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Court Affirms Conviction In Case Involving $126 Million Loan For Shopping Mall Transaction, Rejecting Argument That Sentence Should Be Lowered Because Of The Financial Crisis

In a summary order on March 8, 2017, the Second Circuit (Katzmann, C.J. and Pooler and Lynch, J.) affirmed the conviction and sentence for wire fraud in United States v. Frenkel. The case attracted some public attention because Frenkel’s co-conspirator, Mark Stern, was a cooperating witness in a number of public corruption cases brought by the U.S. Attorney for the Southern District of New York. The underlying facts involved Frenkel’s fraudulent inducement of Citigroup to lend $126 million to finance the purchase of shopping malls. Although the decision has no precedential value, it presented four interesting issues.

First, the Court rejected Frenkel’s argument that the district court erred when it barred Frenkel from offering evidence that Citigroup was negligent when it loaned money in support of the shopping mall transaction. A victim’s negligence does not negate any of the elements required for a wire fraud conviction. The Court also reminded the reader that the elements of wire fraud are distinct from those involved in common law fraud, and does not involve such elements as justifiable reliance or damages.

Second, in the next breath, the Court explained that the definition of materiality used in wire fraud prosecutions is drawn from common law fraud and that the standard for materiality is objective, not subjective (from the victim’s perspective), as Frenkel argued. Any error in the district court’s instructions was harmless, as “[t]here was overwhelming evidence in the record that Frenkel’s misrepresentations influenced Citigroup’s decision to approve the $126 million loan.”

Third, the Court affirmed the district court’s determination of loss amount under U.S.S.G. Section 2B1.1. Frankel argued that the $70 million loss sustained by Citigroup should be reduced because the collapse in the real estate market was a significant contributing factor in the loss amount. The Court stated that Frankel should have reasonably anticipated the declining market conditions, but also held that “an unforeseeable decline in the value of collateral is not relevant to calculating loss under [Section] 2B1.1 of the Guidelines,” citing United States v. Turk, 626 F.3d 743, 749 (2d Cir. 2010).

Finally, the Court affirmed the restitution order of $70 million, jointly and severally owed by Frankel and others responsible for the offense (including Stern, the government’s cooperator). The Court at oral argument expressed some concern that this order was too high and also that Frankel might make unnecessary payments if other defendants were also paying restitution. The Court stated that it expects the government to notify Frankel “should others pay Citigroup monies that would reduce the amount of restitution owed by Frankel so that he could move for a modification of the restitution order.”

The third issue—the calculating of loss amount in mortgage crisis era cases—is particularly interesting to those who practice in this area. The Court showed little patience with the argument made by a wrongdoer that the financial crisis is really to blame and instead ruled that those who engaged in fraudulent behavior should be held responsible for the full extent of their wrongs. The Court seemed to believe that a contrary ruling would permit an evasion of personal responsibility for fraud and therefore rejected this argument.