We previously bookmarked the question of how to balance the “open texture” of the federal fraud statutes with the common law’s long interpretive tail attached to the word “fraud.” Over the last few decades, the U.S. Supreme Court has searched for an answer to this question from time to time, but unfortunately has not come up with a coherent analytical framework to guide us. Neder v. United States, 527 U.S. 1 (1999) offers a convenient point of entry into the debate over how best to reconcile fuzzy statutory language with fairly settled common-law expectations. What we’ll soon enough see, though, is that the Supreme Court does not hew to one path or the other; rather, it oscillates between novel and traditional modes of interpreting and applying the concept of fraud.

Ellis Neder engaged in a number of fraudulent banking and real estate schemes. He was tried and convicted on charges of violating several federal criminal statutes penalizing fraud. On appeal, Neder argued that the trial court erred in failing to instruct that materiality is an element of the federal mail-fraud, wire-fraud, and bank-fraud statutes—specifically, whether materiality is an element of a “scheme or artifice to defraud” under those statutes. To answer this question, the Court employed a two-step analysis, first looking “to the text of the statutes at issue to discern whether they require a showing of materiality.” The Court did not tarry on this step because “as the parties agree, none of the fraud statutes defines the phrase ‘scheme or artifice to defraud,’ or even mentions materiality. Thus, based solely on a ‘natural reading of the full text,’ materiality would not be an element of the fraud statutes.”

That did not end the inquiry, though, because “it is a well-established rule of construction that [w]here Congress uses terms that have accumulated settled meaning under … the common law, a court must infer, unless the statute otherwise dictates, that Congress means to incorporate the established meaning of these terms.” So the question becomes, is “defraud” a term into which Congress implicitly incorporated its common-law meaning, including its requirement of materiality? The Court registered no dispute that when the mail-fraud statute was adopted in 1872; “‘fraud’ had a well-settled meaning at common law.” And, moreover, at that time an actionable fraud claim required proof of a misrepresentation or concealment of material fact. As the Court thus saw it, under the common law, no materiality, no fraud. As a matter of statutory construction, then, the rule that Congress intends to infuse words it uses with well-settled common-law meanings bars the argument that absence of an express reference to materiality means that there was a congressional intent to drop that element. Indeed, something of the opposite obtains: a presumption of the incorporation of common-law materiality has arisen.

The most ready counter to the incorporation argument (and rebuttal to the presumption) is that “defraud” would carry its common-law meaning only if the statutes bore indicia of a congressional intent to codify “the crime of false pretenses or one of the common-law torts sounding in fraud.” And Congress plainly did something else by criminalizing not just completed frauds but inchoate schemes as well. Pushed to its limit, this argument suggests that materiality is immaterial: all that matters is that a defendant “intended” to defraud, i.e., the defendant is guilty even if the chosen scheme fails for want of materiality and was thereby “incapable of influencing the intended victim.” The Court found such an outcome a bridge too far: “accordingly, we hold that materiality of falsehood is an element of the federal mail-fraud, wire-fraud, and bank-fraud statutes.”

In closing its discussion, the Court did concede that “the fraud statutes did not incorporate all the elements of common-law fraud.” In particular, citing lower-court holdings, the Court noted that the “common-law requirements of ‘justifiable reliance’ and ‘damages’ … plainly have no place in the federal fraud statutes.” The reasoning, as the Court suggested, is that “by prohibiting the ‘scheme to defraud,’ rather than the completed fraud, the elements of reliance and damage would clearly be inconsistent with the statutes Congress enacted.” The stated difference between materiality and reliance has more than a whiff of ipse dixit behind it and observers had to wait years to see if the Court would find more to say about reliance.

In Bridge v. Phoenix Bond & Indemnity, 553 U.S. 639, 653-60 (2008), the Court declined the challenge, at least with respect to the federal fraud statutes. The case was brought under civil RICO, about which I’ll have more to say later. For now, we need only register that the underlying violation alleged was mail fraud. Despite some factual subtleties that we can safely elide for purposes of our discussion, the case arose out of a classic bid-rigging scheme, one involving tax liens. Cook County, Illinois, has taxing authority over property and fairly regularly accumulates liens for unpaid taxes. Instead of holding the liens for extended periods, the county sells them at public auctions. The winning bidder has the right to purchase the lien by paying the back taxes. If the property owner of record does not pay off the lienholder, the lienholder is entitled to a tax deed for the property.

