Card Declined: The Credit Card Fraud – Crime Sentencing Transaction

The Issue

Wire fraud, an intentional act to defraud another individual or entity of property (usually money) through electronic means, is becoming an increasingly common and widespread crime in the United States. According to a study by Javelin Strategy & Research in partnership with LifeLock, Inc., approximately 15.4 million consumers were victims of identity theft or fraud in 2016, up 16 percent from 2015, and more than ever recorded by the firm. Obtaining credit card numbers, encoding them on blank cards, and making purchases or withdrawals from automated teller machines (ATMs) has become a favorite medium of crime among fraudsters. When determining how a perpetrator of wire fraud should be sentenced for possessing credit cards that are canceled, expired or attached to an account from which all funds have been successfully siphoned, a key issue is whether the “access device” is in fact usable by the perpetrator.

The Split

Credit cards that have been encoded with stolen numbers and used fraudulently are governed by 18 U.S.C. § 1029(e)(1) and (e)(3). Of particular importance, Application Note 3(F)(i) of § 2B1.1 of the sentencing guidelines says in cases involving “unauthorized access devices,” in this case credit cards, “loss includes any unauthorized charges made with the counterfeit access device.”

The Ninth Circuit ruled on this issue in 2012, when it considered United States v. Onyesoh, which explored access device fraud under 18 U.S.C. § 1029 and whether the government must prove the usability of an expired credit card number in order for a district court to increase the severity of a sentence. In Onyesoh, the Ninth Circuit held that unauthorized access devices must be usable:

An “unauthorized access device” must be an “access device,” which itself must be capable of obtaining “money, goods, services, or any other thing of value.” 18 U.S.C. § 1029(e)(1) and (e)(3). The statute’s language is clear and we give it full effect—unauthorized access devices are a subset of access devices, and therefore must be capable of obtaining something of value…The statute is intended to target major fraud operations instead of individual [fraud]…But the kind of devices potentially covered by the statute says nothing about the quantum of proof necessary to establish usability. The legislative history simply does not address that issue. No court, in this or any other circuit, has read usability out of the statute.

But in deciding United States v. Popovski at the end of 2017, the Seventh Circuit changed the score. Judge Easterbrook adopted the Sixth Circuit’s 2015 decision in United States v. Moon, arguing that the statute and note must be read together:

[T]he definition of “unauthorized access device” in § 1029(e)(3) includes “any access device that is lost, stolen, expired, revoked, canceled, or obtained with intent to defraud”. This necessarily implies that a card, number, or other identifier with a potential to obtain goods or initiate a transfer of funds remains an “access device” even if it is “expired, revoked, [or] canceled.” These two statutory paragraphs can work together only if paragraph (1) defines an “access device” according to its nature—the sort of thing that could in principle be used to get goods or funds, whether or not it would work in practice…. If a calculation under Application Note 3(F)(i) overstates the seriousness of the offense, a district judge must adjust accordingly. That process, rather than warping the language of § 1029(e), is the way to avoid the Ninth Circuit’s parade of horribles.

While the Ninth Circuit’s decision was likely predicated on a desire to prevent obtuse sentences for criminals who possessed but did not use expired credit card numbers, Judge Easterbrook’s scathing critique of the Ninth Circuit made clear that the Seventh Circuit, like the Sixth Circuit, will not cut financial criminals any sentencing slack:

Like the panel in Onyesoh, we too think that a district judge should not increase a sentence just because the defendant possessed ancient pieces of plastic or lists of numbers useful only during the reign of Xerxes. But we disagree with Onyesoh’s view that this result should be achieved by treating the language in § 1029(e)(3) as irrelevant to the meaning of “access device”. Courts must read the statute to reconcile these paragraphs.

Looking Forward 

After a new sentencing hearing, the Ninth Court of Appeals and the Supreme Court denied Onyesoh’s petition for a writ of certiorari.  Certiorari is currently pending for Popovski, but the Supreme Court has not expressed interest in ruling on the case in the current session.

