11th Circuit Tosses Fraud Precedent

Alyson M. Palmer

Daily Report

The full 11th U.S. Circuit Court of Appeals has tossed a 12-year-old precedent that had irked prosecutors in their pursuit of alleged fraudsters.

The 1996 ruling had said that prosecutors seeking to convict for mail fraud needed to show that a defendant's scheme could have deceived a reasonably cautious person. Prosecutors had complained that this requirement had the perverse effect of exempting from prosecution schemes that target the most naive and gullible victims.

But on Monday the 11th Circuit voted to overrule that decision, U.S. v. Brown, 79 F.3d 1550. The court unanimously agreed to uphold the convictions at issue, but four of the 13 judges who looked at the case questioned the reasoning behind Judge William H. Pryor Jr.'s decision for the court.

Chief Judge J.L. Edmondson, who authored the Brown decision, and Judge Stanley F. Birch Jr. said that the reasonably cautious person requirement was part of the common law of fraud when Congress wrote and amended the mail fraud statute and was incorporated into that statute.

Peter Goldberger, a Pennsylvania lawyer who represents one of the defendants in the case, said Tuesday that he hadn't spoken with his client about the decision or whether he would want to ask the U.S. Supreme Court to look at the matter.

But Goldberger said the 11th Circuit's decision was a good one for Supreme Court review. Goldberger disagreed with Pryor's suggestion that the 11th Circuit's prior approach to the question was unique among the federal appeals courts.

Goldberger said the circuits were nearly evenly divided on the question. "So, I think the issue ... has a fairly good chance of being of interest to the Supreme Court," he said.

For now, the case will go back to the three-judge panel that heard the case initially to see if there are other appellate issues raised by Goldberger's client, David W. Svete, and co-defendant Ron Girardot that it still needs to resolve.

SELLING LIFE INSURANCE PROCEEDS

According to the panel's initial opinion issued last year, Svete and Girardot incorporated multiple entities for the purpose of finding investors for viaticals. Those are products in which a terminally ill patient sells the proceeds from his life insurance policy to an investor, who essentially bets the patient will die quickly.

At a 2005 jury trial in Pensacola, Fla., according to the panel opinion, federal prosecutors put on evidence that the defendants had misrepresented to investors the risks of the investments and the life expectancies of the patients, known as viators.

The defendants' lawyers have maintained that the contracts signed by all investors fully and accurately disclosed the terms and risks of investment and that many of the investors dealt with independent agents.

The jury convicted Svete and Girardot on fraud and conspiracy charges. Judge M. Casey Rodgers sentenced Svete to more than 16 years in prison and gave Girardot just over a five-year term. Both men also were ordered to pay more than $100 million in restitution, and Svete was ordered to pay a $21 million forfeiture.

When the defendants appealed, a three-judge panel consisting of 11th Circuit Judge Joel F. Dubina, Senior Judge Phyllis A. Kravitch and U.S. District Judge L. Scott Coogler of the Northern District of Alabama reversed the mail fraud convictions.

They said the trial judge didn't give a jury instruction that included the requirement that the alleged scheme be "reasonably calculated to deceive persons of ordinary prudence and comprehension." That requirement was set forth in the 11th Circuit's Brown decision, written in 1996 by Edmondson and joined by Kravitch and a visiting district court judge.

Twelve years later, Pryor wrote for the en banc court that Brown was inconsistent with the plain language of the federal mail fraud statute, Supreme Court precedent and the common law trends when the mail fraud statute was enacted in 1872 and amended in 1909.

"Proof that a defendant created a scheme to deceive reasonable people is sufficient evidence that the defendant intended to deceive, but a defendant who intends to deceive the ignorant or gullible by preying on their infirmities is no less guilty," wrote Pryor. "Either way, the defendant has criminal intent."

Pryor wrote that the court's 1996 Brown precedent has been rejected by other circuits, commentators and, implicitly, the 11th Circuit judges themselves. He noted Brown has been criticized for relying on civil fraud concepts such as buyer beware, with one commentator explaining that rule was less appropriate for the criminal context when the case is being brought by the government, not a private party looking for money.

