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United States v. Weimert

United States Court of Appeals, Seventh Circuit

April 8, 2016

UNITED STATES OF AMERICA, Plaintiff-Appellee,
v.
DAVID WEIMERT, Defendant-Appellant

         Argued January 22, 2016.

          Appeal from the United States District Court for the Western District of Wisconsin. No. 3:14-cr-00022-jdp-1 -- James D. Peterson, Judge.

         For United States of America, Plaintiff - Appellee: Antonio M. Trillo, Attorney, Office of The United States Attorney, Madison, WI.

         For David Weimert, Defendant - Appellant: Stephen J. Meyer, Attorney, Meyer Law Office, Madison, WI.

         Before BAUER, FLAUM, and HAMILTON, Circuit Judges. FLAUM, Circuit Judge, dissenting.

          OPINION

         Hamilton, Circuit Judge.

         In the midst of the 2008-09 financial crisis, a Wisconsin bank called AnchorBank was struggling to stay above water. Under pressure to find cash to pay its own lenders, the bank's president told vice president David Weimert to try to sell the bank's share in a commercial real estate development in Texas. Weimert, who is the defendant and appellant in this criminal wire fraud case, successfully arranged a sale that exceeded the bank's target price by about one third. The deal also relieved the bank of a liability of twice the sale price.

         Given the version of the facts we must accept for this appeal, however, Weimert saw an opportunity to insert himself into the deal personally. He persuaded two potential buyers that he would be a useful partner for them. Both buyers included in their offer letters a term having Weimert buy a minority interest in the property. The bank agreed. It also agreed to pay Weimert an unusual bonus to enable him to buy the minority interest. We must also assume that the successful buyer, at least, would have been willing to go forward without Weimert as a partner, and that Weimert deliberately misled his board and bank officials to believe that the successful buyer would not close the deal if he were not included as a minority partner. The government prosecuted Weimert for wire fraud on the theory that his actions added up to a scheme to obtain money or property by fraud, and the jury convicted him on five of six counts of wire fraud under 18 U.S.C. § 1343.

         We reverse and order judgment of acquittal. Federal wire fraud is an expansive tool, but as best we can tell, no previous case at the appellate level has treated as criminal a person's lack of candor about the negotiating positions of parties to a business deal. In commercial negotiations, it is not unusual for parties to conceal from others their true goals, values, priorities, or reserve prices in a proposed transaction. When we look closely at the evidence, the only ways in which Weimert misled anyone concerned such negotiating positions. He led the successful buyer to believe the seller wanted him to have a piece of the deal. He led the seller to believe the buyer insisted he have a piece of the deal. All the actual terms of the deal, however, were fully disclosed and subject to negotiation. There is no evidence that Weimert misled anyone about any material facts or about promises of future actions. While one can understand the bank's later decision to fire Weimert when the deception about negotiating positions came to light, his actions did not add up to federal wire fraud. Weimert is entitled to judgment of acquittal. We order his prompt release from federal prison, on the stated terms of supervised release in his sentence, pending issuance of our mandate.

         I. The Standard of Review

         We review de novo the denial of a motion for judgment of acquittal. United States v. Durham, 766 F.3d 672, 678 (7th Cir. 2014), citing United States v. Claybrooks, 729 F.3d 699, 704 (7th Cir. 2013). We construe the evidence in the light most favorable to the government, asking whether a rational trier of fact could have found the elements of the crime beyond a reasonable doubt. Durham, 766 F.3d at 678, quoting United States v. Love, 706 F.3d 832, 837 (7th Cir. 2013).

         Given our deference to jury determinations on evidentiary matters, we rarely reverse a conviction for mail or wire fraud due to insufficient evidence. See United States v. Mullins, 800 F.3d 866, 870 (7th Cir. 2015) (" Sufficiency challenges are very difficult to win ... ." ). We have sometimes said that such appeals face " a nearly insurmountable hurdle." E.g., United States v. Domnenko, 763 F.3d 768, 772 (7th Cir. 2014), quoting United States v. Torres-Chavez, 744 F.3d 988, 993 (7th Cir. 2014). The hurdle is not actually insurmountable, though. See, e.g., Durham, 766 F.3d at 678-79 (reversing on two counts); United States v. Dooley, 578 F.3d 582, 588-89 (7th Cir. 2009) (reversing on one count); see also United States v. Lake, 472 F.3d 1247, 1260 (10th Cir. 2007); United States v. Izydore, 167 F.3d 213, 220 (5th Cir. 1999); United States v. Goodman, 984 F.2d 235, 239-40 (8th Cir. 1993). Even more to the point, the Supreme Court has reversed mail and wire fraud convictions that would have dramatically expanded the scope of the statutes. Skilling v. United States, 561 U.S. 358, 413-15, 130 S.Ct. 2896, 177 L.Ed.2d 619 (2010) (affirming the reversal of honest-services wire fraud conviction); Cleveland v. United States, 531 U.S. 12, 26-27, 121 S.Ct. 365, 148 L.Ed.2d 221 (2000) (reversing wire fraud conviction for failure to demonstrate loss of property); McNally v. United States, 483 U.S. 350, 360-61, 107 S.Ct. 2875, 97 L.Ed.2d 292 (1987) (reversing wire fraud conviction on honest services theory of fraud prior to statutory revision). We take a similar step here.

