In an interesting and confusing decision, the Ninth Circuit gave us US v. Van Alstyne last week, and again considered just when do funds arising from specified illegal activity constitute "proceeds" for purposes of the money laundering statute, 18 USC § 1956. To decide the matter, the Court had to address the Supreme Court’s decision in United States v. Santos, 128 S.Ct. 2020 (2008), which had arisen in the interim.
So here are the basics – Van Alstyne was convicted of running a ponzi scheme. Usual stuff here – limited liability companies, millions of "investor" dollars that never produced any real investment in anything except the lining of the appellant’s pockets, and the Government, jumping into the fray to try and get some of the "investment" money back for the retired and other folks who forgot that most important rule: if it sounds too good to be true, IT IS! Here the investors gave up their savings and then shortly after began receiving their 10% return on investment from the investors who followed them toward the sea. As is always the case, eventually there are not enough lemmings to keep the march going, and alas, the ghost of Charles Ponzi rides again.
Van Alstyne was convicted in 2001 of 7 counts of mail fraud and 3 counts of money laundering. He picked up 24 years (yes, YEARS) in prison and a variety of other inconveniences, including $9 million in restitution. For the court’s consideration here was whether the proceeds contemplated under the money laundering statute meant profits or gross receipts. Based on a serious reading of Santos, the term means profits, or else every violation of the underlying specified illegal activity would be a violation of the money laundering statute, a problem because of the merger doctrine. Before Santos, the 9th Circuit had taken the view that "proceeds" meant "gross receipts." Now, the Court concludes that a uniform "receipts" approach would violate Santos, although that case dealt only with money taken in from an illegal lottery – which might somehow be different from an Illegal ponzi scheme and mail fraud. Of the three counts on which Van Alstyne was convicted, the Court overturns the two transfers which were intended to provide distributions to individual investors, but upheld the one transfer of money intended to refund the entire amount one investor had entrusted to the appellant. Bottom line – this is still very murky water. Why is it money laundering when the funds of many go to one specific recipient, but not to the many? It is likely that this matter is not fully resolved yet.
What should we take away from the decision? First, remember that Van Alstyne got canned for seven mail fraud convictions. Those convictions were not at issue, but rather, the question was whether the money laundering counts would survive. Here is the court’s reminder:
Our question, then, is whether mail fraud is, or can be, a crime presenting the “merger” problem that was a fulcrum consideration for the Santos plurality and concurrence. Mail fraud has two elements: “(1) having devised or intending to devise a scheme to defraud (or to perform specified fraudulent acts), and (2) use of the mail for the purpose of executing, or attempting to execute, the scheme (or specified fraudulent acts).” Carter v. United States, 530 U.S. 255, 261 (2000); see also Bridge v. Phoenix Bond & Indem. Co., 128 S.Ct. 2131, 2138 (2008). The Supreme Court has emphasized that 18 U.S.C. § 1341 prohibits “the ‘scheme to defraud’ rather than the completed fraud. . . . ,” Neder v. United States, 527 U.S. 1, 25 (1999), and that a mailing need only be “incident to an essential part of the scheme” to satisfy the second element. Bridge, 128 S.Ct. at 2138
Again, the scheme is focus of the mail fraud statute, just as in the wire fraud setting. This is also true under Idaho state law and in civil cases involving fraud. Convicting him for having paid the cost of keeping the scheme going – that is – the lulling payments to investors that kept them thinking they had made a great investment – would only serve to make this necessary part of the scheme an additional crime. Merger makes sense when you interpret these payments as the cost of doing business for Van Alstyne. In fact, as the Court points out, each of the mail fraud counts could have been charged instead as money laundering, so that crime is viewed as having merged into the fraud. The one count upheld was different because this involved a specific transfer of money taken by fraud back to a particular investor as a refund.
The rumors continue to swirl that we can expect to see grand jury indictments in the United States District Court for Idaho in several new fraud cases, some of which are likely to involve Ponzi schemes similar to this one. That having been said, the issue of whether the money laundering statute will provide a hook to the money remains subject to analysis on a case-by-case basis.