Pryor brushed aside the defendants' citations to other circuits' decisions that use "ordinary prudence" language in talking about what prosecutors need to prove about the scheme in a mail fraud case. "None of these decisions reversed a conviction of mail fraud for failure to instruct the jury that the alleged scheme had to be capable of deceiving people of ordinary prudence," the judge wrote, "and none reached the perverse result of insulating criminals who target those least likely to protect themselves."

DISAGREEMENTS

Four of the 13 judges who heard the case en banc wrote concurring opinions indicating they agreed with the result -- that Svete and Girardot cannot get their convictions overturned because the district judge didn't give a jury instruction based on Brown -- but not Pryor's reasoning.

Kravitch, who is allowed to hear the case en banc even though she's a senior judge because she was on the original three-judge panel, wrote a three-sentence opinion saying simply that Brown is no longer good law after a 1999 Supreme Court decision.

Judge Gerald B. Tjoflat's concurrence took issue with Pryor's use of modern sources such as a 1984 edition of a treatise to figure out what the law was over a century ago.

For the second time in a week, Birch penned a very brief opinion indicating he was concurring in a decision of his colleagues "dubitante," which is a word judges use to signal they have doubts about a decision. (On Jan. 30 Birch concurred "dubitante" to a panel's decision to dismiss as moot a challenge to Democrats' presidential primary system.) He also joined Edmondson's concurrence in the fraud case decided Monday.

Edmondson stuck to his position in Brown that the mail fraud statute usually requires the government to show that the scheme was "capable of inducing reliance on the part of a reasonable person exercising ordinary prudence for the protection of his own interests." He wrote that standard was part of the common law of fraud when the statute was written in 1872 and amended in 1909 and has been embraced by the 11th and other circuits for decades.

The chief judge said that even if he were not clearly correct about what the common law was a century ago, his view is reasonable and not plainly incorrect, so the courts have to err on the side of defendants until Congress speaks more clearly on the issue.

In a footnote, Edmondson suggested the reach of the court's ruling had its limits. He questioned whether the court could decide in this case that a real estate seller who exaggerates the value of his property -- the factual scenario in Brown -- is guilty of mail fraud or whether the mail fraud statute covers "seller's talk" or "puffing."

In the end, however, Edmondson agreed the failure to give a jury instruction based on Brown doesn't justify a new trial for Svete and Girardot, saying that failure was harmless error given the complicated and sophisticated nature of the scheme at issue in the case. (The government had conceded any error was not harmless, but Edmondson said the court need not accept that admission.)

The federal government had signaled the case's importance to it by sending its top criminal appeals lawyer, Deputy Solicitor General Michael R. Dreeben, from Washington to argue before the full 11th Circuit.

Amy L. Weil, the longtime appellate chief of the U.S. attorney's office in Atlanta who's now in private practice, said that while prosecutors had found ways around the Brown ruling, they had long disagreed with it. Federal prosecutors had unsuccessfully petitioned for rehearing en banc after the Brown decision came out.

"You were left with the sense that only the savvy could be deceived and have that be a mail fraud violation," said Weil. "And it seemed that it was inevitable that that decision probably wouldn't withstand the test of time."

Karen E. Rhew of the U.S. attorney's office for the Northern District of Florida, which has handled the prosecution of the case, noted in an e-mail that the 11th Circuit's decision echoed the government's argument that the prudent-person rule invited con artists to prey on those most in need of the law's protection -- people of below-average judgment or intelligence.

Goldberger, Svete's lawyer, said the question for the court was not whether the rule was a good one, but whether it was the rule in the 1870s. "It's wrong for judges to rewrite the criminal law according to the times, the needs of the times," he said. "That's Congress' job."

The case was U.S. v. Svete, No. 05-13809.

Staff Reporter Alyson M. Palmer can be reached at Alyson.Palmer@IncisiveMedia.com