Federal Judiciary

Players: Decision by visiting Alaska District Judge Holland.

Facts: Crandall and cohorts conspired in condo conversions. Id. at *1. The scheme was to concoct fraudulent ?stock cooperatives? to hold apartments, exploit a regulatory loophole, and avoid lengthy condo conversion requirements. Id. The feds charged mail, wire, and ?honest services? fraud. Id. At trial, the defense unsuccessfully sought a mens rea instruction that required ?knowing and conscious? engagement in ?criminal wrongdoing.? Id. at *3. The defendants were convicted.

They were sentenced using loss amounts based on USSG § 2B1.1, comment. n. 2(F)(v)(III) ? a rule for ?regulatory scheme? frauds that permits no offset for ?the value of those items or services.?

Issue(s): 1. Mens Rea: ?Defendants argue that their convictions must be reversed because the district court erred in declining to give their proposed ?intent to defraud? instructions.? Id. at *3.

2. Sentencing Loss Amounts: ?Defendants argue that their sentences must be vacated because the district court erred in relying on . . . 2(F)(v)(III) to calculate the loss caused by the fraud.? Id.

Held: 1. Mens Rea: ?Defendants? proposed ?intent to defraud? jury instruction was not supported by law. Arthur Anderson [an obstruction case upon which the defense had relied] did not involve either the mail or wire fraud statute and there is no indication that the Court intended its holding as to the mens rea requirement for obstruction of justice to extend to other federal statutes.? Id. at *3.

2. Sentencing Loss Amounts: ?The district court erred in relying on Application Note 2(F)(v)(III) to calculate loss.? Id. at *4. ?[T]he use of [this rule] was not a realistic, economic approach to calculating the loss caused by the fraud.? Id. (emphasis added).

Of Note: Crandall will be a key case in the wave of impending mortgage fraud prosecutions. Its mens rea holding, unfortunately, isn?t great. The Court emphasizes that ??[T]he ?intent to defraud? instruction that was given adequately covered the defense theory of lack of intent.? Id. at *3 & n.4. That model instruction states, ?An intent to defraud is an intent to deceive or cheat.? Id. The difference between the Ninth?s model instruction, and the proposed defense instruction, was the (rejected) requirement that the defendant ?knowingly and consciously engaged in criminal wrongdoing.? This mens rea holding will haunt future mortgage fraud prosecutions.

Crandall also bears out our cynical ?06 prediction that the feds would abuse the ?honest services? fraud statute by broadly charging non-government employees with that offense. See COTW blog here, discussing United States v. Williams, 441 F.3d 716 (9th Cir. 2006).

How to Use: Crandall redeems its mens rea misstep with a valuable discussion of loss amount calculations for sentencing. First, the decision rejects the district court?s refusal to off-set the value of the condos: a critical holding where, for example, foreclosure sales can recoup much of the fraud ?loss.?

Second, the decision correctly emphasizes a ?realistic, economic approach? to loss calculations: again, critical to shaving offense levels off of economic fraud cases. Finally, the case suggests several good theories for calculating loss amounts in real estate fraud cases:

i) a ?fair market appraisal? to determine ?actual loss? to the victim;

ii) a ?cost of repair? theory, using the price needed to get the apartments converted to condos, and;

iii) a ?gain? theory ? what the defendants gained by the sale of the condos, less what they paid for the apartments. Id. at *6.

Worry, though, about footnote 8: it appears to limit loss evaluation to the time of the fraud, instead of permitting the offset of subsequent gains (like a rising real estate market). Id. at *6.

For Further Reading: ?Mortgage fraud? is the prosecution du jour in the ND Cal ? and many other federal districts as well. Here?s a good website that collects cases and sentences on these prosecutions.

For the FBI?s spin on these cases (and a very useful overview) visit the Bureau's webpage here.

Map above from http://www.fbi.gov/publications/fraud/mortgage_fraud06.htm.

Steven Kalar, Senior Litigator N.D. Cal. FPD. Website at www.ndcalfpd.org

.

Full post as published by Ninth Circuit Blog on May 26, 2008 (boomark / email).