Weighing in on the bank fraud statute, the U.S. Supreme Court sided with the government to hold that the bank had a property interest in the customer's deposits, and the law does not require proof that the bank suffered ultimate financial loss as a result of the defendant's action, nor that the defendant intended the bank to suffer a loss, but that knowledge that the defendant would likely harm the bank's property interest was sufficient.
Lawrence Shaw was convicted of violating 18 U.S.C. Section 1344(1) based on a scheme to transfer more than $300,000 out of a third party's bank account and into his own PayPal account. Shaw appealed his conviction, arguing that the government should have been required to prove that he not only intended to deceive the bank but that he also meant to target the bank as a financial victim of the fraud.
After the Ninth Circuit Court of Appeals affirmed the conviction, the U.S. Supreme Court granted certiorari. In a unanimous opinion, Justice Stephen G. Breyer began with the language of the statute, which makes it a crime:
"knowingly [to] execut[e] a scheme … (1) to defraud a financial institution; or (2) to obtain any of the moneys, funds, credits, assets, securities, or other property owned by, or under the custody or control of, a financial institutions, by means of false or fraudulent pretenses, representations, or promises."
Shaw argued that he did not violate the statute because his scheme was only designed to obtain the property of a bank customer and not the bank's own property and that he had no intent to deceive the bank.
But the justices were not persuaded.
"The basic flaw in this argument lies in the fact that the bank, too, has property rights in [the customer's] bank account," the Court wrote. "When a customer deposits funds, the bank ordinarily becomes the owner of the funds and consequently has the right to use the funds as a source of loans that help the bank earn profits (though the customer retains the right, for example, to withdraw funds) … Thus, Shaw's scheme to cheat [the customer] was also a scheme to deprive the bank of certain property rights."
As for the fact that the bank did not actually suffer a loss (as it recovered the funds that were transferred), the justices said the statute "demands neither a showing of ultimate financial loss nor a showing of intent to cause financial loss." The Court analogized to the similar mail fraud statute, which it has also interpreted to find that an actual loss was immaterial, concluding that the state "requires a state of mind equivalent to knowledge, not purpose."
Shaw's ignorance as to the fact the bank had a property interest in the customer's account did not alleviate him of culpability.
"Shaw did know, however, that the bank possessed [the customer's] account," Justice Breyer wrote. "He did make false statements to the bank. He did correctly believe that those false statements would lead the bank to release from that account funds that ultimately and wrongfully ended up in Shaw's pocket. And the bank did in fact possess a property interest in the account. These facts are sufficient to show that Shaw knew he was entering into a scheme to defraud the bank even if he was not aware of the niceties of bank-related property law. To require more, i.e., to require actual knowledge of those bank-related property-law niceties, would free (or convict) equally culpable defendants depending upon their property-law expertise—an arbitrary result."
The Court was not impressed by Shaw's attempt to differentiate Section 1344(1) from Section 1344(2). Because the latter makes criminal the use of "false or fraudulent pretenses" to obtain property under the custody or control of the bank, subsection (1) should not apply to those circumstances, Shaw told the justices. But while the two subsections "overlap substantially but not completely," they apply to different circumstances that do not demand Shaw's interpretation, the Court said.
"Hence, for purposes of the bank fraud statute, a scheme fraudulently to obtain funds from a bank depositor's account normally is also a scheme fraudulently to obtain property from a 'financial institution,' at least where, as here, the defendant knew that the bank held the deposits, the funds obtained came from the deposit account, and the defendant misled the bank in order to obtain those funds," Justice Breyer concluded.
However, the justices punted on the question of whether the instructions given to the jury that the phrase "scheme to defraud" means any deliberate plan by which someone intends to deceive, cheat, or deprive a financial institution of something of value, rather than an instruction that the scheme must be one to deceive the bank and deprive it of something of value, were erroneous, remanding the case to the Ninth Circuit to determine whether the instruction was lawful and if not, whether any error was harmless.
To read the opinion in Shaw v. United States, click here.
Why it matters
The Supreme Court has now completed its review of both subsections of Section 1344, after taking a closer look at subsection (2) in 2014. In that case, Loughrin v. United States, the justices concluded that the statute requires only that a defendant intended to obtain bank property "by means of" a false statement and that no proof of intent to defraud the particular institution is required. In conjunction with the Shaw decision, these broad interpretations of the bank fraud statute will prove beneficial for government prosecutors.