Two decisions do not ordinarily a trend make. But when New York federal judges author two circuit court opinions, issued within approximately three months of each other, dismissing mail fraud claims for failing to satisfy the “mailing” requirement, it is worth noting.
As we recently addressed elsewhere in an article discussing the first of these two decisions, United States v. Phillips, it has long been taken as an article of faith that the mail fraud statute allows federal authorities to prosecute a virtually limitless variety of fraud schemes so long as they involve some use of the mails. As has been memorably stated: “[t]o federal prosecutors of white collar crime, the mail fraud statute is our Stradivarius, our Colt 45, our Louisville Slugger, our Cuisinart—and our true love. We may flirt with RICO, show off with 10b-5, and call the conspiracy law ‘darling,’ but we always come home to the virtues of 18 U.S.C. §1341, with its simplicity, adaptability, and comfortable familiarity.”
Indeed, perhaps because of the statute’s familiarity and flexibility, over the years scant attention has been paid to one potential limit on its breadth: the requirement that the mails be used not just “in connection with” the scheme, but “in furtherance” of the scheme. Phillips, and another more recent decision, Lundy v. Catholic Health System of Long Island Inc. rely on this limitation to dismiss mail fraud claims.
Philips, a decision by the Ninth Circuit Court of Appeals issued in late December 2012, was authored by visiting Southern District of New York Judge Jed Rakoff. The government prosecuted Phillips, the CEO of MOD Systems, Inc., for among other things, stealing money from MOD by submitting phony invoices for purported services to MOD. Phillips had the funds wired to a trust account held by his personal attorney, which funds were then forwarded to his girlfriend, who made personal expenditures on Phillips’ behalf, including the purchase of two Breguet watches, an investment in a startup company, and a condominium deposit.
The government sought to rely on the retailer’s mailing of a Breguet watch to Phillips to support a mail fraud charge. The Ninth Circuit held that this mailing was insufficient, because the success of the scheme in no way depended upon it. That the money fraudulently obtained from MOD was used to buy a watch and the watch dealer mailed it “was not a part of the scheme to defraud MOD and to obtain money from MOD – it was simply a byproduct of that scheme.” Because the fraud was successfully executed once the funds had been obtained from MOD on false pretenses and deposited, the subsequent use of the funds was extraneous, and the mailing of the watch was not “in furtherance” of the scheme.
Approximately three months after Phillips, on March 1, 2013, the Second Circuit Court of Appeals issued Lundy, a decision written by Chief Judge Dennis Jacobs for a panel that included retired Supreme Court Justice Sandra Day O’Connor. Lundy and other employees of a hospital group sued their employers for failure to adequately pay them for time worked during breaks, before and after scheduled shifts and during training sessions. The plaintiffs asserted claims under the labor laws, and claims under the federal Racketeer Influenced and Corrupt Organizations Act (“RICO”) predicated on violations of the mail fraud statute. The Second Circuit affirmed the dismissal of most of the labor law claims for failure to plead sufficient factual detail and other infirmities, but vacated the dismissal of one narrow category of those claims.
As to the RICO claims, the plaintiffs’ mail fraud allegations were based on the defendants’ mailing of “misleading payroll checks” on the theory that they concealed the employees’ underpayment and “misled them into believing that they were being paid properly.” The Second Circuit affirmed the dismissal of the RICO claims because they were not pleaded with sufficient particularity, and also because the mailings were not “in furtherance” of any fraudulent scheme. The Court found that “the mailing of pay stubs cannot further the fraudulent scheme because the pay stubs would have revealed (not concealed) that Plaintiffs were not being paid” all that was due to them. Because the mailings increased the probability of detection of the mailer, they could not support a mail fraud charge.
Care should be taken not to overstate the significance of Phillips and Lundy. They apply established precedent. Lundy involved civil claims, not criminal charges by a prosecutor, and the court found that those claims had other fundamental weaknesses. But because it is uncommon for a mail fraud charge to fall short on the mailing requirement, it is fair to ask whether these two rulings are just a coincidence, or perhaps a signal of greater willingness by judges in the Second Circuit to use at least one means to rein in the longtime favorite statute of federal white collar prosecutors.
To read more from Richard Albert, please visit www.maglaw.com