Spiritualism is unique as a religious community. In no other religious group have substantive charges of fraud played such a large part, and within no other group has the need to confront fraud had such an effect upon its development. Soon after the founding of the movement charges of deliberate fraud were leveled against a growing number of mediums, and the movement itself was charged with complicity in the fraud and a refusal to rid itself of obviously fraudulent leaders.
The frequency with which mediums were exposed in acts of trickery and even convicted of fraud induced many people— concluding the bulk of the phenomena to be fraudulently produced—to abandon both the movement and psychical re-search. The era of systematic research on Spiritualist phenomena came to a close in the 1930s when psychical researchers concluded that there was little, if anything, real in physical phenomena. Psychical research was gradually superseded by laboratory-oriented parapsychology. In most countries Spiritualism was pushed to the fringes of the community of people interested in paranormal phenomena and has never regained its credibility. It is conspicuously absent from the New Age movement.
The question of fraud is an interesting and complicated one, however, worthy of the student's attention. Simple deception practiced for money was founded, but there were also many instances of apparently deliberate trickery in which there was no reward to be obtained, and even some cases in which the medium seemed entirely innocent and ignorant of the fraud.
The great majority of fraud was related to the production of physical phenomena, especially materialization, apports, and the levitation of trumpets and other objects. A significant portion of the mental phenomena remains that provides an interesting arena for research and explains the continuing fascination with the paranormal.
Conscious and Unconscious Fraud
It is helpful to distinguish between conscious and unconscious fraud, although at times one seemed to shade imperceptibly into the other. During the century (1850-1950) when researchers turned their attention to Spiritualism, conscious fraud most often appeared in connection with physical phenomena. Almost at the outset of the spiritualistic movement (i.e., in 1851) three doctors demonstrated that the rappings that attended the Fox sisters were produced by manipulation of the knee and toe joints, a fact that was soon afterward corroborated by a relative of the Fox family. In the wake of the sisters' contradictory claims, confessions, and recantations the evidence was declared inconclusive, but the possibility of fraud had been shown.
After that many mediums have at one time or another been detected in fraud, and every phase of physical mediumship was eventually discredited. Slate writing, spirit photography, and materialization were all in turn exposed, and now exist only in the fringes of Spiritualism, primarily at Camps Chesterfield in Indiana and Silver Belle in Pennsylvania and in the several churches associated with them. A major exposure of materialization fraud was published as late as 1960 in the Psychic Observer by Andrija Puharich. The result of the exposure was the bankruptcy of the periodical. In the 1970s Lamar Keene, a Spiritualist medium heavily involved in the production of fraudulent phenomena, left the profession and published his memoirs. In the 1980s magician James Randi discovered several faith healers operating on the fringe of the Pentecostal community using some old conjuring tricks to convince their audiences that miracles were occurring.
Time and again, sitters beheld the form and features of the medium in the materialized spirit; shadowy figures in filmy draperies were shown to be dummies wrapped in muslin. False beards and white draperies were found on the medium's person. Apports —jewels, flowers, perfumes, objects d'art —were smuggled into the séance room in order to be showered upon the sitters by generous "spirits." Threads and human hairs were used to move furniture and other objects. More elaborate and complicated machinery was sometimes provided, but more often the fake medium depended upon sleight of hand and skillful suggestion to accomplish his ends. Some of the mediums were so skilled that professional magicians admitted to séances failed to discover the modus operandi of the phenomena, which would only be revealed at a later date.
Fraud can also be illustrated by many instances of self-styled clairvoyance where the medium acquired information by muscle-reading, or by judicious inquiry before the séance. Fraud of this kind may have been either conscious or unconscious.
A large group of automatic phenomena occuring when the medium was in a trance state must be classed under the heading of unconscious fraud. In many of the more pronounced cases of automatism, the agent was not consciously responsible for his or her acts. There was a slighter degree of automatism where the agent may have been partly conscious of, and responsible for, the phenomena. The latter state, if frequently induced and if the automatist's willpower was somewhat relaxed, may have passed into the more profound stage, so that fraud that was at first conscious and voluntary may have become un-conscious and spontaneous. Thus it is extremely difficult to know when an accusation of fraud was fairly brought against a medium.
There is evidence that many trance mediums reproduced in their discourses information subconsciously acquired at some more or less remote period. The trance utterances of Leonora Piper, Rosina Thompson, and others revealed this peculiarity. It is true that extensive and apparently fraudulent arrangements were sometimes made before a séance. It is possible, though unlikely, that such preparations were made automatically in a state similar to the mediumistic trance.
Spiritualists themselves were often called to face exposures of undoubted fraud, and on such occasions various apologies of a more or less ingenious nature were sometimes offered for the fraudulent medium. Sometimes it was said that the medium was controlled by a mischievous, lying, or lower spirit who made use of the medium's physical organism to perform tricks and deceptions, an apology that opened Spiritualists to charges of demonic possession from Christian detractors. It was sometimes stated that the medium felt an irresistible impulse to perform the action that he or she knew was in the mind of the control.
Italian medium Eusapia Palladino sometimes extended her hand involuntarily in the direction in which movement of furniture was to take place, although without actual contact. Perceiving that the spirits desired to move the object, she was impelled to attempt a physical (and fraudulent) forestalling of the action, it was said. Other investigators who examined this medium's phenomena declared that their production caused Palladino a great deal of pain and fatigue, and that she therefore seized an opportunity to produce them easily and without trouble. Such an opportunity, they held, only presented itself when their rigorous precautions were relaxed.
The same explanation was given in connection with other mediums. Following cases of materialization séances when the spirit form was grasped and found to be the medium, apologists attempted an elaborate if ultimately unsatisfying explanation. A certain amount of the medium's physical energy, it was suggested, was imparted to the spirit. If the latter was roughly handled, spirit and medium would unite for their joint benefit, either within or outside of the cabinet. If the medium possessed the greater amount of energy she drew the spirit to herself. If most of the energy belonged to the materialized spirit the medium would instantly be attracted to the spirit. The fact that the latter invariably happened had no significance for committed Spiritualists.
Alternatively, Spiritualists suggested, as did Sergeant Cox, on one occasion, that the medium was controlled in order to impersonate a spirit entity.
Whatever the reason for fraud, it became clear to psychical researchers that even the most honorable medium could not be trusted without reserve, even if his character in normal life was blameless and there was no apparent objective for committing fraud. Investigators had to rely on the strictest vigilance and the most up-to-date scientific methods and apparatus.
The Mechanics of Fraud
While some Spiritualists were apologists for the most questionable phenomena and proved themselves the exponents of an intense "will to believe," a few manifested an eagerness to challenge and expose fraudulent mediumship and proved themselves far from gullible. On a few occasions Spiritualists joined in the exposure of fraudulent colleagues, such as the celebrated rogue William Roy, although these instances were rare.
From the time of the Hydesville phenomena many mediums, including most all the physical mediums, were accused of cheating and fell victim to compromising exposures. In the attempt to test the genuineness of the extraordinary claims of Spiritualism, mediums were pursued both by people who hoped the phenomena proved true and skeptics eager to un-cover fraud. The means of fraudulent production of phenomena has a literature of its own. Hereward Carrington aptly stated:
"The ingenuity of some of these methods is simply amazing, and in some respects the race between fraudulent mediums and psychical investigators has resembled that between burglars and police—to see which could outwit the other. It may be said, however, that these trick methods are now well known. To take one simple example, it may be pointed out that Mr. David O. Abbot's book Behind the Scenes with the Mediums and my own Psychical Phenomena of Spiritualism have between them explained more than a hundred different methods of fraudulent slate-writing."
More efficient controls evolved with the development of the science of deception. Wooden sleeves and pants were tied on the Davenport brothers in Bangor, Maine. Augustus Politi was brought before the psychical research society of Milan in a woolen sack. Elizabeth d'Esperance, Mrs. C. E. Wood, and Annie Fairlamb were meshed in nets like fish to prevent masquerading during their séances of materialization. Florence Cook was closed into an electrical circuit. Charles Bailey was shut in a cage with mosquito netting. Eusapia Palladino was tied by Enrico Morselli to the couch with a thick, broad band of surgical tape like that used in asylums to fasten down violent lunatics. Rudi Schneider was under a formidable triple control while being tested at the National Laboratory of Psychical Re-search.