         II. The Limits of Mail and Wire Fraud

         A. The Breadth of Mail and Wire Fraud

         Before giving a detailed account of the evidence, we explain the legal standards we apply. The wire fraud statute prohibits schemes to defraud or to obtain money or property by means of " false or fraudulent pretenses, representations, or promises" if interstate wire or electronic communications are used to execute the scheme. 18 U.S.C. § 1343. To convict a person under § 1343, the government must prove that he " (1) was involved in a scheme to defraud; (2) had an intent to defraud; and (3) used the wires in furtherance of that scheme." United States v. Faruki, 803 F.3d 847, 852 (7th Cir. 2015), quoting Durham, 766 F.3d at 678.

         To prove a scheme to defraud, the government must show that Weimert made a material false statement, misrepresentation, or promise, or concealed a material fact. United States v. Powell, 576 F.3d 482, 490 (7th Cir. 2009); see also Neder v. United States, 527 U.S. 1, 25, 119 S.Ct. 1827, 144 L.Ed.2d 35 (1999) (holding " materiality of falsehood" is an element of federal mail and wire fraud statutes). Intent to defraud requires proof that the defendant acted willfully " with the specific intent to deceive or cheat, usually for the purpose of getting financial gain for one's self or causing financial loss to another." Faruki, 803 F.3d at 853, quoting United States v. Howard, 619 F.3d 723, 727 (7th Cir. 2010).

         Like its cousin mail fraud, the wire fraud statute has been interpreted to reach a broad range of activity. Courts have taken an expansive approach to what counts as a material misrepresentation or concealment in a scheme to defraud. As we will see, it is possible to put together broad language from courts' opinions on several different points so as to stretch the reach of the mail and wire fraud statutes far beyond where they should go.

         First, for example, materiality has been defined in broad and general terms as having a tendency to influence or to be capable of influencing the decision-maker. Neder, 527 U.S. at 16; United States v. Seidling, 737 F.3d 1155, 1160 (7th Cir. 2013).

         Second, the concept of a misrepresentation is also broad, reaching not only false statements of fact but also misleading half-truths and knowingly false promises. Powell, 576 F.3d at 490-91; United States v. Sloan, 492 F.3d 884, 890 (7th Cir. 2007), citing United States v. Stephens, 421 F.3d 503, 507 (7th Cir. 2005); see generally Durland v. United States, 161 U.S. 306, 312, 16 S.Ct. 508, 40 L.Ed. 709 (1896) (mail fraud not limited to common law fraud but includes " representations as to past or present, or suggestions and promises as to the future" ). It can also include the omission or concealment of material information, even absent an affirmative duty to disclose, if the omission was intended to induce a false belief and action to the advantage of the schemer and the disadvantage of the victim. United States v. Morris, 80 F.3d 1151, 1160-61 (7th Cir. 1996), quoting Emery v. American General Finance, Inc., 71 F.3d 1343, 1346 (7th Cir. 1995); see also United States v. Keplinger, 776 F.2d 678, 697-98 (7th Cir. 1985).

         Third, wire fraud does not require the false statement to be made directly to the victim of the scheme. Deception of someone else can suffice if it carries out the scheme. Seidling, 737 F.3d at 1160.

         Fourth, it is no defense that the intended victim of wire fraud was too trusting and gullible or, on the other hand, was too smart or sophisticated to be taken in by the deception. United States v. Coffman, 94 F.3d 330, 333 (7th Cir. 1996); see also United States v. Colton, 231 F.3d 890, 903 (4th Cir. 2000) (" If a scheme to defraud has been or is intended to be devised, it makes no difference whether the persons the schemers intended to defraud are gullible or skeptical, dull or bright." ) (citation omitted).

