Fraud

A false representation of a matter of fact—whether by words or by conduct, by false or misleading allegations, or by concealment of what should have been disclosed—that deceives and is intended to deceive another so that the individual will act upon it to her or his legal injury.

Bank of China v. NBM

To establish a common law action for fraud, a plaintiff must prove, among other things, the element of reasonable reliance by the injured party on the fraudulent statement or act, to his detriment. In Bank of China v. NBM, et al., No. 03-1559, the U.S. Supreme Court initially granted certiorari limited to the following question: "Did the Court of Appeals for the Second Circuit err when it held that civil RICO plaintiffs alleging mail and wire fraud as predicate acts must establish 'reasonable reliance' under 18 U.S.C. § 1964(c)?" However, before the case was argued, the Supreme Court dismissed the case without comment under Supreme Court Rule 46 (which generally covers party-initiated dismissals).

The dismissal resulted in the underlying (appealed) decision of the Second Circuit Court of Appeals being held as the final decision in the matter (359 F.3d 171 [2004]). However, holdings of the First, Third, Seventh, and Ninth Circuits have held to the contrary, making it likely that this issue may again come before the high court in another case.

In the underlying case, the Bank of China (Bank) filed charges in federal district court against numerous defendants, including John Chou and Sherry Liu, a married couple. According to the lawsuit, starting in 1991, Chou and Liu began an elaborate money-transferring scheme to defraud the Bank. Specifically, the suit alleged that the couple defaulted on loans (secured through misrepresentations and forged documents), converted borrowed funds into different currencies, then transferred them to other accounts (represented by Chou and Liu as independent third-party businesses, but in fact, alleged alter-egos and/or businesses controlled by Chou and Liu). The suit further alleged that Chou and Liu, by falsely representing the borrowed funds as "trade debts," falsely created the appearance that the third-party businesses (including defendant NBM, LLC) were thriving and had cash flows able to sustain the borrowing limits set by the Bank. The borrowed funds were also disguised as collateral for further loans. The suit claimed that additional funds were drawn against letters of credit secured through the presentation of false and forged documents for non-existent transactions. By the time of the scheme's collapse in 2000, the Bank estimated that it had more than $85 million in outstanding loans to defendants Chou and Liu and the businesses they controlled. The Bank ultimately recovered approximately $50 million in collateral, but was left with losses exceeding $34 million.

Finally, the Bank claimed that the defendants were able to succeed with their fraud by bribing a former bank deputy manager, Patrick Young, who was allegedly paid $120,000 to make false representations and submit false representations to Bank management. Young was separately convicted and served ten months in prison. (Chou and Liu were also independently prosecuted and convicted; both were sentenced to terms in prison.)

In conjunction with the district court civil trial, a jury returned a verdict finding that all defendants had been unjustly enriched at the Bank's expense; that they had committed fraud, breached loan contracts, and violated § § 1962(c) and 1962(d) of the federal Racketeer Influenced and Corrupt Organizations Act (RICO). The court entered judgment in the amount of $106 million, constituting $35.4 million in compensatory damages, trebled (punitive damages ) under RICO § 1962(d). Defendants (excepting Young, the deputy bank manager) appealed.

On appeal, defendants argued that the jury instructions were erroneous. Specifically, at trial, defendants requested that the court charge the jury that "if senior Bank management knew of defendants' activities, that knowledge must be imputed to the Bank." (This would prove advantageous to defendants, as the Bank could not allege that it innocently relied on the fraudulent misrepresentations, because the Bank was imputedly aware of their falsehood.) But the trial court rejected this request, and instead instructed jurors in the context of common-law bank fraud, i.e., "I instruct you that an institution may be defrauded, even if its agents and employees permitted or participated in the fraud." In other words, the trial court told jurors that the Bank may have been defrauded even if high-ranking bank officers, such as Patrick Young, knew of the true nature of the transactions in question.

On appeal, defendants argued that this erroneous charge removed the Bank's need to prove that it had reasonably relied upon the misrepresentations, to its detriment. This essentially stripped defendants of their argument, at trial, that "the actions complained of were sanctioned and authorized by the Bank's officers, and that therefore the Bank could not have detrimentally relied on any of the defendant's [sic] representations."

In February 2004, the Second Circuit Court of Appeals unanimously agreed, vacating the lower court's judgment and remanding the case for a new trial; in light of the erroneous jury instruction and the award of treble damages under RICO, the court could not find the error harmless. The court noted that, to prevail in a RICO claim, a plaintiff must show that the alleged violation was the proximate cause of the injury. Therefore, in a RICO claim alleging predicate acts of mail, wire, and bank fraud (as in this case), a plaintiff must prove reliance upon the misrepresentations, and the reliance must be reasonable.

Finally, the court noted a narrow exception known as the "adverse interest exception." This might apply where an agent (e.g., Young) has totally abandoned his principal's (e.g., the Bank) interests. This would be an issue of material fact to be determined by the jury at retrial, and it would have been an appropriate instruction to give in conjunction with a "reasonable reliance" instruction for both common law fraud and civil RICO claims.