From the simple method of holding the medium (one of the most efficient methods of control) to the electrical indicators and infrared cameras of modern psychical research laboratories (as in the Institut Métapsychique ), a long line of evolution might be traced to the point where fraud was reduced to a negligible factor. To operate fraudulently under the conditions thus imposed might be a far greater marvel than a genuine physical phenomenon.
With mental phenomena the control was more laborious and fraught with many psychological difficulties. There is no doubt, however, that persevering examination of an imposture inevitably leads to the discovery of the source of deception. Through the early twentieth century many physical mediums avoided detection primarily because of the ineptness of the observers.
As early as 1894 pioneering researcher F. W. H. Myers divided séance-room phenomena into three classes. The first and by far the largest class consisted of tricks whose mechanism was perfectly well known—as well known as the way in which the ordinary conjurer produced the rabbit from the hat. These tricks, indeed, were generally on a lower level than those of the conjurer at a fair, but in spite of repeated exposures they deceived the great mass of seekers hoping and expecting to contact the supernatural.
The second class consisted of phenomena somewhat similar to those of the first class, but that confounded the average magician, who was unable to reproduce the phenomena. If these phenomena were genuine, the first class may be called imitations of them. If they were fraudulent, they indicate that here and there a so-called medium had professional secrets of his own.
The third class consisted of a few rarely attested phenomena, of which Home fire-tests are examples, which were not imitated with any kind of plausibility, even by the most accomplished conjurers. This leads to the hypothesis that genuine mysterious phenomena have occurred, or, equally interesting, that some kind of hallucination was induced in the observers in some readily imitable manner.
In the past, charges of fraud often resulted from a lack of knowledge of unsuspected possibilities. William H. Mumler, the first spirit photographer, was promptly accused of trickery when, instead of the spirit of the dead, the double of the living appeared on his plate. The famous third limbs or "pseudopods" of Eusapia Palladino were first ascribed to movement of her hands.
The suggestion that a mysterious substance, ectoplasm, existed as an agent for physical phenomena provided some critical examples of the problem of fraud in psychical research. For example, in his experiments with the Goligher Circle, William J. Crawford posited the existence of ectoplasm to account for some otherwise odd phenomena carring minute particles of fresh paint discovered on objects and on the medium's body. It was later discovered that the phenomena in the circle was fraudulently produced. The idea of ectoplasm was later abandoned altogether, but before that searching out the substance and attempting to define its properties proved a formidable task for psychical researchers.
Charles Richet, for example, suggested that "there is a quasi-identity between the medium and ectoplasm, so that when an attempt is made to seize the latter a limb of the medium may be grasped; though I make a definite and formal protest against this frequent defence of doubtful phenomena by the spiritualists. More frequently the ectoplasm is independent of the medium, indeed, perhaps it is always so."
Apologies for Fraud
The resemblance of the materialized phantom to the medium was a frequent source of the accusations throughout the history of materializations. The more dedicated argued that the double of the medium served as a model for the first materialization and appeared before the manifestation of true phantoms.
Sir Arthur Conan Doyle suggested that the medium's double served as a pattern on which the temporary new body was built. He carried the suggestion too far, however. In pointing out that in certain cases so much ectoplasm was taken from the medium that hardly anything was left behind than an invisible simulacrum, he conjectured that when a materialized figure was seized it might not dematerialize into the simulacrum but absorb the residue of the medium. The acceptance of such a naive explanation would have opened the gates of fraud and made it nearly impossible to present evidence in case of brazen fraud.
The problem, however, was not so complicated as Doyle suggested. The simple truth was that nearly all materializing mediums were from time to time exposed by spirit grabbing. The "ectoplasm" was often seen to disappear, but quite often the medium was found in undergarments and without shoes, so that conscious or unconscious masquerade appeared to be incontestable.
It was suggested that many genuine mediums, when they felt their powers ebbing, could not resist the temptation of supple-menting then by artifice. Some, in an extreme state of suggestibility, might have obeyed the secret urging of a deceitful person. Such was the defense of Eusapia Palladino in an instance in Genoa before Cesare Lombroso. Julien Ochorowitz said, "When it is understood that the medium is but a mirror for reflecting and directing the nervous energies of the sitters to an ideoplastic purpose, it will not be found surprising that suggestion should play an important part. With controllers imbued with the notion of fraud the medium will be dominated by the suggestion of fraud."
Gustav Geley was forced to declare that "when a medium tricks the experimenters are responsible." Hereward Carrington's advice in the case of genuine mediums who resorted to trickery was "to say nothing but to let the medium see by one's manner that one is displeased and the phenomena evidently not convincing. If she perceives that such attempts are useless, she will settle down, pass into a trance, and genuine phenomena will be obtained." In his Mysterious Psychic Forces (1907), Camille Flammarion notes:
"One may lay it down as a principle that all professional mediums cheat. But they do not always cheat; and they possess real, undeniable psychic powers. Their case is nearly that of the hysterical folk under observation at the Salpétrière or elsewhere. I have seen some of them outwit with their profound craft not only Dr. Charcot, but especially Dr. Luys and all the physicians who were making a study of their cases. But because hysterics deceive and simulate it would be gross error to conclude that hysteria does not exist."
Unconscious fraud was facilitated by the anesthetic condition observed by William James in automatic writing, which involved the medium's hands and arms to a considerable degree. James H. Hyslop found this as an explanation when, with the medium's consent, he made several flashlight photographs of the production of physical phenomena. The medium was dumbfounded when the pictures were shown to her. They plainly showed that she produced every manifestation.
The unconscious impulse to cheat is sometimes quite beyond control. Laura I. Finch, editor of the Annals of Psychic Science, confessed that once, during a materialization séance, she felt a nearly overpowering impulse to roll up her sleeve in the cabinet and pass her arm out between the curtains.
Andrew Jackson Davis adduced the impulse as a partial explanation of the Stratford Poltergeist phenomena that occurred in the home of Eliakim Phelps. The testimonial given to Henry Gordon by the Springfield Harmonial Circle in January 1851 attempted an explanation:
"It may be stated, however, as a circumstance which seems to have been the cause of some misapprehension, that the individual referred to is highly susceptible to the magnetic power of the spirits, and that under the influence of an impression which he is unable to resist, he occasionally endeavors to perform the very action which he perceives to be in the mind of the spirit."
Professor Haraldur Neilsson of Iceland quoted a case in Psychic Science (July 1925) in which a perfectly senseless fraud was committed by one of the circle and a spirit afterward confessed to instigating the fraud.
A few have suggested, though it stretches credulity, that a state of dissociated consciousness prompting automatic preparations for fraud before a séance be considered as a possibility for understanding a medium's tricks. Such activity might be attributed to a form of "posthypnotic promise." Frank Podmore suggested that in trance the medium may promise to apport flowers in the next séance and then, in the waking state, might buy them and hide them in the séance room without conscious knowledge. Some hint of this possibility is given in Philippe Tissé's book Les Rèves (Paris, 1890), which narrates the case of a man who repeatedly commits thefts in the daytime under the effect of a dream in the night before.
Fraud by Psychical Researchers and Parapsychologists
Accredited scientists who performed psychical research were expected to have training in various disciplines that made them reliable observers and experimenters. It was assumed that only mediums were likely to practice fraud and that it was the task of the scientist to expose any fraud. Many scientists approached the paranormal already convinced that claimed phenomena must be fraudulent (or the result of some other mundane explanation), since they not only violated accepted physical laws but contradicted their own personal experience. Thus, to the average scientist examining mediums, it was only a matter of finding out how a medium cheated.
In the nineteenth century many scientists had a devout religious heritage, a heritage they felt had been stolen from them by science. When the opportunity of using science to reconstruct the lost foundations upon which their traditional religious beliefs had been constructed, they eagerly pursued it. The biographies of the founders of psychical research suggest that just such a motivation energized their investigations.