Judge Easterbrook, in deciding United States v. Popovski, came down hard on the Ninth Circuit’s interpretation of the sentencing law regarding this sort of wire fraud. He argued, in part, that district judges can come to a workable resolution under the current law without disregarding any specific portion of the statute. Following Judge Easterbrook’s logic, it seems unlikely that this issue will pique the Supreme Court’s interest. Nevertheless, if credit card fraud continues to rise at record levels and continues to emerge as the cause celebre of the consumer crime world, constituent pressure may push Congress to act.

 

On Whose Authority? Authorized Access and Criminalized Computer Use under CFAA

It’s a close thing, when watching a crime drama, to see whether the makers of a show thoroughly misunderstand the law or the use of computers. The fantasy of the hacker furiously typing as code streams down a computer screen, and the fantasy of the lawyer defying the judge to give a rousing speech and sway the jury, are equally illusory mainstays of network TV. Occasionally, however, law and computer technology do produce real drama. On January 13th, 2013, a young man named Aaron Swartz faced a lawsuit from the United States. Swartz, a student from MIT, had been accused of downloading over 4,000,000 articles from the online database JSTOR. Swartz had, according to the United States, broken into a network closet at MIT and downloaded the majority of the JSTOR archives, which MIT had licensed, before sharing the millions of scholarly articles on various file-sharing websites. After his breach of the network was discovered, the United States filed suit. During the course of the litigation, after learning that he could face up to seven years in prison, Mr. Swartz committed suicide.

Though this is a dramatic example of information redistribution, many who are currently law students or young lawyers grew up committing, and continue to commit, routine criminal offenses on their computers. Anyone who ever downloaded a song over Napster or Limewire, who got a free version of Microsoft Office or Adobe Photoshop from a friend on a USB drive, or fought through hundreds of pop-up ads to watch a low-res version of a not-on-Netflix movie with a date has committed a crime. Commentators have often worried about statutes that criminalize large swaths of everyday behavior, creating a situation where most people receive no penalty while an arbitrary few face crushing consequences. One such statute under scrutiny is the Computer Fraud and Abuse Act, the statute under which Mr. Swartz was prosecuted.

The Split

The Computer Fraud and Abuse Act, ‘CFAA,’ is codified at 18 U.S.C. § 1030. The CFAA criminalizes certain acts by those who have “knowingly accessed a computer without authorization or exceeding authorized access.” The question is, what constitutes authorized access? Courts have split over the proper definition. The narrow view, held by the Ninth and Fourth Circuits, interprets “exceeding authorized access” as referring to only access restrictions on restricted data itself. The broader view, held by the First, Fifth, Seventh and Eleventh Circuits, interprets “exceeding authorized access” as referring to any use of the computer that was not authorized.

Typical of the narrow interpretation is the case U.S. v. Nosal (9th Cir. 2012). The defendant, David Nosal, was planning on leaving his contracting firm and starting a competing business. Along with associates, he obtained login credentials and downloaded source lists and other data from his employer, to use in founding his own company. Nosal summarises the split well:

This language can be read either of two ways: First, as Nosal suggests and the district court held, it could refer to someone who’s authorized to access only certain data or files but accesses unauthorized data or files—what is colloquially known as “hacking.” For example, assume an employee is permitted to access only product information on the company’s computer but accesses customer data: He would “exceed authorized access” if he looks at the customer lists. Second, as the government proposes, the language could refer to someone who has unrestricted physical access to a computer, but is limited in the use to which he can put the information. For example, an employee may be authorized to access customer lists in order to do his job but not to send them to a competitor.

After review, the Ninth Circuit upheld the reasoning of the district court, arguing both that the broad interpretation made redundant prior “without authorization,” clause of the statute, and that the federal statute too broadly criminalized computer use:

Minds have wandered since the beginning of time and the computer gives employees new ways to procrastinate, by g-chatting with friends, playing games, shopping or watching sports highlights. Such activities are routinely prohibited by many computer-use policies, although employees are seldom disciplined for occasional use of work computers for personal purposes. Nevertheless, under the broad interpretation of the CFAA, such minor dalliances would become federal crimes. While it’s unlikely that you’ll be prosecuted for watching TV on your work computer, you could be. Employers wanting to rid themselves of troublesome employees without following proper procedures could threaten to report them to the FBI unless they quit. Ubiquitous, seldom-prosecuted crimes invite arbitrary and discriminatory enforcement.

