WIRE FRAUD 101

"Wire Fraud" is one of the most misunderstood of the so called white collar crimes. People hear "Wire Fraud" and conjure up images of a penny stock boiler room where wanna be wise guys dial up old lady’s and hype stocks traded on a Canadian exchange. What people don’t understand is that many garden variety business crimes are also "Wire Fraud" simply by the fact that the transaction involved the use of the telephone, radio or television. The danger to the business person is that what started as a disputed business transaction can mushroom into a charge of wire fraud.

Consider the stock scenario. A broker has an acquaintance at his club who works for a small biotech company. The acquaintance lets it slip that his company is about to make an imporant announcement regarding FDA approval of a new drug. The broker checks the website of the company and finds that the drug is in trial and is awaiting approval.

The next day the broker starts "pounding the table" and calls his best customers with the tip. The broker’s customers buy the stock but the broker is somewhat disturbed because there is rather high volume on the stock but the price has been relatively stable. Something is stimulating demand but there no shortage of supply. This worries the broker but he keeps selling.

A week later the news comes out that the FDA has halted the trial. Not only has the drug not been approved but is future is very much in doubt. The stock dives. Angry customers question the source of the broker’s information. He gives up the name of his acquaintance. A week later the FBI comes to his door. The acquaintance is an insider with the company. It appears that this insider and several others have been promoting the stock knowing that the drug was in trouble with the FDA. This insider and others have been using the artificially created demand to dump their own stock. The FBI considers the broker a potential co-conspirator. Among the potential charges against the broker is Wire Fraud. The broker is likely not guilty of any crime because he lacked a knowing and willful intention to defraud. However, there are cases that equate an extremely reckless state of mind as sufficient to constitute civil fraud. (See: Kronfeld v. First Jersey Nat. Bank, D.N.J. (1986), 638 F.Supp. 1454). Let us assume one additional fact. Assume the broker finds out about the fraud and immediately has all of his clients liquidate their holdings. Assume that none of his clients lose a penny. He says nothing about what he knows to his clients or to law enforcement. Is he guilty of wire fraud? (There are other statutes that he may have violated including misprison of a felony which means keeping your mouth shut like this broker did.) This is an interesting question. In a sense, this broker had specific knowledge of a stock fraud and had his clients trade their stock based upon his knowledge of this fraud.

There are other improbable scenarios that have constituted Wire Fraud. In U.S. v. Catalfo, C.A.7 (Ill.) 1995, 64 F.3d 1070 a futures and options trader lulled a clearing firm into believing he would trade at a small level but his real plan was to make large purchases of Treasury bond puts and large sale of Treasury bond futures. The trader argued that he sought profit from floor of exchange rather than from firm but he was found to have committed Wire Fraud because he defrauded the clearing firm of right to control its risks.

Defendant's operation of bogus talent agency which he established to meet and seduce young women was a "scheme to defraud" within meaning of this section. U. S. v. Condolon, C.A.4 (Va.) 1979, 600 F.2d 7.

Alleged scheme to build and sell descramblers enabling cable television subscribers to receive additional cable channels without paying cable company is scheme or artifice to defraud and violates mail and wire fraud statutes, even if no false representation or statement is made. U.S. v. Norris, N.D.Ind.1993, 833 F.Supp. 1392, affirmed 34 F.3d 530.

Posting several advertisements on a classified-ads website constituted "mass-marketing," warranting a two-level enhancement to defendant's base offense level for using the Internet to commit wire fraud, though only three people responded to the advertisements, where advertisements invited any and all persons to send money for computers that defendant had no intention of providing; the enhancement did not require use of mass e-mail rather than a classified ad. U.S.S.G. 2F1.1(b)(3), 2F1.1, comment. (n. 3), 18 U.S.C.A. , U.S. v. Pirello, 255 F.3d 728, 1 Cal. Daily Op. Serv. 5090, 2001 Daily Journal D.A.R. 6263 (9th Cir.(Wash.), Jun 20, 2001)

We recently had a case where merchandise had been purchased at a "lowered" price (via a change of UPC code) and returned without a receipt for the full price.  This was charged as "Wire Fraud" because the company allegedly processed its internal paperwork using a T3 line connecting from California to the home office in another state.   We prepared a challenge to that tenuous "wire" connection and quickly resolved the case.