JURIST Guest Columnists Daniel B. Levin and Victoria A. Degtyareva of Munger, Tolles & Olson LLP discuss the federal bank fraud statute and Loughrin v. United States…

Kevin Loughrin and an accomplice used six stolen and altered checks to steal just over $1,000 from a local Target store. They stole checks from mailboxes, crossed out the payees’ names and payment amounts and wrote in “Target” and new amounts next to the original text. They used the altered checks to purchase food and merchandise, which they then returned often without even leaving the store.

There was no evidence that Loughrin intended to defraud a bank. On the contrary, the evidence at trial showed that most of the checks were intercepted by Target’s staff and were never even submitted to a bank.

Despite the tenuous connection between Loughrin’s conduct and any federally regulated bank, the government charged Loughrin with six counts of federal bank fraud under 18 USC § 1344(2) and two counts of aggravated identity theft under 18 USC § 1028A
. He was convicted and sentenced to thirty-six months in prison—twelve months on the bank fraud charges and a mandatory consecutive term of two years for identify theft. If he been convicted of forging checks under state law in Utah, where the crime occurred, he would have likely been sentenced to less than a year.

The question presented in Loughrin v. United States, which was argued before the Supreme Court on April 1, 2014, was whether the federal bank fraud statute could be interpreted so broadly that it covers any fraudulent scheme to obtain funds from a bank, even when the defendant had no intent to defraud a bank.

The bank fraud statute contains two clauses: the first clause prohibits schemes intended to defraud a financial institution; the second clause prohibits schemes to obtain money or property that is owned or controlled by a financial institution through false representations. The US Court of Appeals for the Tenth Circuit held that, under the second clause, the government is not required to prove that a defendant intended to defraud a bank and expose it to a risk of loss. As long as the defendant intended to defraud someone and funds stored in a bank were involved, the defendant can be convicted of federal bank fraud.

The justices repeatedly questioned the breadth of the government’s and the Tenth Circuit’s reading. Justice Kagan asked whether a defendant who passed off a painting she made in her kitchen as the work of a famous artist would be guilty of bank fraud if the unwitting buyer paid with a check. The government’s answer was “yes.” Justices Sotomayor and Scalia asked whether a defendant who falsely promised to paint someone’s house and took a $100 check as payment would be guilty of bank fraud. Again, the government’s answer was “yes,” as long as the painter intended to obtain money he understood might come from a bank. Scalia told the government that its position “extend[s] federal law enormously into the kind of stuff that we’ve usually left to the states.” Hearing these examples, Justice Kennedy commented: “you have federalized every fraudulent transaction in the economy whenever a check is involved.”

The justices’ concerns are well founded. The court should not broadly interpret federal criminal statutes to cover petty offenses that have traditionally been handled by the states absent some clear indication that Congress intended to expand the reach of federal criminal law.

Significant problems arise when identical conduct may be prosecuted in either state or federal court. When dual jurisdiction exists, the decision to file charges in federal rather than state court can have major consequences. Federal law often provides fewer procedural protections to defendants, including more powerful grand juries, lower standards for the approval of search warrants, lower burdens of proof to justify wiretaps and more restricted discovery of the government’s case. And federal offenses often carry more severe penalties than their state law equivalents. Federal criminal statutes use more mandatory minimum sentences than many state laws and the federal sentencing guidelines generally recommend harsher penalties than many states’ guidelines.

Loughrin’s case shows that the consequences of federal prosecution are real. He faced a relatively minor sentence on the state side. Once the federal government decided to bring charges, he faced not only a thirty-year statutory maximum under the bank fraud statute, but because bank fraud is a predicate for aggravated identity theft, he also faced a mandatory minimum, consecutive sentence of two years. Loughrin challenged the government’s interpretation of the statute and went to trial, which left him with a three-year sentence, but the threat of a mandatory minimum sentence compels many defendants to accept plea deals.

The Tenth Circuit’s interpretation of federal bank fraud is just one example of a major trend toward the federalization of criminal law. A 2010 study by the Heritage Foundation and the National Association of Criminal Defense Lawyers found that the number of criminal offenses in the US Code has increased from 3,000 in the early 1980s to over 4,450 by 2008. And the number of defendants prosecuted in federal courts has grown from 67,000 in 1996 to 102,931 in 2011.

Federal criminal statutes were historically limited to a small subset of crimes that affected uniquely federal interests such as treason or bribery of a federal official, but federal law now reaches many purely local crimes that are already covered by state law. The result is an overlapping and largely redundant system in which similarly situated defendants receive substantially different treatment depending only on where they are prosecuted.

In addition to the effects on individual defendants, unnecessarily expanding federal criminal law also negatively impacts the overall administration of criminal justice. It burdens the relatively limited resources of federal courts by making them a venue for the prosecution of minor local crimes. It creates counterproductive competition between state and federal authorities and leads to the ineffective duplication of investigative, prosecutorial and judicial resources. And it undermines the vital role of the states in prosecuting crime by creating the perception that state prosecutors and state courts are not capable of handling these types of cases.

Admittedly, the federalization of criminal law is often based on legislation that explicitly federalizes crimes that had previously been within the province of state courts. But whatever the wisdom of Congress’ decision to expand federal criminal law, the court need not consider the extent of Congress’ power to do so in this case. Loughrin was convicted for federal bank fraud and received a much harsher penalty than similar defendants in state court without any clear indication from Congress, either in the text of the bank fraud statute or in the legislative history, that it intended to subject people accused of this type of petty fraud to federal prosecution.

In the absence of a clear Congressional statement and in light of the dangers of bringing minor local crimes within the scope of federal criminal jurisdiction, the court should reject the government’s broad interpretation of the federal bank fraud statute and use this case as an opportunity to limit the over-federalization of criminal law.

Daniel B. Levin is a partner in the Los Angeles office of Munger, Tolles & Olson LLP. Victoria A. Degtyareva is an associate at the firm. Working with the National Association of Criminal Defense Lawyers, they filed an amicus brief in the US Supreme Court in Loughrin v. United States on behalf of the petitioner.

Suggested citation: Daniel B. Levin and Victoria A. Degtyareva, The Federal Bank Fraud Statute: Loughrin v. United States, JURIST-Professional Commentary, Apr. 12, 2014, http://jurist.org/hotline/2014/04/levin-degtyareva-bank-fraud.