Eleventh Circuit Removes Reasonable or Ordinarily Prudent Person Standard from Fraud Cases
Misrepresentations in fraud cases in the Eleventh Circuit will no longer be tested according to whether a reasonable or ordinarily prudent person would find them material. That is the result of the Eleventh Circuit’s decision yesterday in United States v. Svete, No. 05-13809 (February 2, 2009), in which the appellants sold financial interests in viatical settlements—agreements with “viators” with terminal conditions who sold their life insurance policies for less than the mature value while the viators were still alive, id. at 2. The government alleged that the appellants made false statements and provided literature containing false statements to investors. Id. at 3. The appellants were indicted for mail fraud, and defended that the investors had signed contracts which provided that the investors did not rely on any representations other than those contained in the contracts, and requested the following jury instruction on fraud:
To prove a fraud crime, the government must show that the defendant under consideration intended to devise or participate in a scheme reasonably calculated to deceive persons of ordinary prudence and comprehension. The person of ordinary prudence standard is an objective standard and is not directly related to the gullibility or level of knowledge and experience of any specific person or persons. For purposes of this offense, the government must prove that a reasonable person of average prudence and comprehension would have acted on the representation made by the defendant under consideration.
Id. The district court rejected the instruction, and the appellants were found guilty and appealed. Id. at 4, 5. The Eleventh Circuit discussed the history of the mail fraud statute to conclude that “Congress has never used any language that would limit the coverage of the mail fraud statute to schemes that would deceive only prudent persons.” Id. at 9.
The Court did recognize the Supreme Court’s holding in Neder v. United States, 527 U.S. 1, 119 S. Ct. 1827 (1999), that materiality of falsehood is an element of mail fraud. Id. at 11 (quoting Neder, 527 U.S. at 25). However, the Court observed that all of the authorities which the Supreme Court relied upon in Neder “support the proposition that materiality may be proved without establishing that the misrepresentation was objectively reliable.” Id. at 12. Oddly, however, in contending that a misrepresentation may be fraudulent even if a reasonable or ordinarily prudent person would not regard it as fraudulent, the Court quoted the following section of the Restatement (Second) of Torts that a matter is “material” if:
(a) a reasonable man would attach importance to its existence or nonexistence in determining his choice of action in the transaction in question; or
(b) the maker of the representation knows or has reason to know that its recipient regards or is likely to regard the matter as important in determining his choice of action, although a reasonable man would not so regard it.”
Id. (quoting Restatement (Second) of Torts § 538, at 80). The Court held that “the purpose of the element of materiality is to ensure that a defendant actually intended to create a scheme to defraud.” Id. at 14. It then proceeded at length to overrule its prior holding in United States v. Brown, 79 F.3d 1550 (11th Cir. 1996) that “mail fraud requires an objective inquiry; a scheme to defraud ‘that is, a violation of the mail fraud statute exists only where a reasonable person ‘would have acted on the misrepresentations: were the misrepresentations reasonably calculated to deceive persons of ordinary prudence and comprehension.’” Brown, at 1558 (emphasis added) (quoting Pelletier v. Zweifel, 921 F.2d 14651498-99 (11th Cir. 1991)); id. at 15-23.
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