Can there be fraud if no money is lost?
That’s the question raised by the fraud charges filed last week by Manhattan district attorney, Cyrus R. Vance Jr., against two media companies.
Fraud is a type of theft, but in this case, the loans were repaid and the banks the firms are accused of deceiving did not lose any money.
That poses a challenge for prosecutors. A loss in a fraud case is important not as an element of the crime — which it is not — but more for the jury appeal. A theft typically involves a victim losing money or property, but when a bank loans money and gets repaid, then misstatements may not cause much concern.
According to the charges, the two media companies — IBT Media, which owned Newsweek, and Christian Media, a faith-based online publisher in Washington — obtained loans from banks to purchase high-end computer servers. Instead, most of the money was funneled back to accounts controlled by the two media companies and their principals — Etienne Uzac, a co-founder of IBT, and William Anderson, Christian Media’s former chief executive and publisher — to make payments on other loans to maintain Newsweek’s credit profile, the indictment said.
The defendants also provided false information to the banks, including financial statements audited by a fictitious accountant for which they created a fake website, phone number, and email address, according to the charges.
In a statement on IBT’s website, Mr. Uzac asserted his innocence and said that “the equipment lenders in question have been repaid in full along with interest and fees. There were no victims, and my intention never was to harm anyone.” Mr. Anderson’s attorney stated that “the Manhattan district attorney’s office is initiating a case where the victim has suffered no financial harm.”
To prove fraud, prosecutors must show the defendants engaged in “a scheme constituting a systematic ongoing course of conduct with intent to defraud more than one person” of property with a value in excess of $1,000.
The key element in these types of cases is proving fraudulent intent. If the defendants can show they acted in good faith and did not try to deceive anyone, then they cannot be convicted of fraud.
New York courts have long recognized that showing what is in a defendant’s mind is difficult. There is rarely evidence establishing what a person was thinking at the exact moment of a transaction. In People v. Sala, the New York appeals court explained that “fraudulent intent is usually not susceptible of proof by direct evidence and must ordinarily be inferred from circumstantial evidence such as the defendant’s knowledge of the misleading or deceptive nature of the particular business practices employed.”
The use of a fake accountant could go a long way toward proving that there was a scheme to mislead the banks. Under the federal bank fraud statute, the Supreme Court held in 2014 in Loughrin v. the United States that the crime is perpetrating the scheme, not the completion of the fraud that might cause damage to the bank.
But the absence of any loss to the banks raises a potential defense: “So what if we fudged the financials a little?” Banks often require a statement from a borrower about how the funds will be used, but their primary concern is whether the money will be repaid with interest.
Mr. Vance’s office has encountered problems in high profile white-collar cases in recent years. In 2015, Abacus Federal Savings Bank, a small lender in New York’s Chinatown, was acquitted of fraud, conspiracy and falsifying business records charges for mortgage loans involving false information. A column in The New York Timesdescribed the bank’s encounter with prosecutors as a “surreal trip” that began with a 184-count indictment and ended with its exoneration by a jury.
The New York district attorney filed a 106-count indictment in 2014against three executives of Dewey & LeBoeuf, once a leading Manhattan law firm until it collapsed in 2012, accusing them of fraud. After two trials that each lasted months, only one executive was convicted, receiving a sentence of a $1 million fine and 750 hours of community service.
The result in these cases does not mean the prosecution of IBT Media, Christian Media and their executives is doomed. Unlike the proceedings against Abacus and the Dewey executives, this indictment only lists 10 charges, so it will be a much more streamlined case. That will make it easier to present the case to a jury, which may not have to grapple with a mountain of evidence in trying to discern whether there was an intent to defraud the banks.
But the absence of any loss is sure to be a key point raised by the defendants. If no one was hurt, then can there be a crime? The answer is yes, but the government will need to be persuasive.