U.S. Appeals Court Reverses Bank Fraud Convictions, Says Prosecutors Charged Defendants With “The Wrong Crimes”

On August 5, in United States v. Banyan, a panel of the U.S. Court of Appeals for the Sixth Circuit reversed the convictions of two defendants on bank fraud-related charges, on the ground that the prosecution had failed to prove that the companies at which the fraud was directed were federally insured financial institutions.  In doing so, the majority opinion stated at the outset that the government had “charged the defendants with the wrong crimes.”

The facts in Banyan involved two individuals: Bryan Puckett, a Nashville homebuilder who had become overloaded with debt incurred while building luxury homes that he had yet to sell; and Amir Banyan, a mortgage broker.  Together, they recruited straw buyers to purchase Puckett’s unsold homes with loans that SunTrust Mortgage Company, where Banyan had previously worked, and Fifth Third Mortgage Company funded.   While neither of those companies was a federally insured financial institution, both were owned by federally insured banks.  The Court of Appeals, however, found that none of the straw buyer’s loan applications (most filled out by Banyan) included, which included overstatements of the buyer’s income and false statements about the buyer’s intention to live in the home – reached the parent banks, and neither parent bank funded the loans.

Banyan’s and Puckett’s scheme eventually garnered more than $5 million from the two mortgage companies.  When Puckett proved unable to keep up with his mounting debt, by the end of 2008 the mortgage companies foreclosed on most of the homes.

Thereafter, there was a delay of more than five years between the time that the FBI began investigating the case in 2009 and the indictment in 2014.  Although most federal felonies have a five-year statute of limitations, federal bank fraud statutes have a ten-year statute of limitations, which made possible the indictment in this case.  Both defendants were charged with financial institution fraud under 18 U.S.C. §1344 and conspiracy to commit financial institution fraud under 18 U.S.C. §1349.   At trial, both defendants were convicted of both offenses.

On appeal, the majority opinion decided that the government had failed to prove that the defendants had intended to obtain bank property, and that the obtaining of bank property occurred by means of false or fraudulent pretenses, representations, or promises.  It stated that the government’s argument that the Court “should regard the mortgage companies as banks because each of them is a wholly owned subsidiary of a bank” was “nearly frivolous.”

The majority opinion also found that the government offered no evidence ”that either of the parent banks funded the loans at issue and that the defendants were aware of such funding.”  It rejected the argument that the parent banks had custody or control of their subsidiary mortgage companies’ funds.  It held that the government failed to prove “that the defendants sought to obtain bank property ‘by means of’ a misrepresentation.”  Since the government’s argument on the bank-fraud conspiracy count under section 1349 was “derivative of its arguments as to the sufficiency of the evidence under § 1344,” the majority stated, it failed “for the same reasons.”

Note: This decision may be of interest to financial-institution fraud compliance teams for two reasons.  The first is that on its face, the case appears to involve a simple classic mistake that federal prosecutors have made in a number of cases over the years: i.e., failure to present evidence proving that the entity from which a defendant sought to obtain funds was a federally insured financial institution.  Unless the parties stipulate to federal jurisdiction in a bank-fraud prosecution (see United States v. Branch, 46 F.3d 440 (5th Cir. 1995)), prosecutors must adduce evidence sufficient to prove that element beyond a reasonable doubt, like all other elements of a federal criminal case.

The government is free to choose to prove that element with one or more forms of evidence (see, e.g., United States v. Stergios, 659 F.3d 127, 131-32 (1st Cir. 2011).  But it must use at least one.   For that reason, a financial institution that was the target of a fraud scheme should be prepared, when federal prosecutors obtain an indictment of one or more defendants connected with the scheme, to identify a suitable representative who can testify at trial if necessary about its insured status.

The second is that the panel’s declaration that the government had “charged the defendants with the wrong crimes” is, on its face, both inaccurate, given the facts of this case, and inappropriate for a federal court to make.  By the majority’s own reasoning, the indictment charged the defendants with federal crimes that, had the prosecutors presented affirmative evidence as to all elements of those crimes, would likely have resulted in conviction.  By referring to “the wrong crimes,” however, the majority’s statement implies that the Court had in mind some other federal crimes that it considered the “right crimes.”

It is no part of the judicial function to opine on whether particular crimes are the “right crimes” or “wrong crimes” for prosecutors to charge.  For that reason, neither phrase should be part of the vocabulary for judicial opinion-writing.

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