The possibility of rebuilding a lost faith coupled with the genuine scientific breakthrough that would result if their work proved fruitful was enough to test the integrity of any individual. The contemporary awareness of fraud in every area of scientific endeavor testifies to the temptation to cheat, even when the likely reward was far less than that afforded by any positive data in psychical research. It is to the credit of psychical re-search that no serious charges of fraud were leveled at the primary people involved in leading the Society for Psychical Re-search and the American Society for Psychical Research during its foundational years.
Within the last decade or so, however, a formidable attack on the credibility of Sir William Crookes was sustained. He allegedly was a party to deception by the medium Florence Cook because he was sexually involved with her, and the séances were a coverup for the affair.
There is every reason to doubt much of Cook's phenomena; the claim that Crookes was her lover is not conclusive, but does explain why he reported so favorably on them, given his scientific training and later unquestioned accomplishments. Crookes's defenders have argued that he was scrupulous in his other investigations of psychical phenomena, and that it would be absurd to attempt to invalidate his work with Daniel Dunglas Home, for example, on the grounds that he was sexually involved with him. Yet the question remains: if Cook was a fraud, why was Crookes so completely taken in?
After the death of veteran psychical researcher Harry Price, other researchers declared that Price had been guilty of deception in the famous case of the haunting of Borley Rectory, and that doubt must therefore be cast upon his other investigations. In his biography The Search for Harry Price (1978), author Trevor H. Hall (who also made the substantive charges against Crookes), even questions Price's personal integrity. Hall seems to go beyond the evidence of Price's shortcomings as a researcher in extending his critique to Price's basic honesty.
The modern era of parapsychology has also been affected by evidence of error and deception. In the summer of 1974 J. B. Rhine announced that Walter J. Levy, Jr., the director of the Institute for Parapsychology, had been discovered deliberately falsifying experimental results. This announcement was clearly a challenge to parapsychology, then in the midst of a controversy surrounding charges of fraud directed at S. G. Soal, a leading British parapsychologist. Soal died in 1975, and three years later hard evidence of fraud (conscious manipulation of computer data) was uncovered and publicized. Fortunately for the field, such cases have been rare, and parapsychologists have not been hesitant in reporting them when found.
Conjuring Campaigns Against Parapsychology
By World War I awareness of the depth of fraud that beset Spiritualism had become common knowledge within psychical research, though hope remained that some elements of real phenomena existed and could be isolated. It was during this time that Harry Houdini introduced his magic show, and it became evident that his conjuring skills would be helpful in uncovering Spiritualist tricks the average untrained researcher would miss.
Many intelligent Spiritualists and psychical observers were led to believe that what they perceived was the result of psychic faculty. Doyle thought Houdini's tricks so inexplicable that he declared him a psychic.
Trained stage magicians were especially helpful in the observation and denouncement of fraudulent psychics and heal-ers whom laboratory-oriented parapsychologists considered outside their concern. Such phenomena is often found in worship services and thus difficult to fully examine as one might in an experimental situation, but the religious setting has not proved insurmountable.
Assuming the mantle of Houdini during the late twentieth century as the archenemy of fake psychics and miracle workers is the magician James Randi (known as "the Amazing Randi"). He has never acknowledged observing any genuine psychical phenomena, and operates out of a stated desire to destroy belief in the paranormal. He has become a leading public spokesperson for the Committee for the Scientific Investigation of Claims of the Paranormal. While his work has rarely spoken to the claims and efforts of mainstream parapsychology, he has demonstrated that he can ostensibly perform ESP, psychic surgery, metal bending and other parapsychological phenomena by trickery. He also demonstrated that at least some who call themselves parapsychologists were incompetent in detecting fraud.
To prove his point Randi planted magicians in tests by parapsychologists. At a press reception in New York in 1982, he revealed that two young "metal benders," Steve Shaw and Mike Edwards, had deceived parapsychologists at the McDonnell Laboratory for Psychical Research, Washington University, St. Louis, for four years. On various occasions Randi himself was present at some sessions in disguise. The researchers at McDonnell believed that Shaw and Edwards had demonstrated genuine paranormal talent in metal bending and psychokinesis.
Randi's point was driven home in 1984 when Masuaki Kiyota, hailed as the Japanese Uri Geller, revealed in a television interview that he had faked the phenomena that had been verified by both American and Japanese researchers. Randi had long denounced Geller as a fake, but had been unable to provoke a decisive confrontation. Kiyota claimed that he had reproduced the primary Geller phenomenon, metal bending, as well as another frequently hailed phenomenon associated with psychic Ted Serios— the paranormal creation of pictures on film.
The incidents in which researchers did not discover fraud are important, but must also be placed in the larger context of parapsychology. Even before Randi revealed his scheme at the McDonnell Laboratory, for example, parapsychologists had called attention to methodological problems in their research that would have to be solved before they could accept any optimistic initial findings. The application of those proper controls tied the hands of the two magician/subjects and they were unable to perform.
During his research of fake ministers operating as Pentecostal healers, Randi investigated several in whom he could find no evidence of deceit, even though he found their faith naive and personally unacceptable.
Berger, Arthur S., and Joyce Berger. The Encyclopedia of Parapsychology and Psychical Research. New York: Paragon House, 1991.
Christopher, Milbourne. ESP, Seers, and Psychics. New York: Thomas Y. Crowell, 1970.
Houdini, Harry. A Magician among the Spirits. New York: Harper & Brothers, 1924. Reprinted as Houdini, A Magician among the Spirits. New York: Arno Press, 1972.
Keene, M. Lamar. The Psychic Mafia. New York: St. Martin's Press, 1976.
Price, Harry, and Eric J. Dingwall. Revelations of a Spirit Medium. London: Kegan Paul, Trench, Trubner, 1922.
Randi, James. The Faith Healers. Buffalo, N.Y.: Prometheus Books, 1987.
——. Flim-Flam: Psychics, ESP, Unicorns, and Other Delusions. Buffalo, N.Y.: Prometheus Books, 1982.
——. The Magic of Uri Geller. New York: Random House, 1975.
Stein, Gordon. Encyclopedia of Hoaxes. Detroit: Gale Re-search, 1993.
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.
Seventh Circuit Upholds Criminal Convictions of Conrad Black
On June 25, 2008, the U.S. Circuit Court of Appeals for the Seventh Circuit unanimously affirmed the convictions of former media giant Conrad Black and three others found guilty in July 2007 of mail and wire fraud (and Black, in addition, of obstruction of justice). U.S. v. Black, Conrad, No. 07-4080 (7th Cir. 2008). The focus of the appeal was on the sufficiency of evidence as well as the use of a certain jury instruction. The 62-year-old British Baron, formally known as Lord Black of Crossharbour, was already serving his six and a half year sentence in a Florida federal prison at the time of the Seventh Circuit's decision.
In its 16-page decision, the appellate court summarized relevant findings at the trial court level, including the jury's 2007 verdict that Black was guilty of mail and wire fraud in violation of 18 USC 1341 and of obstruction of justice under 18 USC 1512(c). The charges stemmed from his (and the other defendants') roles as senior executives (Black was chairman and CEO) of Hollinger International, which, through its subsidiaries, owned a number of domestic and international newspapers. The defendants were found to have engaged in a multimillion-dollar corporate fraud scheme that shorted both the company and its shareholders of several million dollars.
Hollinger was controlled by a Canadian company, now defunct, called Ravelston, which in turn was controlled by Black, who owned 65 percent of its shares. The evidence at trial established that Black was able to control Hollinger through his majority stake in Ravelston.
Hollinger had a subsidiary called APC, which owned several newspapers and was in the process of selling out. When APC had only one remaining newspaper, a small weekly community paper in Mammoth Lake, California, Hollinger's corporate counsel (another defendant) drafted and executed (on behalf of APC) an agreement (covenant not to compete) to pay Black and the other defendants $5.5. million in return for their promise not to compete with APC for three years. The trial established that the money was paid. The trial also established that neither Hollinger's audit committee (required for all transaction approvals) nor Hollinger's board of directors was informed of this transaction.
