THE SECOND CIRCUIT SAYS MAIL AND WIRE FRAUD MUST INVOLVE A FALSE STATEMENT

FacebookTwitterEmailPrint

As every RICO  lawyer knows, even those who have casually dealt with the law in a civil case, nearly every plaintiff relies upon the vaguely worded mail and wire fraud statutes.  The former was originally written in the 1890’s to allow the federal government to prosecute people who used the U.S. Postal Service to cheat consumers.  Those days are largely over, thanks to the internet.  Now fraud is usually executed online.  But the federal wire fraud statute, 18 U.S.C. 1343, was enacted long before the internet age and was used by federal prosecutors to go after criminals who made interstate phone calls to cheat people.  That too is rare these days.  Virtually all consumer and business transactions today use the internet and email.  This creates a big opportunity to escalate  ordinary state law fraud cases to RICO and file them in federal court.  Many such cases have made it under RICO, at least surviving a motion to dismiss because section 1343 is so vaguely worded, prohibiting “schemes to defraud” and “obtaining money or property my means of false or fraudulent pretenses…”

This week the Second Circuit held that no matter how the statute is read, a RICO claim predicated upon either the mail fraud statute or 1343 (worded nearly identically), must allege a false statement, i.e., fraud.  It rejected the plaintiffs’ theory, brought as a consumer class action, that an online retailer committed wire fraud by inducing consumers to purchase “memberships” in buying clubs after they had finished the purchase of a single item.  The premise of the case was that consumers were made to believe that the club membership was connected to the purchase and they did not realize the charge would be made to their credit card every month until cancelled, which was made difficult to accomplish.  Yet the Plaintiffs did not allege any particular statement made online was false.  Disclaimers in small type disclosed the actual details of the “club” and recurring monthly charge.  The case relied on the notion that the wire fraud statute sould vitiate the membership charges because they were deceptive and misleading.

The Court should have pointed out that the First, Seventh, Eighth and Ninth Circuits disagree with its conclusion.  Those decisions interpret the word “defraud” in the mail and wire fraud statutes as including deception which does not necessarily involve a misrepresentation.  This is what the Plaintiffs here were arguing.  The Second Circuit did not go so far as to say its ruling will be applied to criminal prosecutions under the mail and wire fraud statutes.  So it effectively created a double standard for interpretation, a tougher bar for RICO plaintiffs than for the Justice Department.  It recently did so in another case involving what constitutes a pattern of racketeering.  The Second Circuit seems to be unfriendly to RICO.