The broader view can be found in cases like U.S. v. Rodriguez (11th Cir. 2010), argued in the Eleventh Circuit. Rodriguez found that an employee in the Social Security Administration who authorized personal information in the database without a business reason had violated the CFAA, as “the policy of the Administration is that use of databases to obtain personal information is authorized only when done for business reasons… In the light of this record, the plain language of the Act forecloses any argument that Rodriguez did not exceed his authorized access.”

Looking Forward

Many tech commentators continue to worry that the CFAA as interpreted as broadly as it is in the Rodriguez case will, as the Ninth Circuit notes, criminalize even basic work slacking. Despite his win, the defendant Nosal found himself in court again for U.S. v. Nosal (9th Cir. 2016), or “Nosal II.” In this case, Mr. Nosal was found in violation of the CFAA, though the Ninth Circuit retained their narrow interpretation. Mr. Nosal appealed to the Supreme Court, and the case was denied certiorari. Until the Supreme Court clarifies the CFAA, courts will continue to disagree on how broadly the statute should be interpreted, and on whether the use of a work computer “without a business reason,” like sneaking some Netflix in during company time, should be a federal crime.

Speak Now or Forever Hold Your Peace: A Split on a Fiduciary’s Duty to Speak

Imagine: a member of your trusted investment club approaches you encouraging you to purchase securities in a new company, which you do because your investment club always has the group’s best interests in mind. Later you learn that this member received a commission from your transaction. You feel betrayed, but did he have a duty to tell you about his stake in your investment?

Duty to Speak

In Chiarella v. United States, the Supreme Court held, “When an allegation of fraud is based upon nondisclosure, there can be no fraud absent a duty to speak.” Such a duty is found when a party has information “that the other is entitled to know because of a fiduciary or similar relation of trust and confidence between them.”

This rule, like virtually all legal rules, reflects a balancing of competing interests. On one hand, we want to believe that people are trustworthy, particularly when a person has a fiduciary duty to us. The investment adviser industry depends on people trusting that their investment advisers have their best interests at heart. If an individual recommending the purchase of securities is deriving a commission from the sale, a potential investor would want to be wary of a potential conflict of interest.

On the other hand, is it wise to impose a duty to speak on every individual who may share information about a company offering securities? With the growth of technology, communication and the sharing of information have become constant. If such a duty is imposed on every individual who recommends a security or supplies information about a company, the chain of liability would be unending.

The Split

On whom do we impose a duty to speak? Three circuits have taken different approaches.

The Third Circuit found that a general fiduciary duty does not implicate a duty to speak. In Schiff v. United States the Court held:

“The Government argues that Schiff’s duty to disclose in the SEC filings derives from a general fiduciary obligation of ‘high corporate executives’ to the company’s shareholders . . . This argument reaches too far.”

The Second Circuit held in Securities and Exchange Commission v. Dorozkho that a duty to speak should be found wherever there is a fiduciary duty.

“[These cases] all stand for the proposition that nondisclosure in breach of a fiduciary duty ‘satisfies § 10(b)’s requirement . . . [of] a deceptive device or contrivance’.”

Finally, the Ninth Circuit extends the duty to speak to a much broader class in Paracor Finance, Inc. v. General Electric Capital Corp.

“A number of factors are used to determine whether a party has a duty to disclose: (1) the relationship of the parties, (2) their relative access to information, (3) the benefit that the defendant derives from the relationship, (4) the defendant’s awareness that the plaintiff was relying upon the relationship in making his investment decision, and (5) the defendant’s activity in initiating the transaction.”

Looking Forward

While the Ninth Circuit approach allows a judge to balance factors and find whether a duty to speak exists as a matter of fairness, this approach does not seem practical in a world where people are constantly accruing and sharing information. Thus, it makes the most sense for the court to follow the Second Circuit’s approach of only finding a duty to speak where there is a fiduciary duty, which represents the middle ground of who has a duty to speak and promotes predictability.

Failure To Read: When “or” means “and,” Perjury, and the Recantation Defense

When does “or” mean “and”? When does “or” simply mean “or”? And whose job is it to decide—a Federal court or Congress?

