicable standard of review.

Key Takeaways

Loughrin remains a high bar for bank fraud convictions in kickback schemes.  Robinson reinforces that bank fraud under Section 1344(2) requires more than a fraud that results in disbursement of funds from a bank.  Where, as here, the check that the bank cashes is a genuine instrument written on a real account, it does not amount to bank fraud simply because the defendant procured that instrument through fraud.  Kickback and other corruption schemes often follow this pattern, with a bank disbursing funds obtained through a separate fraud.  Defense counsel should patrol the government’s attempts to expand the scope of bank fraud in cases involving that dynamic.

They should do so by objecting at trial.  Judge Easterbrook’s concurrence seems like an open invitation to the government to argue for a tougher standard of review for unpreserved sufficiency challenges.  That’s especially true where the stakes are not great—like an additional $600 special assessment but not much else.  And even if courts of appeals do not formally adopt a new standard, they may do so indirectly by tightening the reins in reviewing for plain error.  As Judge Easterbrook suggests, one could argue that the district court made no error, let alone a plain one, by failing to grant a motion that no one made.  One way or another, it seems the writing is on the wall, at least in the Seventh Circuit, that sufficiency arguments not presented at trial may receive a frosty reception on appeal.

Notwithstanding Loughrin,defendants should not assume bank fraud is toothless.  Prosecutors may be able to establish bank fraud in cases involving direct misrepresentations to banks (such as fraudulent loan applications) or where checks themselves contain false information beyond the normal representations inherent in a check.  Forged checks, false statements in loan applications, and other false or misleading statements actually presented to banks may suffice for a bank fraud conviction.