The defendants had argued that the $5.5 million actually represented management fees owed to Ravelston, but had been characterized as compensation for the non-compete covenant in the hope that Canada might not treat the fees as taxable income . Notwithstanding, evidence at trial showed that Hollinger, a large and sophisticated public corporation, had no documents to indicate either that the $5.5. million was credited to management fees accounts or, for that matter, approved by the corporation at all. The payment checks were also backdated to a time when APC had sold most of its newspapers, a scheme that the jury found to make the ostensible non-compete compensation less suspicious. Additionally, the checks were made out to Black and the other defendants personally. None of the defendants disclosed the money in the 10-K reports required annually by the Securities and Exchange Commission (SEC). The defendants also caused Hollinger to falsely represent to its shareholders that the payments had been made “to satisfy a closing condition.” As to Black, a corporate security camera caught him on video as he hauled 13 boxes of documents from his Toronto office after learning they were being sought as part of an investigation into his financial dealings. There was additional evidence showing that Black had tried to avoid the security cameras. That evidence led to the obstruction of justice charge and conviction.
Black also defended that he did no harm to the company, because the purpose of the “for private gain” criminal element in this case was to achieve a gain at the expense of the Canadian government, not Hollinger. But the Seventh Circuit's opinion noted, “They are making a no harm-no foul argument, and such arguments usually fare badly in criminal cases … [There was] no doubt that the defendants received money … and very little doubt that they deprived Hollinger of their honest services.” The appellate court also rejected Black's argument that the jury was improperly given the “ostrich” jury instruction, which provides that a jury can find a defendant guilty for intentionally avoiding knowing the truth about criminal behavior. Said Justice Posner in the appellate opinion, “If you receive a check in the mail for $1 million that you have no reason to think you are entitled to, you cannot just deposit it and when prosecuted for theft say you didn't know you weren't entitled to the money.”
Ultimately, the Seventh Circuit opinion, in affirming the convictions, held that (1) there was no error in the jury instruction which directed jurors to convict upon proof that defendants had schemed to deprive a corporation or its shareholders “of their intangible right to the honest services of the corporate officers, directors or controlling shareholders …”; (2) the obstruction of justice charge (against Black) did not require proof of materiality; all that was required was a showing that documents were concealed in order to make them unavailable in an official proceeding; (3) the “ostrich instruction” was proper; and (4) the court did give inadequate limiting instructions with respect to the jury's use of the false filings with the SEC (not affecting the ultimate verdict).
Counsel for Black did not indicate whether an appeal to the U.S. SUPREME COURT was forthcoming. Moreover, Black and his parent Canadian company, Hollinger, Inc. had additionally faced lawsuits by the SEC (SEC v. Black, No. 04-7377), and by Sun-Times Media, (Hollinger International v. Hollnger Inc, No. 04-698).
David Chalmers and BAYOIL Companies Sentenced
In March 2008, the U.S. Attorney for the Southern District of New York in Manhattan announced the sentencing of David Chalmers, of Houston, Texas, and two corporations operated by him, BAYOIL INC. (American) and BAYOIL SUPPLY & TRADING LTD. (Bahamian) (collectively, BAYOIL COMPANIES), for their roles in illegal kickbacks to Iraq under its Oil-for-Food Program. U.S. v. Chalmers, No. S1-05-CR-59(DC). Chalmers, 54, was sentenced to two years imprisonment and payment of restitution in an amount over $9 million. The corporations were each sentenced to three years probation and payment of restitution in conjunction with joint and several liability with another defendant, Oscar Wyatt, Jr.
While the sentencing was unremarkable, the crimes were not. They involved a set of defendants who tendered secretive illegal surcharge payments directly to the former Saddam Hussein regime of the former Government of Iraq, in exchange for crude oil, and in circumvention of the United Nations' sanctions and the Oil-for-Food Program.
As background, in August 1990 (about four days after Iraq invaded Kuwait), the United Nations (UN) imposed economic sanctions on the Government of Iraq. Specifically, it prohibited UN member states from trading in any Iraqi commodities or products. UN Security Council Resolution 986 authorized the Government of Iraq to sell a limited quantity of oil, but the proceeds from sales were deposited in an escrow bank account managed by the UN. The money in the account could only be used for humanitarian purposes approved by the UN, including food and medicine for the Iraqi people and reparations to victims of the Hussein regime's 1990 invasion of Kuwait.
On/about 2000, the Hussein regime developed a way to circumvent this sanction and obtain free money directly without UN supervision. It began to condition the right to purchase oil under the Oil-for-Food Program (i.e., to prioritize prospective purchasers) on their willingness to make secret surcharge payments directly to the Hussein regime. Chalmers, working with and through BAYOIL COMPANIES, elected to participate and began paying the illegal kickbacks between 2000 and 2003. This diverted millions of dollars otherwise available for humanitarian purposes intended to benefit the Iraqi people under the Oil-for-Food Program.
With a pending September 2007 trial, in August 2007, Chalmers and the BAYOIL COMPANIES each pleaded guilty to “participating in a conspiracy to commit wire fraud related to the payment of secret illegal surcharge payments to the former Government of Iraq.” Another defendant, Ludmil Dionissiev, an associate of Chalmers, pleaded guilty to facilitating the transportation and sale of Iraqi oil in January 2001. He was charged with facilitating the smuggling of Iraqi oil by sending a message to a Russian political figure that an agent of the BAYOIL COMPANIES had promised to pay an illegal surcharge on the oil on behalf of the Russian political figure. On December 13, 2007, Dionissiev was sentenced to a fine of $5000 and two years probation.
In addition to guilty pleas from Chalmers, Dionissiev, and the BAYOIL COMPANIES, the Oil-for-Food investigation led to several additional convictions. In October 2007, Oscar Wyatt, Jr., the founder of the Coastal Corporation, pleaded guilty (four weeks into his trial) to conspiring to make illegal kickback payments to the Saddam Hussein Regime. In 2006, Tongsun Park, a Korean national was found guilty by jury trial of conspiring to, among other things, serve as an unregistered agent of the Hussein regime in the United States; Samir Vincent, an Iraqi-American businessman, pleaded guilty to the same charge the year before. Vincent, not yet sentenced, had cooperated and testified for the U.S. government. Wyatt and Park both received prison sentences and fines.
Federal charges related to the Oil-for-Food Program were also filed against several other persons and entities, including Ephraim Nadler and Benon V. Sevan. At the time, Sevan was the Executive Director of the UN office that operated the Program. The charges alleged that Sevan received more than $150,000 from Nadler on behalf of the Government of Iraq, as a result of an oil transaction under the Program.
Those funds remitted to the U.S. Attorney's Office in connection with its investigation of abuses in the Oil-for-Food Program have been substantial: more than $11 million from Wyatt; $20 million from Chevron Corporation; and more than $5 million from El Paso Corporation, the latter two being publicly-traded companies that obtained Iraqi oil under the Program through third parties who paid the illegal kickbacks to the former Iraqi government. The monies collected were transferred to the Development Fund of Iraq (established by UN Security Council Resolution 1483 in 2003) as restitution for the benefit of the people of Iraq.
Democratic Fundraiser Norman Hsu Sentenced and Charged Again
Democratic fundraiser Norman Hsu, a Chinese businessman who was convicted of grand theft in the United States more than 15 years ago but fled to Asia before sentencing, was sentenced in January 2008 in a San Mateo, California court for the 1992 no-contest conviction. (He was charged in 1991 but entered his plea in 1992). Immediately thereafter, he was transferred to federal custody in New York to face fraud charges involving political fundraising totaling more than $20 million.
Hsu was a major contributor and fundraiser for Senator Hillary Rodham Clinton (D-NY), and it was widely reported that she would return at least $850,000 in donations because of the fraud charges. According to Lee Cary in his April 2008 article for American Thinker (“Norman Hsu Who?”), the three highest benefactors of Hsu's funds were three New York politicians: Hillary Rodham Clinton, state Attorney General Andrew Cuomo, and then-state Governor Elliot Spitzer, in descending order. “The second highest [Cuomo] might have been the man that a Governor Spitzer would have appointed to complete a President Hillary Clinton's unexpired Senate term [on the assumption of her winning],” Cary opined.
After fleeing to Asia while on bail following his 1992 conviction, Hsu resurfaced in the United States years later as a political fundraiser. When media coverage of Hillary Rodham Clinton's presidential campaign exposed Hsu's fugitive status, he surrendered to San Mateo authorities in August 2007. Free on $2 million bail, he again fled, but was caught a short time later in a Colorado hospital after injuring himself aboard an Amtrak train leaving the area.