A Tale as Old as Time

Federal courts have been telling us the what the law is since time immemorial. (Or 1803, roughly. And to answer your question, yes, that is an obligatory link to Marbury.) This task has always involved more than simply reading the text and giving each word its ordinary definition—it has always been, as the late Justice Scalia oft lamented, a matter of interpretation. (For an accessible book review, click here.) And, while many judges profess to search for the “objective” intent of the law, the final result is often guided by the ethereal intent of Congress and judicial policy choices, not the objective text. While this may lead to “good” law—if such a thing could objectively exist—sometimes a federal court ends up wreaking havoc upon the system Congress created, devaluing important rights and undermining Congressional policy.

This dynamic is clearly conveyed in one of the older splits this blog will cover: whether, under 18 U.S.C. 1623, the recantation defense is written in the conjunctive or the disjunctive.

Perjury Before a Grand Jury or a Court

People lie all the time, some more than others.  Immoral a lie may be, but rarely are such lies actionable. However, a lie—or, more technically, a “false declaration”—before a grand jury or a court isn’t just a moral issue, it’s a criminal one.

Under 18 U.S.C. 1623, if an individual under oath, in any proceeding before or ancillary to any court or grand jury, knowingly makes any false material declaration, they can be fined and imprisoned for up to five years. A seasoned lawyer—or a bright 1L, frankly—can see there are several ways to defend a perjury charge. Knowingly, materiality, falsity—all grounds ripe for a defense lawyer (and all grounds this post will not discuss further).

Congress also provided a defense within the statute itself—the recantation defense. Under 1623(d):

Where, in the same continuous court or grand jury proceeding in which a declaration is made, the person making the declaration admits such declaration to be false, such admission shall bar prosecution under this section if, at the time the admission is made, the declaration has not substantially affected the proceeding, or it has not become manifest that such falsity has been or will be exposed.

Seems simple, right? As long as the false declaration has not substantially affected the proceeding, or it has not become “manifest” that the lie has been or will be exposed, a witness can recant without fear of prosecution.

The recantation defense comports with the common-sense purpose of perjury statutes: to promote truthfulness, not truthiness. By building a safety valve within the statute, Congress encourages a potential-perjurer to recant and tell the truth, all at the low-low price of $ 9.99 (and an invaluable get out of jail free card). It’s not the easiest defense to establish—you still have to show that the false declaration has not “substantially affected the proceeding,” or that it has not become “manifest” that the lie will be or has been exposed. But that’s precisely the point. If the lie has already had a substantial affect and it’s clear you’ve been (or are about to be) caught, too bad, go to jail; if not, recant.

Something funny then, (maybe strange), must have happened on the way to the First, Second, Third, Fifth, and D.C. Circuits.

“18 U.S.C. § 1623(d) is deceptive in its apparent clarity”

The First, Second, Third, Fifth, and D.C. Circuits hold “or” in 18 U.S.C. 1623(d) to mean “and.” What? Yes, I agree.

Normally, I’d try to paraphrase some of the arguments. However, the Third Circuit in Sherman (linked above), provides the clearest example of the reasoning used by her Sisters. The following is a full quote, with citations omitted for length, and the most pertinent reasoning bolded.

Statutory interpretation usually begins, and often ends, with the language of the statute.  “Where … the statute’s language is plain, ‘the sole function of the court is to enforce it according to its terms.’ ” We look to the text of a statute to determine congressional intent, and look to legislative history only if the text is ambiguous. Plain meaning is conclusive, “except in the ‘rare cases [in which] the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters.'”

18 U.S.C. § 1623(d) is deceptive in its apparent clarity. It says “or” and Sherman argues that Congress intended the statute to mean exactly that. However, reading the statute as Sherman argues we must results in a statute that is both inconsistent with, and frustrating to, Congress’ twofold intent in enacting the legislation. If Sherman is correct, one could commit perjury with impunity. A witness could violate his or her oath in the comfort of knowing that no perjury prosecution was possible so long as he or she recanted as soon as it appeared the perjury would be disclosed. A recantation at that point, under Sherman’s interpretation, would shield the conduct even if the judicial proceedings had been substantially affected by the false testimony. Similarly, a witness could escape prosecution even after the false nature of it had been disclosed and hope to successfully argue that the proceedings had not been substantially effected [sic] because there had been a recantation.

