This Week at The Ninth: Conspiracy Theories

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This week, the Ninth Circuit explores permissible theories of liability in a bank fraud conspiracy case.

USA V. DIANA YATES

The Court holds that theories of conspiracy liability premised on a bank’s right to accurate information and its right not to continue to pay deceptive employees could not support two executives’ convictions for bank fraud.

Panel: Judges Berzon, Miller, and Bress, with Judge Miller writing the opinion and Judge Bress dissenting.

Key Highlight: “[W]e agree with the defendants that two of the government’s three theories of bank fraud were legally inadequate and that presenting those theories was not harmless. We therefore set aside the conspiracy conviction. Without a conspiracy, the false-entry counts cannot stand because the jury may have based its verdict on those counts on a theory of co-conspirator liability.”

Background: Dan Heine and Diana Yates were executives at the Bank of Oswego charged with one count of conspiracy to commit bank fraud and 18 counts of making a false bank entry in an effort to disguise the financial health of the bank. At trial, the government presented three theories of conspiracy liability to the jury: that Heine and Yates had conspired to deprive the bank of (1) “accurate financial information in the bank’s books and records,” (2) “the defendants’ salaries [and] bonuses,” and (3) “the use of bank funds.” With respect to the false entry charges, the district court instructed the jury that it could find the defendants guilty of making false entries as principals, as aiders and abettors, or as co-conspirators. The jury found Heine and Yates guilty on all counts.

Result: The Ninth Circuit vacated and remanded. First, the Court held that the government’s accurate-information and salary maintenance theories of conspiracy were legally insufficient. “There is no cognizable property interest in the ethereal right to accurate information,” the Court explained, and “[r]ecognizing accurate information as property would transform all deception into fraud.” For that reason, “[t]he deprivation of that intangible right cannot support the convictions.” The salary and bonus theory fared no better, the Court said, because the Supreme Court had rejected a similar theory in Skilling v. United States, 561 U.S. 358 (2010). While “a scheme whose object is to obtain a new or higher salary” may constitute fraud, “a scheme whose object is to deceive an employer while continuing to draw an existing salary” is different, and accepting the government’s theory would criminalize a wide range of commonplace conduct like lying about surfing the Internet at work.  The salary and bonus theory was thus also legally insufficient to support the conspiracy counts. As for the remaining theory that Heine and Yates “misled the bank and the board of directors for the use of bank funds to continue their conspiracy,” the Court held that “the fraudulent diversion of a bank’s funds for unauthorized purposes certainly could be the basis for a conviction,” but nonetheless vacated the conspiracy convictions because presenting the other legally invalid theories was not harmless. Because “the entire district court proceedings were permeated with the prohibited . . . theor[ies],” the Court was “unable to say beyond a reasonable doubt that the invalid legal theories did not contribute to the jury’s verdict.”

Next, the Court vacated the false entry convictions. Heines and Yates argued on appeal that because the district court had instructed the jury that the defendants could be convicted of making false entries either as principals or co-conspirators, the false entry convictions had to fall along with the vacated conspiracy convictions because conspiracy could have been the basis of the jury’s verdict. The Ninth Circuit noted that any effect of the instruction might have been harmless error, but because the government never argued as much on appeal, that argument was forfeited.

Finally, the Court reviewed the sufficiency of the evidence for some of the vacated counts because “[a] finding of insufficient evidence . . . would bar retrial.” False entry counts relating to three loans to bank customers were not supported by sufficient evidence, the Court held, because Heines and Yates had not actually reported anything false. Although they “displayed an economy with the truth that is not much to their credit,” the Court said it was not enough that they omitted who made payments on the loans when the loan payments themselves were not fictitious. Another false entry count was similarly unsupported, the Court reasoned, because it was not “false” to use generic language describing the transaction in a report on the aggregate amount of past due loans. But a final false entry count involving a loan payment made without the borrower’s knowledge “was not what it was necessarily represented to be—an irrevocable commitment by the payor to depart with funds and allow the bank to keep the money in payment of an outstanding loan,” and thus was supported by sufficient evidence.

Judge Bress dissented. In his view, the majority “ ignore[d] the overwhelming evidence of defendants’ guilt” and failed to recognize a valid theory of conspiracy to commit bank fraud: that defendants misappropriated bank funds by diverting millions of dollars to use in their scheme to obscure the bank’s financial health. It did not matter “whether the bank suffered an ‘ultimate financial loss’ or whether defendants had an ‘intent to cause financial loss,’” Judge Bress wrote. He disagreed with the majority that the other theories were the focus of the prosecution, and argued that whatever inaccuracies were in the government’s closing argument at trial did not warrant reversing the conspiracy convictions. Likewise, Judge Bress expressed the view that vacating the false entry convictions was mistaken. Heine and Yates’ personal involvement in making the reports charged as false entries was enough to support those convictions even without conspiracy charges, Judge Bress said. And at very least, the Court should have asked for further briefing on the question of harmlessness. “Whatever the line between poor judgment and criminal behavior,” Judge Bress opined, “the defendants here clearly crossed it.”

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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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