Will the Supreme Court Resolve the Circuit Split on the Geographic Scope of Wire Fraud Statute?
September 12, 2023
The federal wire fraud statute is a workhorse for federal prosecutors. In 2021, there were more than 4,500 federal prosecutions for fraud, theft, or embezzlement, constituting 8% of federal criminal cases. The wire fraud statute is particularly important in transnational fraud cases, because communicating with people in the United States using U.S. wires is considered U.S. conduct even when the communication originates abroad. Wire fraud is also a predicate offense for civil RICO claims. Earlier this year, in Yegiazaryan v. Smagin, the Supreme Court permitted to go forward a civil RICO claim for concealing assets to avoid paying a judgment, with wire fraud alleged among the predicate acts.
The lower courts are divided, however, on the geographic scope of the wire fraud statute. The Third Circuit has held that the statute, by its own terms, applies extraterritorially, while other circuits disagree. Among the circuits holding that the wire fraud statute is not exterritorial, there is also disagreement about how much conduct in the United States is required.
The cert petition in Elbaz v. United States asks the Supreme Court to resolve these circuit splits. In addition to the split, which is a common reason to grant review, the Court recently reformulated the presumption against extraterritoriality in Abitron Austria GmbH v. Hetronic International, Inc. (2023), emphasizing the need for domestic conduct, a question clearly raised in Elbaz.
The Elbaz Case
Lee Elbaz is an Israeli citizen who worked for an Israeli company, Yukom, in Israel. Two other foreign companies that sell binary options (all-or-nothing bets on the price of assets at certain times) to investors around the world, including the United States, hired Yukom to help them retain customers. Yukom allegedly made fraudulent misrepresentations in performing this service. Specifically, Elbaz was alleged to have caused three transmissions to Maryland over U.S. wires in furtherance of a scheme to defraud: two emails and a phone call.
Elbaz was arrested while on vacation in the United States and charged with three counts of wire fraud and one count of conspiracy to commit wire fraud. She was tried and convicted in Maryland. The district court sentenced her to 22 years in prison and ordered her to pay $28 million in restitution. Elbaz appealed, arguing that the wire fraud statute should not apply extraterritorially to punish her for conduct in Israel.
The Fourth Circuit’s Decision
On appeal, the Fourth Circuit applied the two-step framework for the presumption against extraterritoriality articulated by the Supreme Court in RJR Nabisco, Inc. v. European Community (2016). Step one asks whether a federal statute gives a clear indication of extraterritoriality. If not, then step two determines the “focus” of the statute and asks whether conduct relevant to the focus occurred in the United States. If so, then the case involves a permissible domestic application of the statute; if not, then the case involves an impermissible extraterritorial application of the staute.
The federal wire fraud statute provides in relevant part:
Whoever, having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises, transmits or causes to be transmitted by means of wire, radio, or television communication in interstate or foreign commerce, any writings, signs, signals, pictures, or sounds for the purpose of executing such scheme or artifice, shall be fined under this title or imprisoned not more than 20 years, or both.
At step one of the extraterritoriality analysis, the Fourth Circuit found no clear indication that Congress intended this provision to apply abroad. Although the statute refers to “foreign commerce,” this was not sufficient to rebut the presumption.
At step two, the Fourth Circuit reasoned that the focus of this provision had to be either the scheme to defraud or the use of U.S. wires. Citing the Supreme Court’s decision in Pasquantino v. United States (2005), the court held that the statute’s focus was the use of the wires. Because “the transmissions were received by victims in Maryland using wires in Maryland,” the court reasoned, “Elbaz’s convictions are all permissible domestic applications of the wire-fraud statute.”
The Circuit Splits
In her petition for cert, Elbaz identifies two circuit splits concerning the geographic scope of the wire fraud statute. The Third Circuit held in Georgiou v. United States (2015) that the wire fraud statute applies extraterritorially because it refers to “foreign commerce,” quoting some loose language from the Supreme Court’s decision in Pasquantino.