Hsu's attorneys had attempted to have the 1992 case dismissed, or at least to allow Hsu to withdraw his no contest plea, arguing that his right to a speedy trial had been violated. The argument was premised on alleged facts that authorities were passive in attempting to locate him, despite his visibility, being photographed with political candidates and attending major fundraising events. The judge rejected that argument and Hsu was sentenced to the three years he faced under his original plea deal for the 1992 conviction. More importantly, the new charges Hsu faced involved more than $20 million dollars federal prosecutors alleged he bilked from political campaign donors.
Little was publicly known about Hsu until numerous old storage files were opened at various courts and from former partners and friends, in light of the more recent fraud charges. The collage of information revealed several failed businesses and bankruptcy filings, lawsuits, a kidnapping, and an unexplained financial recovery from each of his financial failings. He was said to have charmed people into investments in real estate, restaurants, and apparel businesses. According to court documents filed in the federal fraud case, several people lost their life savings.
Norman Yuen Hsu was born in Hong Kong in October 1951, according to his own statements to acquaintances, although a former college friend and business associate, Pedro Woo, stated that Hsu's roots were in Shanghai. In any event, he moved to California and received a Social Security Card in 1969 when he enrolled as a student of computer science at the University of California, Berkeley. According to public records, he married at 22 in 1974, shortly after graduating.
In 1976, Hsu received a California license to sell real estate. After completing a degree program at the University of Pennsylvania's Wharton School in 1981, he dabbled in various retail and restaurant enterprises and maintained a long list of businesses registered under his name. Known for dressing well, he apparently built trust by establishing himself as a successful businessman. He had impeccable educational credentials, was seen in popular political and social circles, and was often quoted in trade magazines.
Hsu and two college friends, including Pedro Woo, started a retail men's wear enterprise, from which Woo suffered a $50,000 loss (the third partner returned to Hong Kong). Woo, who was angry and felt Hsu abused his trust, could not track Hsu down for recourse. In fact, Hsu began to develop a reputation as long as the list of false addresses he left behind, much to the wonderment and chagrin of longtime bona fide occupants of those addresses who had never heard of him and were frustrated by mail from bill collectors.
In retrospect, it appeared that Hsu was building the classic pyramid-type investment scams, particularly one in the 1980s involving latex glove products. When several investors sued, Hsu filed for bankruptcy protection. Hsu vanished again just prior to his sentencing hearing in 1992, only this time, to Asia. According to Hong Kong business records, he began setting up two vague businesses with broadly-worded charters; both went bankrupt in 1997 and 1998. It is believed that shortly thereafter he returned to California, where he again dabbled in real estate and retail clothing businesses. As Hsu's California business contacts appeared to have tapered off, he reemerged in New York, this time in political circles. It remained unclear just how, why, or specifically when that happened.
Hsu became heavily involved in political fundraisers for the Democratic Party and tendered hefty donations, as well as threw lavish parties, for several of them. In 2004, when the Democrats succeeded in Congress, Hsu hosted a large party at a swank New York Club, during which he reportedly grabbed the microphone and ordered anyone not supporting Hillary Clinton to “get out!” Hsu also was a member of the Clinton Global Initiative, for which he paid an annual $15,000 donation membership fee.
Hsu's life began to crash again when media persons following political fundraisers began describing discernible patterns between Hsu's contributions and those of people with no prior history or means of contributing. Federal investigators began probing into whether donors were reimbursed and/or donation money from one individual was spread out among many donors to slide in under the maximums allowable per contributor. Amid these new probes, Hsu, who was to surrender his passport and discuss bail reduction, disappeared again only to be caught in Colorado.
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 ). 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.
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.
Crematory Owner Pleads Guilty to Dumping Bodies on Property
Ray Brent Marsh, a 30-year-old crematory operator in Georgia, pleaded guilty in 2004 to charges that he scattered bodies throughout his property rather than cremating them. Under a plea agreement with prosecutors, March received a sentence of 12 years in prison. The case also led to a multi-million-dollar civil lawsuit brought by those whose family members' remains were mishandled at Marsh's crematory.
Ray Brent Marsh's family was reportedly highly respected in Walker County, Georgia. Tommy Ray Marsh, Ray Brent's father, operated a gravedigging and vault company, while Clara Marsh, the defendant's mother, was a former schoolteacher and had been named Citizen of the Year in the county. Tommy Ray Marsh opened the Tri-State Crematory in Walker County in 1982 and operated it until 1996, when his health began to fail. Ray Brent Marsh's older sister, LaShea, assisted her father in the business until 1996.
The Tri-State Crematory avoided several regulations during the 1990s. Although a 1990 state law in Georgia required all crematories to hire a licensed funeral director, the Marshes were temporarily exempted, through the help of a state representative. Later in the decade, legislation proposed by the Georgia Funeral Services Board would have required all Georgia crematories to obtain a state license and to submit to regular inspections. Legislators later omitted portions of the bill related to crematories, however. Neither Tommy Ray Marsh nor Ray Brent Marsh was a licensed funeral director.
Funeral homes in Tennessee, Alabama, and Georgia sent bodies to Tri-State for cremation, for which the crematory received $200 to $250 per body. Until 1996, Tommy Ray Marsh reportedly kept the property neat and tidy. LaShea Marsh testified that her father had prepared bodies for cremation "in a reasonable amount of time after he received [them]." She also said that the remains were properly identified in preparation for their return to a funeral home or to a family member.
Ray Brent Marsh, then 22, took over the Tri-State Crematory in 1996. Some time during 1997, according to allegations made in court, Marsh stopped performing cremations on some of the bodies that he received. The number of bodies that he did not cremate increased each year. Family members who expected to receive the remains of their loved ones actually received cement dust instead. Neighbors said that they did not know that Marsh was stacking corpses on his property, which was not visible from the nearest roadway.
In April 2001, a man delivering gas to the crematory saw some bodies in a pit on the crematory property. The man, Gerald Cook, told his supervisor, who in turn notified the Walker County Sheriff's Department. The department did not act on the information. Sheriff Steve Wilson stated, "I felt it was a regulatory issue at the time. Basically, it dealt with bodies not being disposed of in a timely fashion. There wasn't much we could do about it then." At the time of the delivery man's observation, nothing under Georgia law rendered improper disposal of bodies as illegal.
Cook again saw bodies at the property during a delivery in November 2001. This time, he told his aunt, Fay Deal, who worked for a local office of the Federal Bureau of Investigation. Instead of informing the FBI, Deal contacted the Environmental Protection Agency. Through some miscommunication between Deal and the EPA agent, the EPA believed that a woman's dog had found a human skull on the property. The EPA contacted the Walker County Sheriff's Department, which dispatched an officer to the property in November 2001. The officer did not conduct a thorough search of the property at that time.
Deal contacted the EPA again in February 2002 after Cook informed her that he had seen human remains on the property for a third time. She gave a more complete description to the EPA, and the EPA sent agents to the crematory. The agents discovered a human skull outside of a fence on the property. From that point, the EPA, the Walker County Sheriff's Department, and the Georgia Bureau of Investigation searched the premises for bodies. More than 60 bodies had been sent to Tri-State between April 2001, when officials first received the information about the crematory, and February 2002.
Investigators discovered a gruesome scene in which bodies were discarded in pits and vaults on the property. Officials located a total of 339 bodies at the site. Marsh maintained a record of the bodies that he received, which helped officials to identify the bodies. During the months that followed the initial discovery, investigators were able to identify about 225 bodies. Some of the corpses had been embalmed, which made it impossible to collect DNA samples. Inspectors of the property testified later that the property was in "serious disrepair," with cremated remains scattered in several locations.
Marsh faced criminal charges and civil actions related to his activities at the crematory. About 1,700 family members of the deceased whose remains had been sent to Tri-State from 1997 to February 2002 sued the crematory, Marsh, 52 funeral homes that had sent bodies to Tri-State, and the Georgia Farm Bureau, which had insured Marsh's property. The plaintiffs settled with the funeral homes for $36 million, much of which was paid. The plaintiffs also settled with Marsh for $80 million.