Illegal Harvesting of Body Parts Results in Fraud Cases

A November 2004 investigation into missing funeral prepayments led Brooklyn detective Patricia O'Brien to uncover a case of illegal human-tissue harvesting, potentially contaminated transplants, and fraud by former dental surgeon Michael Mastromarino and funeral-home owner Joseph Nicelli. O'Brien, with the help of Sergeant Timothy Breene and Detective Paul Courtney of the NYPD Major Case Squad, found evidence linking Mastromarino and Nicelli to more than 1,000 decedents whose tissue—skin, bones, tendons, ligaments, and heart valves—were allegedly harvested without their permission or the permission of their families. Many of those so harvested had died in old age or of diseases that made the tissue unusable to transplant patients. Forged consent papers, as well as altered death certificates, made the scheme appear legitimate.

Nicelli sold his Daniel George & Sons funeral home in Brooklyn to Robert Nelms and Debora Johnson, who called in Detective O'Brien about the missing funds. On a visit to the funeral home, O'Brien discovered a pristine operating room on the second floor, along with Federal Express labels listing the names of transplant companies. It also became evident that Nicelli had kept four keys to the property and was using the surgery after hours.

Mastromarino, whose drug abuse lost him his medical license in 2000, had previously partnered with Nicelli in a company called Bio Tissue Technologies of Brooklyn, a clearinghouse for transplant and research tissue. Mastromarino also owns Biomedical Tissue Services, Ltd., out of Fort Lee, New Jersey. Both companies allegedly facilitated the distribution of the tissue and were included in the investigation. The case became public in October 2005, at which time the Food and Drug Administration recalled transplant tissue that could be traced to customers of either biomedical firm. The recall reached to Florida, Georgia, Texas, and even Canada. Health officials asked hospitals that had already used the tissue to inform patients that they may be at risk for disease transmission, since the tissue was collected arbitrarily without consideration of the decedent's age or cause of death. Although transplant tissue is regularly sterilized prior to use and blood samples are supposed to accompany the tissue, the chance still existed for a patient to contract such illnesses as HIV, hepatitis, and syphilis, since it was impossible to know if the data sent with the tissue was legitimate. Officials said there is no way to tell how many transplant patients will ultimately be affected by the suspect tissue. Some patients wasted no time getting involved, and several class-action lawsuits have already resulted. The scandal has affected other related industries. Lifecell, Inc., a client of Biomedical Tissue Services, recalled three products made from body parts.

The FDA shut down Biomedical Tissue Services on February 3, 2006, for failing to screen the tissue for contamination. The investigation allegedly found death certificates in the company's files that were incongruous with those on record with the state as to the deceased's age, and time and cause of death.

On February 23, 2006, Mastromarino, Nicelli, Lee Crucetta, and Christopher Aldorasi were arraigned for defiling and selling human remains. Crucetta, a nurse, and Aldorasi are suspected assistants in the scheme. The four, who pleaded not guilty, were charged with 122 counts, including enterprise corruption, body stealing, opening graves, unlawful dissection, and forgery. Brooklyn District Attorney Charles J. Hynes told reporters at a press conference that, from 2001 to 2005, Nicelli allegedly received bodies from area funeral homes for embalming and then allowed Mastromarino and his assistants to harvest bones and tissue before preparing the bodies. Bones were sometimes replaced with PVC pipe to maintain the body's form. Most of the bodies Mastromarino allegedly dismembered were slated for cremation, a process that makes it difficult if not impossible to gather DNA evidence. Five funeral homes in New York City; eight in Rochester, New York; one in Philadelphia; and three in New Jersey were cited by New York City Police Commissioner Raymond Kelly as central players in the scheme, although as many as 40 funeral homes have been implicated. How much the employees of the homes knew is in question.

The investigation revealed that Nicelli received as much as $1000 for each body he delivered to the dissection surgery, while Mastromarino could make $7000 from the sale of tissue from each body. The indictment alleges that the defendants forged birth certificates to disguise the ages of the deceased, altered death certificates to change the cause of death to something acceptable for tissue harvest, and forged permission forms for the procedures, sometimes even resorting to the names of long-dead relatives for the documentation.

The lawyers for the accused maintain that their clients have done nothing illegal, denying the forgery and other claims. It is their intention to claim innocence to all charges in the indictment.

Current state and federal regulations focus more on the dissemination of transplant organs than on bodies donated for research uses. Under the National Organ Transplant Act of 1984, Congress established the Organ Procurement and Transplantation Network, which is overseen by the United Network for Organ Sharing. Only private, non-profit organizations with federal contracts can legally operate the network, which dictates the strictures for harvesting, transporting, and tracking organs for transplant. Transplant surgeons use harvested tissue to replace spinal disks, perform knee surgery, or make dental implants. Tissue banks not providing material for transplant are not required to register with any government agency. The sale of human tissue is illegal in the U.S., but agencies are allowed to set their own fees for handling various body parts for transplant.

The furor over the case has already brought about movement for changes to the laws affecting funeral homes and the disposition of human remains. Assemblywoman Valerie Vainieri Huttle (D-Englewood) and Dr. Herb Conaway (D-Burlington County) sponsored a bill to make it a first-degree crime to harvest body parts illegally. Offenders could face prison time and up to $200,000 in penalties. Forgery of consent forms or otherwise manipulating donor paperwork is a third-degree crime under the bill, as is selling a body part, although legitimate firms are still able to charge for their services.