But the Supreme Court has repeatedly held—both before and after Pasquantino—that statutory references to foreign commerce are insufficient to rebut the presumption against extraterritoriality. Thus, the Second Circuit held in Bascuñán v. Elsaca (2019) that “[t]he mail and wire fraud statutes do not indicate an extraterritorial reach.” And the Fourth Circuit reached the same conclusion in Elbaz, explaining that the statute’s reference to “foreign commerce” “fails to rebut the presumption against extraterritorial application.”
The courts of appeals are also divided over how to apply step two of the presumption analysis. All the circuits to have addressed the question agree that the focus of the wire fraud statute is the use of U.S. wires rather than the scheme to defraud. But the courts disagree about how significant the use of U.S. wires must be and whether the fraudulent scheme must also be based in the United States.
In Bascuñán, the Second Circuit reasoned that “merely incidental” use of U.S. wires should not be sufficient. Application of the wire fraud statute should be considered domestic, the court held, only “when (1) the defendant used domestic … wires in furtherance of a scheme to defraud, and (2) the use of the … wires was a core component of the scheme to defraud.” In McClellan v. United States (2020), the First Circuit also seemed to endorse this analysis in a footnote.
In Elbaz, by contrast, the Fourth Circuit did not ask whether the use of U.S. wires was a “core component” of the fraudulent scheme or “merely incidental.” The court concluded that applying the wire fraud statute in this case was domestic simply because “the transmissions were received by victims in Maryland.” Elbaz argues that the three transmissions with which she was charged were, in fact, incidental and that the First and Second Circuits would not have upheld her conviction.
The First Circuit also held in McClellan that application of the wire fraud statute is properly considered domestic only if “domestic conduct satisfies every essential element to prove a violation.” The defendant in McClellan “directed the scheme from the United States,” whereas the fraudulent scheme in Elbaz was centered in Israel. For this reason too, Elbaz argues that the First Circuit would not have upheld her conviction.
Elbaz counts the Ninth Circuit as falling on the Fourth Circuit’s side of this split. In United States v. Hussain(2020), the Ninth Circuit upheld a conviction even though the scheme to defraud was based abroad, bringing that decision into tension with the First Circuit’s holding in McClellan that domestic conduct must satisfy “every essential element.” On the other hand, Hussain seems to have agreed in a footnote with the First and Second Circuits that the U.S. wires must have been more than merely incidental. But, of course, if that is true, then Hussain would conflict with the Fourth Circuit’s decision on that question in Elbaz.
The United States’ brief in opposition to the cert petition argues that Elbaz would have been convicted in any circuit because “the use of the wires in this case was not ‘incidental.’” But it seems hard to deny that at least the verbal formulations that the courts of appeals are using are not the same.
Abitron’s Impact
Adding to the argument for review is the Supreme Court’s recent decision in Abitron, which came down after Elbaz filed her cert petition. As I explained in an earlier post, Abitron reestablishes the conduct-based presumption against extraterritoriality that the Supreme Court’s decision in Morrison v. National Australia Bank(2010) had seemed to abandon.
More specifically, Abitron reformulates step two of the presumption analysis, in cases involving both domestic and foreign conduct, as a means of “separating the activity that matters from the activity that does not.” It is certainly possible that the Supreme Court would agree with the lower courts that the focus of the wire fraud statute is the use of U.S. wires, in which case it seems that the activity that matters would be emailing and calling investors in Maryland.
On the other hand, Elbaz can reasonably argue that three communications sent from Israel to Maryland is not much domestic conduct, particularly when compared with what occurred in Israel. In other words, Abitronstrengthens the case for the Second Circuit’s “core component” test (which the First and Ninth Circuits have also adopted), a test that the Fourth Circuit did not apply below.
Conclusion
Elbaz is a petition to watch. The circuits appear divided on how the wire fraud statute applies in transnational fraud cases. And, as I noted at the outset, that question is important not just for criminal prosecutions, but for civil RICO claims as well.