         These and other expansive glosses on the mail and wire fraud statutes have led to their liberal use by federal prosecutors. As one future federal judge put it during his tenure as a prosecutor, these statutes are " our Stradivarius, our Colt 45, our Louisville Slugger, our Cuisinart--and our true love." Jed S. Rakoff, The Federal Mail Fraud Statute (Part I), 18 Duq. L. Rev. 771, 771 (1980). Mail and wire fraud statutes " have long provided prosecutors with a means by which to salvage a modest, but dubious, victory from investigations that essentially proved unfruitful." John C. Coffee, Jr. & Charles K. Whitehead, The Federalization of Fraud: Mail and Wire Fraud Statutes, in White Collar Crime: Business and Regulatory Offenses § 9.05, at 9-73 (1990).

         The mail and wire fraud statutes have " been invoked to impose criminal penalties upon a staggeringly broad swath of behavior," creating uncertainty in business negotiations and challenges to due process and federalism. Sorich v. United States, 555 U.S. 1204, 129 S.Ct. 1308, 1308-11, 173 L.Ed.2d 645 (2009) (Scalia, J., dissenting from denial of certiorari on scope of " honest services" theory of fraud). We must take care not to stretch the long arms of the fraud statutes too far. See Pasquantino v. United States, 544 U.S. 349, 377, 125 S.Ct. 1766, 161 L.Ed.2d 619 (2005) (Ginsburg, J., dissenting) (Supreme Court has " also recognized that incautious reading of the statute could dramatically expand the reach of federal criminal law, and we have refused to apply the proscription exorbitantly" ).

         B. Fraud and Commercial Negotiations

         This case presents a test of how far the mail and wire fraud statutes reach when parties negotiate a substantial commercial transaction that involves, as almost all will, the use of the mails or interstate wire communications. Some deceptions in commercial negotiations certainly can support a mail or wire fraud prosecution. A party may not misrepresent material facts about an asset during a negotiation to sell it. For example, a seller or his agent may not falsely tell potential buyers or investors that a piece of property has no history of environmental problems if soil and groundwater contamination on the property was discovered the year before. The buyer would be led to purchase a property worth far less than she was led to believe, given the looming remediation costs. Similarly, a company may not inform a potential investor that it expects patent protection for its key intellectual property if its patent application was recently rejected as barred by prior art. The investor would be led to believe that he was investing in a valuable asset that was actually worthless. The misrepresentations materially alter one party's understanding of the subject of the deal.

         In prior cases, we have also said that a company may not hide behind disclaimers while deliberately understating expected losses in disclosures to investors. The information would be material to the price buyers of securities are willing to pay. United States v. Morris, 80 F.3d 1151, 1167-68 (7th Cir. 1996). Nor may a company choose to advertise the success of one investor in isolation while omitting the crippling losses of ninety percent of its investors. United States v. Biesiadecki, 933 F.2d 539, 541-43 (7th Cir. 1991). Nor may a party falsify loan documents to defraud mortgage lenders, United States v. Sheneman, 682 F.3d 623, 629 (7th Cir. 2012), forge a buyer's signature on a check, United States v. Powell, 576 F.3d 482, 491 (7th Cir. 2009), or use false advertising to guarantee investors impossible returns, United States v. Sloan, 492 F.3d 884, 890-91 (7th Cir. 2007). In short, the federal mail and wire fraud statutes reach a seller's or buyer's deliberate misrepresentation of facts or false promises that are likely to affect the decisions of a party on the other side of the deal.

         These practices deviate far from behavioral norms for business transactions in a market economy governed by the rule of law. There are more difficult cases, however. " Not all conduct that strikes a court as sharp dealing or unethical conduct is a 'scheme or artifice to defraud.'" United States v. Colton, 231 F.3d 890, 901 (4th Cir. 2000) (alteration omitted), quoting Reynolds v. East Dyer Development Co., 882 F.2d 1249, 1252 (7th Cir. 1989) (affirming summary judgment and sanctions for defendants in civil RICO case alleging failure to disclose information that home lots were not suitable for building). The mail and wire fraud statutes " do not cover all behavior which strays from the ideal." United States v. Colton, 231 F.3d at 901 (citation and internal quotation marks omitted). We have also explained that a corporate officer's breach of fiduciary duty, when combined with a mailing or wire communication, is not sufficient to show mail or wire fraud. United States v. Kwiat, 817 F.2d 440, 444 (7th Cir. 1987) (reversing convictions). And " we do not imply that all or even most instances of non-disclosure of information that someone might find relevant come within the purview" of the mail and wire fraud statutes. United States v. Keplinger, 776 F.2d 678, 697-98 (7th Cir. 1985) (affirming mail fraud convictions for scheme to submit false laboratory results on safety of medications).

