Last year, we wrote about a then-pending criminal wire fraud case, United States v. Raza, and the potential impact that Escobar’s materiality holding might have on its outcome. The Fourth Circuit recently issued its opinion, deciding that Escobar, if it had any application whatsoever in the criminal law context, did not upset long-held understandings of the objective materiality standard.
In Raza, five loan officers at a mortgage originator were convicted after a jury trial of wire fraud for preparing and submitting applications to their employer company, SunTrust, containing false representations about the income and assets of borrowers. The defendants appealed, arguing that the district court had improperly instructed the jury on materiality, employing an “objective” test (that is, whether the alleged false representations would impact a “reasonable” lender) as opposed to a subjective test measuring the actual impact of the false statements on SunTrust. The defendants argued that Escobar compelled the latter interpretation based on its holding that, in FCA cases, courts must “look to the effect on the likely or actual behavior” of the payor (the government) in gauging materiality and that payment of a claim “despite actual knowledge that certain requirements were violated…is very strong evidence that those requirements are not material.”
The Fourth Circuit, however, refused to apply the Escobar standard to criminal fraud “for multiple reasons.” The court cited a case out of the Ninth Circuit, United States v. Lindsey, in creating a distinction between Escobar and the case before it, ultimately concluding that a different materiality standard applies in cases where the federal government, rather than a private party, is the target of a fraud scheme. The Raza Court, relying on Lindsey, determined that “the applicable materiality test verges toward a subjective standard.” In cases where a private entity, such as a lender, is defrauded, the relevant standard is an objective one. While we at LLB do not believe that Escobar itself supports such a distinction, it is clear that the Raza panel was looking for a meaningful distinction to safeguard the relatively liberal criminal materiality standard from the Escobar holding.
The other two reasons provided by the court in support of its rejection of Escobar were that: 1) the court did not believe that the Supreme Court intended to overrule materiality standards previously applied in criminal fraud cases, and 2) that it was “unclear” what the impact would be if Escobar governed the materiality inquiry in the case. The opinion thus appears simply to sidestep an analysis of what an application of Escobar might look like based on the Fourth Circuit’s abrupt conclusion that the Supreme Court likely did not intend for Escobar to be extended to the criminal context.
The Raza Court’s decision leads to an interesting result, at least in the Fourth Circuit – the government must meet only an objective standard of materiality in criminal fraud cases where the standard of proof is higher and personal liberty interests are at stake than in civil FCA cases. We will be keeping a close eye on whether other circuits follow the Fourth Circuit’s lead or decide that Escobar should apply more broadly in the criminal fraud context.