Fraud Abroad? The Fourth Circuit Clarifies When Defendants May Be Prosecuted In The United States for International Fraud.

This month, the Fourth Circuit issued its decision in United States v. Elbaz, 52 F.4th 593 (4th Cir. 2022) on rehearing. The Fourth Circuit clarified that the federal wire fraud statute does not apply extraterritorially, but that the use of United States wires to conduct foreign fraud can justify U.S. prosecution. This has ramifications for digital fraud and for venue challenges to traditional fraud prosecutions.

Background

The key conduct in the case occurred in Israel. Lee Elbaz, her co-conspirators, and several companies offered investors “binary option” contracts. Like normal option contracts, investors were paying a premium based on speculation that an asset would be above or below a certain strike price at the contract’s expiration. Unlike normal options, the owner does not have the right to purchase the underlying asset, nor is the potential profit related to the difference between the actual and strike price at expiration. Rather, the profits are fixed. Moreover, the timeframe is typically very short: minutes or hours. To use the court’s illustration:

[A] binary option might expire in five hours with a “strike price” of $70 for a certain stock. In other words, it’s a bet that the price of a certain stock will be above $70. And the option will have a payout if you win—let’s say $100—and a cost to buy, let’s say $40. If the stock price is above $70 at expiration, you get $100, and so you profit $60. If the stock price is $70 or lower, you get nothing, and lose your $40.

Essentially, stock market gambling.

The scheme involved multiple steps and companies. First, two companies would solicit investors for the binary-option investments. Investors who responded to the solicitations were handed off to a third company that would persuade the investor to become a client and make make an initial deposit. Once the investors were hooked, the investors would transfer to Yukom Communications, based in Israel, where Ms. Elbaz and others—operating under fake names—would lie about their credentials, experience, investment performance, and financial incentives to convince the investors to deposit more and more funds. Yukom would prevent the investors from withdrawing funds—netting more than $100 million worldwide, including millions from American victims.

The scheme solicited investors worldwide but included victims in the United States—more specifically, at least three victims lived in Maryland.

A grand jury indicted Ms. Elbaz on conspiracy to commit wire fraud and three substantive counts of wire fraud against the Maryland victims. She was arrested while traveling in New York for a vacation. She was convicted in a jury trial and the Maryland U. S. District Court sentenced Ms. Elbaz to 22 years in prison and ordered her to pay $28 million in restitution.

Ms. Elbaz challenged her conviction in the U.S. Court of Appeals for the Fourth Circuit. She argued that the wire fraud statute cannot be applied to her conduct in Israel and challenged her restitution (she also made several challenges to her sentence and to procedural irregularities at trial).

The Fourth Circuit initially issued its opinion in June but, in a rare move, stayed its mandate and allowed the parties to argue for rehearing. Its revised opinion was issued on November 3, 2022.

Extraterritorial Wire Fraud

Ordinarily, courts assume that Congress expects its laws to apply only within the United States unless it clearly signals its intention to apply elsewhere—e.g., international terrorism statutes, piracy statutes, and statutes penalizing attacking U.S. Diplomats abroad. All of Ms. Elbaz’s conduct took place in Israel: a sovereign state with its own ability to arrest and punish individuals who engage in fraud. There, Ms. Elbaz’s conduct was arguably legal. Thus, she argued that the wire fraud statute cannot apply to her.

The Fourth Circuit agreed . . . sort of. The Court held that the wire fraud statute does not apply extraterritorially; an Israeli citizen defrauding an American tourist in Israel probably doesn’t need to worry about the 82d Airborne knocking on her door. This does not, however, mean that Ms. Elbaz is in the clear.

U.S. wire fraud statutes specifically punish using a wire to commit fraud: the number of counts is related to the number of times a wire was used, not the number of fraud schemes, and venue is determined based on where the wire was sent or received, not where the scheme was executed. Indeed, “[w]here the scheme was devised is irrelevant to venue.”

The term “wire” refers here to telegrams, telephones, televisions, radio, internet signals, and pretty much any other form of electronic communication.  And a crime is suitably domestic, the Court held, when someone in the United States receives a wire from abroad.

So, the Court determined, the fact that at least three victims received wires in Maryland means that Ms. Elbaz was properly charged for her almost entirely Israel-based scheme in the Old-Line State. This also means she can be tried for conspiracy to commit wire fraud in Maryland—but not the entire conspiracy. Ms. Elbaz could only conspire (in the legal, prosecutable, sense of the word) to commit wire fraud against people in the United States because, while her scheme may have used wires to defraud people all over the world, the use of foreign wires and any subsequent frauds are not punishable under the domestic wire fraud statute.

Loss Amount At Sentencing

Ms. Elbaz also challenged the loss amount at sentencing. The loss calculation factored into to elements of her sentence: her guidelines calculation and her restitution award.

First, foreign losses contributed to the sentencing court’s calculation of her sentencing guidelines recommendation. As we have written before, a high loss calculation can drastically increase a defendant’s level under the sentencing guidelines. Here, the district court calculated Ms. Elbaz’s loss—including losses caused to foreigners—at $28 million and reached a recommended sentence of 324 to 405 months (which it reduced to 264 months).

Ms. Elbaz argued that the court should have calculated her sentence based only on losses in the United States—roughly $5 million. The other losses, she argued, were not chargeable and thus could not be considered. The Circuit Court suggested that this may have been an error, particularly because the district court expressed doubts about whether Ms. Elbaz’s conduct was illegal under Israeli law. But, nonetheless, the Circuit Court found any error harmless because (1) the district court expressly stated it would have ordered the same sentence even if it had reached a different guidelines calculation; and (2) even if district courts cannot consider unchargeable foreign conduct when calculating the sentencing guidelines, they are free to do so when evaluating the holistic factors that go into sentencing.

Second, the loss amount dictated the amount and direction of restitution. The district court ordered Ms. Elbaz to pay restitution, not only to American victims, but to foreign victims as well. She challenged this award along similar extraterritorial lines. The Circuit Court agreed, concluding that the court may only order restitution to “the victim of the offense” and that here “offense” meant the offenses involving U.S. victims. The conspiracy count does not sweep in foreign victims either, because, legally speaking, a defendant can only conspire to violate U.S. laws.

Takeaways

There are several key conclusions for future cases:

  • If a defendant is facing prosecution in the Fourth Circuit for fraud perpetrated abroad, defense counsel should carefully scrutinize the wires that are charged.
  • Defendants alleged to have committed fraud in other districts will not be able to challenge venue if at least one of the wires was received in the district where he or she was indicted.
  • Even if defense counsel cannot secure a dismissal, counsel should object to the use of foreign fraud victims when calculating a guidelines sentence.
  • Counsel should challenge any wire fraud restitution that factors in foreign victims.
  • Counsel representing defendants who allegedly committed other kinds of crime abroad should carefully examine the U.S. nexus for potential challenges.
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