Trying to Define 'Fraud" Under Federal Criminal Law

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[author: Lawrence Bader]

In the past few years, Congress, the press and commentators have debated the wisdom of passing more federal criminal laws to deal with financial crime. However, lost in this debate is the fact that the current federal criminal laws dealing with white collar crime may already provide prosecutors with too much power because of the unclear definition of “fraud” under the federal criminal laws.

A perfect example of this is how the crime of “fraud” is addressed in federal criminal statutes — be they mail or wire fraud or securities fraud statutes. Interestingly, the word fraud is not defined under those statutes. One must consult case law and other precedent to find its definition. The most authoritative treatise on federal jury instructions advises judges to instruct juries in securities fraud cases that fraud is “a general term which embraces all ingenious efforts and means that individuals devise to take advantage of others.” Modern Federal Jury Instructions, Instruction 57-15. As that treatise goes on to explain: “The general description of the term ‘fraud’ reflects the traditional reluctance of courts to define the term with specificity. Most courts agree that due to man’s inventiveness, and the speed with which new schemes can be contrived, the varieties of fraud are almost infinite.”

The courts’ reluctance to define the term “fraud” with specificity gives prosecutors, judges and juries wide latitude to criminalize behavior which offends their personal sense of right and wrong. For what does it mean in the law to “take advantage of others”? It is not difficult to define what a false statement means. Similarly, failing to make a disclosure when there is fiduciary obligation to make a disclosure is something that can be clearly understood (although sometimes it is difficult to know when one has a fiduciary duty to another). The phrase “take advantage of others,” however, is not so clear. Try to explain that concept using other words and you quickly discover that the term is so amorphous that any kind of subjectively offensive behavior can fall within its scope. Is it good public policy to criminalize conduct which is described to juries as “taking advantage of others”?

One can easily envision examples of conduct which “take advantage of others” which one would not want to criminalize. For example, is it “taking advantage of others” to engage in an arms length transaction when one party has more leverage than the other party, or one party understands the transaction better than the other? The greater the disparity in leverage and/or understanding, the more offensive the transaction may appear. But is it fraud? The Supreme Court wrote in Chiarella v. United States: “not every instance of financial unfairness constitutes fraudulent activity…” The problem is that there is no clear guidance on when “financial unfairness” crosses the line into fraudulent activity because it “takes advantage of others.”

There is copious case law that holds that the laws must provide “fair notice” of their scope so that people need not guess about whether their proposed conduct is criminal. However, it is hard to reconcile this “fair notice” concept with a federal criminal law that prohibits acts by which one “takes advantage” of another.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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