The state of Georgia brought a total of 787 charges against Marsh, including 439 counts of theft, 179 counts of abuse of a corpse, 122 counts of burial service fraud , and 47 counts of making false statements. Marsh initially pleaded not guilty to the charges. Had he been convicted, he would have faced prison sentences of more than 8,000 years.
Marsh instead pleaded guilty in November 2004 under a plea agreement with prosecutors. He was sentenced to 12 years in prison, followed by a lengthy probation. He will be eligible for parole in about four years. He also received a $20,000 fine. Prior to sentencing, Marsh faced relatives of some of the people whose remains were supposed to have been cremated. During one of the statements, a family member said to Marsh, "I believe you will come to meet your maker one day, and the hell you put us through will come back to you. You may not have killed my father, but a part of my heart died when you put his body in a vault with 20 others."
Pasquantino v. United States
Fraud schemes can cross national borders and can involve two or more sovereign governments. In the United States, prosecutors have used the federal wire fraud statute , 18 U.S.C.A. §1343, against individuals who have defrauded foreign governments of tax revenue by smuggling goods that are subject to excise taxes. The federal courts of appeal, however, had split over whether such prosecutions were permissible. The U.S. Supreme Court resolved the issue in Pasquantino v. United States, __U.S. __, 125 S.Ct. 1766, __ L.Ed.2d __ (2005), ruling that the wire fraud statute could be used against persons who smuggled liquor into Canada. In doing so, the Court rejected the application of a common law rule that prohibits U.S. courts from enforcing the tax laws of foreign governments.
Carl J. Pasquantino, David Pasquantino, and Arthur Hilts were convicted of violating the wire fraud statute. They had smuggled large amounts of liquor into Canada from the United States. The Pasquantinos, who lived in New York, called discount liquor stores in Maryland and placed orders for liquor. They hired Hilts and other persons to pick the liquor up and drive it across the Canadian border. The drivers avoided paying excise taxes on the liquor by concealing it in their vehicles and by failing to tell Canadian customs agents about their cargo. During the years of the criminal enterprise (1996 to 2000), Canada heavily taxed imported liquor. At trial, the government presented evidence showing the uncollected taxes were double the liquor's purchase price.
Before trial, the defendants challenged the wire fraud indictment, arguing that the U.S. government lacked a sufficient interest in enforcing Canada's tax laws. The district court rejected this argument. After their convictions, the defendants appealed and renewed this argument, contending that the use of the wire fraud statute contravened the "common-law revenue rule" because it required the court to take notice of Canadian revenue laws. The U.S. Court of Appeals for the Fourth Circuit found no merit in this argument, ruling that the common-law revenue rule only forbade U.S. courts from enforcing the tax judgments of foreign governments. Because the U.S. Court of Appeals for the First Circuit had previously ruled that a scheme to defraud a foreign nation of tax revenues did not violate the wire fraud statute, the Supreme Court agreed to hear the defendants' appeal.
The Supreme Court, in a 5-4 ruling, agreed with the Fourth Circuit that the common-law revenue rule did not apply. Justice Clarence Thomas, in his majority opinion, noted that the defendants had challenged two parts of the wire fraud statute. The first concerned whether the object of their fraud was the money or property in the victim's hands. Justice Thomas found that Canada's right to uncollected excise taxes was "property" in its hands. This right was an entitlement and "something of value" to Canada. The failure to pay the required taxes was an economic injury "no less than had they embezzled funds from the Canadian treasury." The second issue in dispute was whether the defendants' actions were "a scheme or artifice to defraud" Canada of its tax revenue. Thomas concluded that the failure to declare the liquor as it passed through Canadian customs was conduct that came under the statute.
Justice Thomas then examined the application of the common-law revenue rule to this case. The defendants relied on a rule of statutory construction that directs courts to ignore statutes that conflict with common-law rules unless the legislature demonstrates its intent to override the common law. Therefore, Thomas examined the common law of 1952, the year that Congress enacted the wire fraud statute. He discovered that as of 1952 there was no common-law revenue rule case "that held or clearly implied that the revenue rule barred the United States from prosecuting a fraudulent scheme to evade foreign taxes."
Turning to the traditional bases for the revenue rule, Thomas found that, since the nineteenth century, U.S. courts had used the rule to bar "the enforcement of tax liabilities of one sovereign in the courts to another sovereign, such as a suit to enforce a tax judgment." These cases shaped the current understanding of the rule as prohibiting the collection of foreign tax claims." In the present case, however, Canada was not seeking to enforce a tax claim; rather, the U.S. government was acting in its "sovereign capacity to punish domestic criminal conduct." Although Justice Thomas acknowledged that the wire fraud prosecution "enforced" Canadian revenue law in "an attenuated sense," it did not contravene the revenue rule.
Justice Ruth Bader Ginsburg, in a dissenting opinion, argued that the majority had "ascribed an exorbitant scope to the wire fraud statute" and that it had ignored the will of Congress. She pointed out that Congress had addressed international smuggling by permitting criminal enforcement of customs laws of a foreign nation, but only when the nation has a reciprocal law criminalizing smuggling into the United States. Canada did not have such a reciprocal law. Ginsburg believed that the better course would have been to have Canada extradite the defendants and to prosecute them in the Canadian courts.
Fraud is commonly understood as dishonesty calculated for advantage. A person who is dishonest may be called a fraud. In the U.S. legal system, fraud is a specific offense with certain features.
Fraud is most common in the buying or selling of property, including real estate, personal property, and intangible property, such as stocks, bonds, and copyrights. State and federal statutes criminalize fraud, but not all cases rise to the level of criminality. Prosecutors have discretion in determining which cases to pursue. Victims may also seek redress in civil court.
Fraud must be proved by showing that the defendant's actions involved five separate elements: (1) a false statement of a material fact,(2) knowledge on the part of the defendant that the statement is untrue, (3) intent on the part of the defendant to deceive the alleged victim, (4) justifiable reliance by the alleged victim on the statement, and (5) injury to the alleged victim as a result.
These elements contain nuances that are not all easily proved. First, not all false statements are fraudulent. To be fraudulent, a false statement must relate to a material fact. It should also substantially affect a person's decision to enter into a contract or pursue a certain course of action. A false statement of fact that does not bear on the disputed transaction will not be considered fraudulent.
Second, the defendant must know that the statement is untrue. A statement of fact that is simply mistaken is not fraudulent. To be fraudulent, a false statement must be made with intent to deceive the victim. This is perhaps the easiest element to prove, once falsity and materiality are proved, because most material false statements are designed to mislead.
Third, the false statement must be made with the intent to deprive the victim of some legal right.
Fourth, the victim's reliance on the false statement must be reasonable. Reliance on a patently absurd false statement generally will not give rise to fraud; however, people who are especially gullible, superstitious, or ignorant or who are illiterate may recover damages for fraud if the defendant knew and took advantage of their condition.
Finally, the false statement must cause the victim some injury that leaves her or him in a worse position than she or he was in before the fraud.
A statement of belief is not a statement of fact and thus is not fraudulent. Puffing, or the expression of a glowing opinion by a seller, is likewise not fraudulent. For example, a car dealer may represent that a particular vehicle is "the finest in the lot." Although the statement may not be true, it is not a statement of fact, and a reasonable buyer would not be justified in relying on it.
The relationship between parties can make a difference in determining whether a statement is fraudulent. A misleading statement is more likely to be fraudulent when one party has superior knowledge in a transaction, and knows that the other is relying on that knowledge, than when the two parties possess equal knowledge. For example, if the seller of a car with a bad engine tells the buyer the car is in excellent running condition, a court is more likely to find fraud if the seller is an auto mechanic as opposed to a sales trainee. Misleading statements are most likely to be fraudulent where one party exploits a position of trust and confidence, or a fiduciary relationship. Fiduciary relationships include those between attorneys and clients, physicians and patients, stockbrokers and clients, and the officers and partners of a corporation and its stockholders.
A statement need not be affirmative to be fraudulent. When a person has a duty to speak, silence may be treated as a false statement. This can arise if a party who has knowledge of a fact fails to disclose it to another party who is justified in assuming its nonexistence. For example, if a real estate agent fails to disclose that a home is built on a toxic waste dump, the omission may be regarded as a fraudulent statement. Even if the agent does not know of the dump, the omission may be considered fraudulent. This is constructive fraud, and it is usually inferred when a party is a fiduciary and has a duty to know of, and disclose, particular facts.
