In United States vs Hickey, the 9th Circuit Court of Appeals affirms the conviction of another real estate developer who made big promises to investors but failed to deliver. Defendants Hickey and Tang induced over 700 investors to invest over $20 million in two real estate developments. The plan was straight forward enough – you give me money, we buy land and develop it for resale at a profit. You profit too – just trust us. As I mentioned, investors dumped money into the "development" as they often do, even in Idaho. As the Ninth notes:
As it turned out, however, the investors were duped by false representations regarding land title, guarantees, and securitization of the funds. Forensic accounting also showed that Hickey and Tang appropriated money from the funds for personal use.
What a shock! Real estate developers who made false representations about owning the land, "guaranteed" returns to investors and security of the investments? And then they used some of that $20 million for themselves? The scheme ultimately turned into the classic Ponzi scheme, leaving later investors empty. OK – enough of my shock and horror.
The interesting issue for me was the Court’s holdings concerning the use of an expert witness to testify that all of this was reasonable and the standard course of such proceedings. He wanted to go further and testify that if Defendants had not been stopped, their efforts would have produced a return for investors. To that the Court said "NO." Here is the part that I do so love:
To begin, loss to investors is not an element of either mail fraud or securities fraud, nor is an intent to cause loss. See United States v. Utz, 886 F.2d 1148, 1151 (9th Cir. 1989) (for mail fraud, “[i]t is enough . . . that the government charge and the jury find either that the victim was actu- ally deprived of money or property or that the defendant intended to defraud the victim of same.”) (emphasis in original); United States v. Benny, 786 F.2d 1410, 1417 (9th Cir. 1986) (actual loss is not an element of securities fraud). Although Hickey is entitled to advance the claim that he did not intend to defraud the victims, his argument misunderstands the relevant intent—“[w]hile an honest, good-faith belief in the truth of the misrepresentations may negate intent to defraud, a good-faith belief that the victim will be repaid and will sustain no loss is no defense at all.” Benny, 786 F.2d at 1417. In other words, even if Hickey genuinely believed his investment scheme would be profitable and would result in gains for his investors, he would still be guilty of securities fraud and mail fraud if he knowingly lied to investors about the risks associated with his plan.
What this means to you as an investor is simple – it is not a defense that the defendant thought ultimately his lies to others would produce profits for you and others. It’s the lies, half-truths and omissions that make it fraud. That someone actually lost money is relevant, not the half-hearted and misguided attempt to prove the defendants "might" have made the money they promised as guaranteed returns.
That this is a criminal case changes nothing – the basic elements of fraud (civil or criminal, securities or otherwise) are essentially the same. This is a very important case for a plaintiff or a defendant in a civil or criminal case. These situations almost always ultimately involve both civil and criminal liability.
So if you think you have been defrauded, or if someone (like a government agency or prosecutor) says that he or she is charging you with fraud, get some good legal help and get it quick. Last week a guy called me to talk about a federal indictment which he claimed was "no big deal – I have been talking to the feds about this for the past year." Another excellent idea – after you commit the fraud, spend a lot of time with the feds trying to talk your way out of it.
No Mr. Defendant, this is no big deal alright – if you like tan jumpsuits, Club Fed accommodations, dark dank holes and lots of time to read the classics while carefully watching your cellie’s next moves! No big deal at all – number 7651991!
No big deal either "Ms. Moneybags are now empty." Not if you don’t mind giving back everything you own and want to spend the rest of your life working to pay off that non-dischargable debt for a couple cool million dollars.
No big deal at all.