         C. Fraud and Negotiating Positions

         As shown below, the central issue in this case is whether the mail and wire fraud statutes can be stretched to criminalize deception about a party's negotiating positions, such as a party's bottom-line reserve price or how important a particular non-price term is. We conclude that they cannot.

         From strands of case law, it is true, one can piece together a mail or wire fraud case based on such deception about negotiating positions. To track the specific rules we discussed above: First, information about a party's negotiating position is surely material in the sense that it is capable of influencing another party's decisions. Second, actionable deception can include false statements of fact, misleading half-truths, deceptive omissions, and false promises of future action. All of these descriptions may fit deceptions about negotiating positions, at least if a negotiator's present state of mind is treated as a fact. Third, the false statement may be made to someone other than the owner or holder of the money or property targeted by the scheme. And fourth, it is no defense that the intended victim either trusted the defendant too much or was too savvy to be fooled.

         But Congress could not have meant to criminalize deceptive misstatements or omissions about a buyer's or seller's negotiating positions. See United States v. Coffman, 94 F.3d 330, 334 (7th Cir. 1996) (" it would not do to criminalize business conduct that is customary rather than exceptional and is relatively harmless" ). Buyers and sellers negotiate prices and other terms. To state the obvious, they will often try to mislead the other party about the prices and terms they are willing to accept. Such deceptions are not criminal.

         To take a simple example based on price, suppose a seller is willing to accept $28,000 for a new car listed for sale at $32,000. A buyer is actually willing to pay $32,000, but he first offers $28,000. When that offer is rejected and the seller demands $32,000, the buyer responds: " I won't pay more than $29,000." The seller replies: " I'll take $31,000 but not a penny less." After another round of offers and demands, each one falsely labeled " my final offer," the parties ultimately agree on a price of $30,000. Each side has gained from deliberately false misrepresentations about its negotiating position. Each has affected the other side's decisions. If the transaction involves interstate wires, has each committed wire fraud, each defrauding the other of $2,000? Of course not. But why not?

         The government's answer at oral argument was the absence of " intent to defraud." That answer begs the question. How do we recognize " intent to defraud" if a party has gained a better deal by misleading the other party about its negotiating position? If a party's negotiation position is material for purposes of the mail and wire fraud statutes, each has obtained a financial gain by deliberately misleading the other.[1]

         The better answer is that negotiating parties, and certainly the sophisticated businessmen in this case, do not expect complete candor about negotiating positions, as distinct from facts and promises of future behavior. Deception about negotiating positions--about reserve prices and other terms and their relative importance--should not be considered material for purposes of mail and wire fraud statutes.

         Even after receiving the government's post-argument supplemental authority, we know of no other case in which a court has found that deceptive statements about negotiating positions amounted to a scheme to defraud under the mail or wire fraud statutes. This absence is consistent with more general understandings in the law.

         In the Restatement (Second) of Torts treatment of fraud, for example, statements about a party's opinions, preferences, priorities, and bottom lines are generally not considered statements of fact material to the transaction. See Restatement (Second) of Torts § 538A cmts. b, g (distinguishing between representations of facts--where the maker has definite knowledge--and opinions--including a " maker's judgment as to quality, value, authenticity or similar matters as to which opinions may be expected to differ" ). Rules of professional conduct for attorneys require honesty in dealing with others, but they draw a similar line on negotiation positions. See Model R. Prof. Conduct 4.1(a) cmt. 2 (" Under generally accepted conventions in negotiations, certain types of statements ordinarily are not taken as statements of material fact. Estimates of price or value placed on the subject of a transaction and a party's intentions as to an acceptable settlement of a claim are ordinarily in this category ... ." ); see also G. Richard Shell, When Is It Legal to Lie in Negotiations?, 32 Sloan Management Rev. 93, 96 (1991) (" There are thus no legal problems with lying about how much you might be willing to pay or which of several issues in a negotiation you value more highly. Demands and reservation prices are not, as a matter of law, material to a deal." ).

         To show how these general considerations govern this case, we lay out in Part III the sequence of negotiations in this sale. Then, in Part IV, we work through the more detailed legal analysis of the government's case against Weimert, including the issues posed by Weimert's status as a corporate officer of one party to the deal, acting under a disclosed conflict of interest. We recount the facts in the light reasonably most favorable to the government. The question to keep in mind is whether the ...


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