Fraud is an independent criminal offense, but it also appears in different contexts as the means used to gain a legal advantage or accomplish a specific crime. For example, it is fraud for a person to make a false statement on a license application in order to engage in the regulated activity. A person who did so would not be convicted of fraud. Rather, fraud would simply describe the method used to break the law or regulation requiring the license.
Fraud resembles theft in that both involve some form of illegal taking, but the two should not be confused. Fraud requires an additional element of false pretenses created to induce a victim to turn over property, services, or money. Theft, by contrast, requires only the unauthorized taking of another's property with the intent to permanently deprive the other of the property. Because fraud involves more planning than does theft, it is punished more severely.
Federal and state criminal statutes provide for the punishment of persons convicted of fraudulent activity. Interstate fraud and fraud on the federal government are singled out for federal prosecution. The most common federal fraud charges are for mail and wire fraud. Mail and wire fraud statutes criminalize the use of the mails or interstate wires to create or further a scheme to defraud (18 U.S.C.A. §§ 1341, 1342).
Tax fraud against the federal government consists of the willful attempt to evade or defeat the payment of taxes due and owing (I.R.C. §7201). Depending on the defendant's intent, tax fraud results in either civil penalties or criminal punishment. Civil penalties can reach an amount equal to 75 percent of the underpayment. Criminal punishment includes fines and imprisonment. The degree of intent necessary to maintain criminal charges for tax fraud is determined on a case-by-case basis by the internal revenue service and federal prosecutors.
There are other federal fraud laws. For example, the fraudulent registration of aliens is punishable as a misdemeanor under federal law (8 U.S.C.A. § 1306). The "victim" in such a fraud is the U.S. government. Fraud violations of banking laws are also subject to federal prosecution (18 U.S.C.A. §§ 104 et seq.).
The Federal Sentencing Guidelines recommend consideration of the intended victims of fraud in the sentencing of fraud defendants. The guidelines urge an upward departure from standard sentences if the intended victims are especially vulnerable. For example, if a defendant markets an ineffective cancer cure, that scheme, if found to be fraudulent, would warrant more punishment than a scheme that targets persons generally, and coincidentally happens to injure a vulnerable person. Federal courts may require persons convicted of fraud to give notice and an explanation of the conviction to the victims of the fraud (18 U.S.C.A. § 3555).
All states maintain a general criminal statute designed to punish fraud. In Arizona, the statute is called the fraudulent scheme and artifice statute. It reads, in pertinent part, that "[a]ny person who, pursuant to a scheme or artifice to defraud, knowingly obtains any benefit by means of false or fraudulent pretenses, representations, promises or material omissions" is guilty of a felony (Ariz. Rev. Stat. Ann. § 13-2310(A)).
States further criminalize fraud in a variety of settings, including trade and commerce, securities, taxes, real estate, gambling, insurance, government benefits, and credit. In Hawaii, for example, fraud on a state tax return is a felony warranting a fine of up to $100,000 or three years of imprisonment, or both, and a fraudulent corporate tax return is punished with a fine of $500,000 (Haw. Rev. Stat. § 231-36). Other fraud felonies include fraud in the manufacture or distribution of a controlled substance (§ 329-42) and fraud in government elections (§ 19-4). Fraud in the application for and receipt of public assistance benefits is punished according to the illegal gain: fraud in obtaining over $20,000 in food coupons is a class B felony; fraud in obtaining over $300 in food coupons is a class C felony; and all other public assistance fraud is a misdemeanor (§ 346-34). Alteration of a measurement device is fraud and is punished as a misdemeanor (§ 486-136).
In civil court, the remedy for fraud can vary. In most states, a plaintiff may recover "the benefit of the bargain." This is a measure of the difference between the represented value and the actual value of the transaction. In some states, a plaintiff may recover as actual damages only the value of the property lost in the fraudulent transaction. All states allow a plaintiff to seek punitive damages in addition to actual damages. This right is exercised most commonly in cases where the fraud is extremely dangerous or costly. Where the fraud is contractual, a plaintiff may choose to cancel, or rescind, the contract. A court order of rescission returns all property and restores the parties to their precontract status.
Fraud is also penalized by administrative agencies and professional organizations that seek to regulate certain activities. Under state statutes, a professional may lose a license to work if the license was obtained with a false statement.
One particularly well publicized area of fraud is corporate fraud. Corporate fraud cases are largely governed by the Securities Exchange Act of 1934 (15 USCA §§ 78a et seq.), along with other rules and regulations propagated by the securities and exchange commission. These laws were a response to the market turmoil during the 1930s and well-publicized corporate fraud cases.
The Securities Exchange Act and the SEC regulate anything having to do with the trading or selling of securities and stocks. They govern fraudulent behavior ranging from stock manipulation to insider trading. They also provide for civil and criminal penalties for corporate fraud.
Despite the act and the SEC, in the early part of the twenty-first century, corporate fraud began to seem endemic. Such well-known companies as energy trader Enron, telecommunications company WorldCom, cable provider Adelphia, and other lesser-known firms went into bankruptcy as a result of corporate fraud. In light of these events, Congress decided to tighten up corporate fraud requirements with the passages of the sarbanes-oxley act of 2002 (U.S. PL 107-204).
Among other features, Sarbanes-Oxley required expanded and more frequent disclosure by public companies of their finances to prevent fraud. It created a Public Company Accounting Oversight Board to register and regulate accounting firms and accounting practices. It also enhanced the SEC's power to monitor and investigate compliance with securities laws, adding stiff penalties for fraudulent behavior by corporations, their officers, and their accountants.
Clemency, John. 2002. "Corporate Fraud: Where Should the Buck Really Stop?" American Bankruptcy Institute Journal 21 (November).
Ribstein, Larry. 2002. "Market vs. Regulatory Responses to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002." Journal of Corporation Law 28 (fall).
Legal Woes of Former CEO of Westar Energy Continue
David Wittig, the former chief executive officer of Westar Energy in Topeka, Kansas, was sentenced to 24 months in prison in February 2007 on charges of bank fraud, money laundering, and conspiracy. It was the third time that Wittig had been sentenced, after panels of the 10th Circuit Court of Appeals reversed two previous sentences due to errors that the trial judge had made in computing his sentence. In January, Wittig successfully appealed his conviction of other fraud charges also stemming from his role with Westar and awaits retrial on those charges.
Wittig worked at a Wall Street investment bank before taking over as CEO and chairman of the board of Westar Energy, the largest public utility in the state of Kansas. He was also a borrower from Capital Bank in Topeka. At that time, Clinton Odell Weidner II was the presi-dent of Capital Bank and also served as Wittig's loan officer. According to court records, Wittig had a net worth of more than $33 million. He had borrowed several million from the bank to purchase and to renovate his home in Topeka.
In April 2001, a bank customer brought to Weidner's attention a real estate project in Scottsdale, Arizona, which would require an investment of $1.5 million. Weidner asked Wittig if the latter would like to enter into the transaction, but Wittig declined. However, Wittig said that he would loan Weidner the $1.5 million if Weidner would increase Wittig's line of credit at Capital City by the same amount. Weidner increased Wittig's line of credit, and then on April 30, 2001 transferred $1.5 million from Wittig's account to make the down payment for the real estate development project. Weidner later provided Wittig with a promissory note for the $1.5 million.
Both Weidner and Wittig attempted to conceal the fact that the extension of Wittig's credit was used to make Weidner's down payment on the Arizona property. The men did not disclose the loan in various documents that were filed with the bank. Bank officers finally discovered the loan in late 2001. At that time, Weidner asked a friend to forward funds to Weidner's partner in Arizona, who in turn transferred funds to Wittig's bank account. Wittig subsequently paid down his line of credit at Capital Bank by $1.6 million. The bank finally discovered the true nature of the loan on March 16, 2002, at which time the bank placed Weidner on administrative leave. The bank asked Wittig to increase the collateral for his line of credit, which he did. He paid off the line of credit three months later.
