The Chicklets and Runts vending machine at your local car repair shop last decade may have been one piece of a fraudulent enterprise that ensnarled roughly 7,000 victims.  As CEO of Vendstar, Defendant Edward (“Ned”) Weaver directed a scheme that enticed victims to make substantial up-front investments in quarter-slot candy dispensers with false promises of significant returns—even hundreds of a dollars a day.  Despite assurances that this “home-based vending business” had “little risk,” many customers lost their entire investment.[1]

In United States v. Weaver, 16-3861 (June 21, 2017) (Newman, Cabranes, Lynch), the Court held in a per curiam order that contractual disclaimers signed by victims of Weaver’s fraud did not render the fraudulent statements “immaterial” as a matter of law and negate criminal liability.  The Court’s holding is in accord with earlier decisions by the 7^th and 5^th Circuits.  In a separate summary order available here, the Court resolved Weaver’s challenges to findings of fraudulent intent and the falsity of certain statements, to the prosecution’s reference to the guilty plea of a cooperating co-conspirator, and to his sentence.

Vendstar’s sales team, with oversight and approval by Weaver, induced customers to purchase its candy machines with promises of “utterly unrealistic earnings,” assurances that the investments were “sound,” and even false stories of their own successes as Vendstar investors.  At trial, victims testified to their reliance on these statements.  The most popular package involved an investment of $10,000 in exchange for 30 triple-dispenser candy machines and an initial supply of Mike & Ike’s, Skittles, or other treats.  Vendstar’s victims paid an additional fee to a “locating company,” which Vendstar sales representatives promised would place the machines in “profit-earning locations.”  These assurances likewise turned out to be overblown.

In order to purchase the vending machines and realize the promised returns, a customer had to sign a contract with Vendstar.  These contracts included various all-caps disclaimers, including the following:

• Purchaser understands that seller has no affiliation or financial relationship with professional locating companies and that seller has no involvement whatsoever in securing retail locations.... 

• Purchaser and seller agree that this purchase order contains the entire understanding of the agreement between the parties and there is no reliance upon any verbal representation whatsoever. Seller has not guaranteed any minimum or maximum earnings....

• It is further acknowledged that no statements, promises[,] or agreements influenced this purchase or are expected other than anything contained in this purchase order....

Customers who questioned the import of these disclaimers were assured by Vendstar salespeople that this was mere “legalese” or “mumbo-jumbo.”  On appeal, Weaver argued that this “mumbo-jumbo” rendered Vendstar’s fraudulent statements immaterial as a matter of law and immunized him from criminal liability.  The Court disagreed.

The Court recognized that the disclaimers “may in some circumstances defeat a civil claim for damages based on fraud,” and that they were “relevant to the jury’s determination of Weaver’s guilt.”  However, the disclaimers did not render the statements “immaterial” as a matter of law in a criminal prosecution.

For purposes of criminal fraud under the federal wire and mail fraud statutes, the focus is on the materiality of the false statement, and not on whether the victim of the fraud reasonably relied on the statement, or even whether the victim of the fraud was injured by the fraudulent scheme.  These statues prohibit “‘the “scheme to defraud,” rather than the completed fraud.’”  Slip. Op. at 10 (quoting Neder v. United States, 527 U.S. 1, 25 (1999)).  Since a fraud victim’s “reasonable reliance” is not required for criminal fraud, a disclaimer of reliance by the victim is irrelevant.

The victims’ disclaimers also did not undercut the “materiality” of the fraudulent representations.  The Court emphasized the “distinction between ‘materiality (in the sense of tendency to influence) and reliance (in the sense of actual influence).’”  Slip. Op. at 13 (quoting United States v. Rosby, 454 F.3d 670, 674 (7th Cir. 2006)).  It thus declined to allow a defense premised on the victims’ lack of reliance to come in through the “back door” of materiality.

In short, “[f]raudsters may not escape criminal liability for lies told to induce gullible victims to make worthless investments by inducing them to sign a contract containing disclaimers of reliance.”  Slip Op. at 14.

Weaver is a useful reminder that the criminal law of wire fraud and mail fraud has a distinct purpose from common law fraud.  First, the federal statutes are meant to protect even the gullible and the credulous.  See United States v. Maxwell, 920 F.2d 1028, 1036 (D.C. Cir. 1990) (“[I]t makes no difference whether the persons the scheme is intended to defraud are gullible or skeptical, dull or bright. . . . [T]he monumental credulity of the victim is not shield for the accused.”).  There is no “reasonable” reliance—or indeed any reliance—required.  Even if the victims here should have been tipped off by the unusual warranty language, this fact does not preclude wire and mail fraud prosecution.  Congress intended to protect everyone from being defrauded.

Second, the federal statutes are meant to protect people regardless of the manner in which the misrepresentations are made.  A charge of wire or mail fraud depends on neither the existence nor the non-existence of written representations and warranties.  Likewise, as demonstrated in Weaver, the use of written disclaimers by the defendant is not exculpatory.  The disclaimers represent a creative attempt to evade criminal and civil liability for fraud, but as the Court held, the protections of the federal fraud statutes are not so easily evaded.