Property purchased for back taxes is often a lucrative investment; consequently, the auctions are fiercely competitive and multiple bidders make the same bid. To keep things fair, the county implemented a “rotation” system that—in theory—would apportion the liens across equal bidders. But bidders gamed the system by sending agents in addition to themselves and thereby receive a skewed amount of the liens. Once it learned of this scheme, the county implemented a “single, simultaneous bidder rule,” which (1) mandated that each “tax buying entity” submit bids in its own name and (2) barred the use of “agents, employees, or related entities” to submit simultaneous bids. To encourage enforcement of the rule and give it teeth, the county required all participants to sign and submit an affidavit attesting that they were in compliance with the rule.

The dispute arose because the defendants presented fraudulent affidavits, and thereby received more liens than they would have, absent the fraud. Based on these allegations, the district court dismissed the suit, holding that plaintiffs’ injuries were too remote. The Supreme Court granted certiorari to resolve an issue left open by previous cases: namely, “whether first-party reliance is an element of a civil RICO claim predicated on mail fraud.” Again, we’ll defer our particular discussion of RICO in the “moral” context to another day, but the Court began its analysis by observing that RICO section 1962(c) makes it “unlawful for any person employed by or associated with” an enterprise “to conduct or participate, directly or indirectly, in the conduct of such enterprise’s affairs through a pattern of racketeering activity.” And, crucially, the phrase “racketeering activity” is defined to include “any act which is indictable under … section 1341 (relating to mail fraud).” This means that RICO confers standing on a person injured in his business or property by reason of a defendant’s conduct of an enterprise's affairs through a pattern of acts indictable as mail fraud, even though there is no private right of action under the mail-fraud statute itself. And as we’ve already discussed, mail fraud is implicated whenever a person, “having devised or intending to devise any scheme or artifice to defraud,” uses the mail “for the purpose of executing such scheme or artifice or attempting so to do.”

Within that framework, the Court saw the case in straightforward terms. The defendants cooked up a scheme that involved garden-variety fraud (false affidavits) and used the mails to execute it (mailing notices to property owners). But the defendants argued that because the case turned on the allegations of mail fraud, plaintiffs had to show that they relied on the misrepresentations. This of course was not possible because defendants made their false statements to the county, not the plaintiffs. Thus, “the county may well have relied on petitioners’ misrepresentations when it permitted them to participate in the auction, but respondents [plaintiffs], never having received the misrepresentations, could not have done so.”

If civil RICO has a reliance requirement, then it must flow from one of two sources: the underlying mail-fraud statute or the private-right-of-action provision of RICO section 1964(c). The first candidate was easily dispatched under the language noted above in Neder: “using the mail to execute or attempt to execute a scheme to defraud is indictable as mail fraud, and hence a predicate act of racketeering under RICO, even if no one relied on any misrepresentation.” Consequently, “no showing of reliance is required to establish that a person has violated Section 1962(c) by conducting the affairs of an enterprise through a pattern of racketeering activity consisting of acts of mail fraud.” So, if a showing of reliance is required, then “it must be by virtue of Section 1964(c),” which provides the right of action. Lest this foray into section 1962(c) take us far afield from our principal object of study, suffice it to say that the Court found textual, common-law, and policy grounds for rejecting the notion that a civil RICO claim requires proof of victim reliance. In an important qualification, the Court went on to state, “Of course, none of this is to say that a RICO plaintiff who alleges injury ‘by reason of’ a pattern of mail fraud can prevail without showing that someone relied on the defendant’s misrepresentations.” This takes us back to a question that has always bothered me about the interplay between materiality and reliance as discussed in Neder. For if a misrepresentation that is “incapable of influencing the intended victim” causes a statutory fraud claim to fail, why should a misrepresentation that no one could reasonably rely on not fail for the same reason? (E.g., I have 400 acres of land on the moon for sale; care to buy it?) This suggests that there’s still some work to be done by the Supreme Court in reconciling its disparate treatment of materiality and reliance.

Next time, we’ll delve into the consequences of departing from common-law understandings of “fraud” and how these departures have lured courts into entertaining novel fraud theories that have a basis in morality.