A federal grand jury with the U.S. District Court in Topeka indicted Wittig and Weidner on November 7, 2002. The men faced a total of six counts, including four counts of making a false bank entry, one count of conspiracy to submit false entries to a federally insured bank and to launder money, and one count of money laundering. Wittig announced his resignation from Westar on November 22, 2002.
After Wittig's resignation, some of his other illicit activities more directly related to Westar came to light. He and former chief strategy officer Douglas Lake were accused of engineering extravagant salaries and benefits for themselves while hiding their actions from Westar's board of directors and federal regulators. Prosecutors charged Wittig with 39 counts on charges that included conspiracy, wire fraud, and money laundering. Lake was charged with 30 similar counts.
Wittig has faced a somewhat confusing series of trials and appeals between 2003 and 2007. In 2003, a federal court convicted Wittig on all six counts related to the transactions with Weidner. The trial court applied the Federal Sentencing Guidelines and determined that his sentencing range was between 51 and 63 months. The court sentenced him to 51 months' imprisonment followed by three years of unsupervised release. The court also ordered Wittig to pay a $1 million fine.
In February 2006, the 10th Circuit Court of Appeals affirmed the conviction, but vacated and remanded the sentence because the appellate court determined that the trial court had miscalculated Wittig's sentence. United States v. Weidner, 437 F.3d 1023 (10th Cir. 2006). On remand, U.S. District Judge Julie Robinson sentenced Wittig to 60 months. The 10th Circuit in November 2006 vacated this sentence on grounds similar to the February opinion. United States v. Wittig, No. 06-3166, 2006 WL 3378451 (10th Cir. Nov. 22, 2006). After the second remand, Robinson in February 2007 reduced the sentence to 24 months. United States v. Wittig, 474 F. Supp. 2d 1215 (D. Kan. 2007).
Wittig and Lake were convicted in September 2005 on charges stemming from the allegations that the men stole millions from Westar. They were sentenced to 18 years and 15 years, respectively, for their involvement in the scheme. However, the 10th Circuit in January 2007 reversed the convictions. The appellate court ruled that prosecutors had failed to prove that Wittig and Lake were required to disclose certain activities on forms filed with the Securities and Exchange Commission, and thus the court determined that the men had not supplied false or fraudulent information in those reports. Moreover, the court determined that the prosecution had not proven that the Wittig and Lake had engaged in unlawful wire fraud, which precluded convictions for money laundering. The court remanded the case for a retrial. United States v. Lake, 472 F.3d 1247 (10th Cir. 2007).
Wittig was imprisoned from January 2006 until February 2007 because he violated the terms of his release from prison. After his conviction for corporate fraud, the trial court allowed Wittig to remain free until his attorneys exhausted the appeals process, provided that he did nothing to hide the value of his assets. Prosecutors persuaded Judge Robinson that Wittig had manipulated bank accounts and sold stocks since the time of his conviction in order to transfer wealth to his wife. Robinson ordered Wittig to return to detention. Wittig was released on bond on February 12.
FRAUD , the prohibition against wronging another in selling or buying property (Lev. 25:14) is one of civil (see *Ona'ah) rather than criminal law – although, since it is a negative injunction, its violation by any overt act may result in the punishment of *flogging (Tos. and Penei Yehoshu'a to bm 61a; cf. Maim. Yad, Sanhedrin 18:1). Where reparation can be made by the payment of money, no such punishment may be inflicted in addition (cf. Yad, loc. cit., 2 and Mekhirah 12:1; Ket. 32a; Mak. 4b, 16a). The express repetition, "And ye shall not wrong one another, but thou shalt fear thy God" (Lev. 25:17), was interpreted to prohibit the "wronging" of another not only in commercial transactions but also in noncommercial intercourse: the prohibition extends to "wronging by words" as distinguished from wronging by fraudulent deeds and devices; and wronging by words includes pestering people in vain as well as offending or ridiculing them (bm 4:10). It is said that wronging by words is even more reprehensible than wronging by fraudulent deeds, because while the latter is an offense against property only and can be redressed by the payment of money, the former is an offense against the person and his reputation, for which money will not normally be an adequate compensation (bm 58b; Yad, Mekhirah 14:12–18; see *Slander). However, though not constituting a cause of action for damages, wronging by words is not punishable by flogging either, because the mere utterance of words is not considered such an overt act of violation as may be punished in this way (cf. Yad, Sanhedrin 18:2). The admonition "but thou shalt fear thy God" (Lev. 25:17) is said to indicate that even though the offender may escape human punishment, divine retribution is certain to follow (Yad, Mekhirah 14:18; Ibn Ezra to Lev. 26:17).
The fact that fraud, even in the civil law meaning of the term, was in biblical times regarded as eminently criminal in character is well illustrated in Ezekiel's discourse on individual criminal responsibility: the same responsibility attaches for wronging the poor and needy, converting property, and not restoring pledges, as for murder, robbery, and adultery (Ezek. 18:10–13), and for all those misdeeds the same capital punishment is threatened (ibid.). Fraud and *oppression are usually found in the same context as *usury (Ex. 22:20, 24; Lev. 25:14, 17, 37; Deut. 23:17, 20; Ezek. 7–8; 12–13, 17). Fraud has also been held as tantamount to larceny (see *Theft and Robbery; Tur, Ḥm 227). As fraud and oppression go hand in hand, their victims are often the weak and the underprivileged; hence there are particular prohibitions on fraud against strangers (Ex. 22:20), widows and orphans (Ex. 21), and slaves (Deut. 23:17). Wronging widows and orphans is so repulsive in the eyes of God that "if they cry at all unto Me… My wrath shall wax hot and I will kill you with the sword, and your wives shall be widows and your children fatherless" (Ex. 22:22–23). Wronging and vexing the poor and the stranger draws forth God's wrath (Ezek. 22:29–31 et al.) and is a cause of national disaster (Jer. 22:3–6).
In post-talmudic times, fraudulent business practices often resulted in the courts barring or suspending the offender from carrying on business. While isolated instances of fraud would be dealt with as civil matters, repeated and notorious fraudulent business practices might be punished by the sequestration of the offender's business, depriving him of his livelihood (S. Assaf, Ha-Onshin Aḥarei Ḥatimat ha-Talmud (1922), 43). On other aspects of fraud see also *Gerama.
In the State of Israel, the criminal law on fraud and kindred offenses has been reformed and expanded by the Penal Law Amendment (Deceit, Blackmail and Extortion) Law, 5723–1963. Fraud is there defined as any representation of fact – past, present, or future – made in writing, by word of mouth, or by conduct, which the maker knew to be false or did not believe to be true. It is made a criminal offense not only to obtain anything by such fraud, but also to obtain anything by any trick not amounting to fraud or by the exploitation of another's mistake or ignorance. Particular instances of fraud mentioned in the Act are pretenses of sorcery or fortune-telling; forgeries and unauthorized alterations of documents and the use or uttering of the same; the fraudulent suppression or concealment of any document or chattel, and the fraudulent incitement of others to make, alter, or conceal documents; as well as the issue of a check where the drawer knew that the banker on whom it was drawn was not bound to honor it.
[Haim Hermann Cohn]
The Penal Code 5737–1977 included the contents of the legislated sections referred to above, pertaining to fraud in general. It also included sections establishing special offences for fraudulent acts in the context of corporations (sections 426–414 of the Law). Furthermore, section 576 of the Companies Ordinance [New Version] 5743–1983 deals with offenses committed by position holders in companies.
[Menachem Elon (2nd ed.)]
et, 1 (19513), 160f.; 2 (1949), 18f.; em, 1 (1950), 149f. add. bibliography: M. Elon, Ha-Mishpat ha-Ivri (1988), 1:536, 537, 576, 604, 622, 720; idem, Jewish Law, (1994) 2:652, 710, 748, 769, 888.
fraud / frôd/ • n. wrongful or criminal deception intended to result in financial or personal gain: he was convicted of fraud| prosecutions for social security frauds. ∎ a person or thing intended to deceive others, typically by unjustifiably claiming or being credited with accomplishments or qualities: mediums exposed as tricksters and frauds.DERIVATIVES: fraud·ster n.ORIGIN: Middle English: from Old French fraude, from Latin fraus, fraud- ‘deceit, injury.’