In Lardieri we examined the legislative history of § 1623 to determine legislative intent, and we are guided by that analysis. We do not believe that Congress intended to “improve truth telling in judicial proceedings,” by incorporating a provision into the perjury statute that would be tantamount to granting immunity from prosecution in many, if not all, instances.

Similarly, we note that, despite the disjunctive phrasing in § 1623(d), the New York statute it was based upon is drafted in the conjunctive.

“Deceptive in its apparent clarity.” “[S]ays or” but means and. “Despite the disjunctive,” the statute is based off a statute written in the conjunctive. (A classic example of valuing history over text.) In another part of the opinion not excerpted above, the court went so far as to evade the rule of lenity, arguing that it doesn’t apply because it would frustrate the alleged “intent” that Congress had in passing 18 U.S.C. 1623. All this, despite the seeming “clarity” of the statute, and despite the “intent” of Congress to promote truthfulness (at 665).

(As an aside, perhaps the canon driving the court was a form of constitutional avoidance. In Sherman, the defendant brought a due process claim, alleging that the prosecutor charged him under 18 U.S.C. 1621—the general perjury statute—instead of 18 U.S.C. 1623, thereby robbing him of the recantation defense under 18 U.S.C. 1623(d). The Sherman court noted that, prosecutorial discretion aside, a due process claim lies when a prosecutor’s charging decision is motivated solely by a desire to achieve a tactical advantage by impairing the ability of a defendant to mount an effective defense. By holding that Sherman was not even entitled to a defense under 18 U.S.C. 1623(d), the court obviated the need to inquire into whether the prosecutor was motivated by an improper desire, and evaded the tangled thickets of due process. This reading of Sherman explains the addled logic employed by the court, although it fails to explain the First, Second, Fifth, and D.C. Circuits endorsement of “or” meaning “and.”)

The Eighth Circuit: Sometimes, Or Just Means Or

As this is a blog about circuit splits, and not just a page for me to rant about shoddy judicial reasoning, I should probably introduce the Eighth Circuit’s opinion in US v. Smith. In Smith, the defendant challenged the lower court’s ruling that she was not entitled to the recantation defense of 18 U.S.C. 1623(d). The lower court based its ruling on existing authority at the time, which did not include Sherman, but did include the other opinions linked above (and which Sherman typifies). The Eighth Circuit reversed, holding that the plain language of the statute must control, and that according the word “or” its “ordinary meaning does not defeat the intent of Congress in enacting . . . recantation defense.” Additionally, the court cited the legislative intent of Congress—chiefly, its focus on truthfulness—and the rule of lenity.

In addressing the New York statute that served as the model for 18 U.S.C. 1623 and which was written in the conjunctive, the Eighth Circuit stated

While this observation may raise some uncertainty about the language Congress intended to enact, it does not create an ambiguity in an otherwise plainly worded statute nor does it militate against according the enacted language its ordinary meaning. “[I]t is appropriate to assume that the ordinary meaning of [the statutory language] accurately expresses the legislative purpose.” In this case, where the statute is unambiguous on its face, the language of the statute is conclusive as to legislative intent, and we thus decline to abandon the ordinary disjunctive meaning accorded to “or” in favor of a conjunctive “and,” as such a construction would defeat the plain language of the statute and would not foster any clearly articulated legislative intent to the contrary.

Looking Forward

To my knowledge, this circuit split has not evolved much since the latest opinion in Sherman (1998). The Tenth Circuit, in an unpublished opinion issued in 2000, observed the split but did not weigh in on it. Scholarship, with the exception of a piece cited below, has largely ignored the split. The one piece that I have found approached the issue in a rather practical manner, focusing on the “illusion” of the recantation defense. There’s more “there” there, as the split speaks broadly about the role of federal courts in interpreting legislation, Congressional intent, rights-remedy gaps, the appropriate use of canons of constructions, and due process issues that Sherman (wrongly) evaded. Hopefully future scholars (I’m looking at you, dear reader) will take the issue up.

For further reading on the New York Statute and 18 U.S.C. 1623, see Linda F. Harrison’s piece “Recantation: Illusion or Reality.”