This implements the Committee's decision to punish the occasional receiver under this section at a lower level than the professional "fence" under section 1732. However, the grading is structured so 'that, if the value of property is greater than $500 or consists of any of the enumerated types of property set forth in section 1731(b) (2) (B), the offense will remain (as it is under current law) a felony.

SECTION 1734. EXECUTING A FRAUDULENT SCHEME

1. In General

This section contains two offenses. The first is designed substantially to reenact the current series of Federal statutes punishing schemes to defraud. These statutes, although worded substantially in similar fashion, are each limited to the use of a particular means for the purpose of executing the scheme, sufficient to confer Federal jurisdiction (e.g., the mails, or a transmission via radio, wire, or television communication in interstate or foreign commerce). This section consolidates these narrow offenses into a single, all-encompassing fraud

statute.

The present Federal statutes in this area play an important role in protecting the consumer against fraud, since the circumscribed jurisdiction of the States renders it difficult for them to suppress fraudulent interstate promoters; an indictment or even a conviction in one State often has little effect on operations in other States. Partly for this reason, the Federal courts have been liberal in their interpretation of the Federal laws, enabling them to reach a wide variety of fraudulent schemes. The Committee's intent is to retain the body of highly favorable case law that has evolved under the current statutes.

The second offense contained in this section is new and is aimed at a particular type of fraudulent scheme the pyramid sale that for various reasons has seldom been prosecuted successfully under existing enactments. The Committee's proposal is based upon a similar bill (S. 1939) that passed the Senate on August 22, 1974.95

2. Present Federal Law

The basic mail fraud statute, 18 U.S.C. 1341, originally enacted in 1872, provides that:

[w]hoever, 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 . . . for the purpose of executing such scheme or artifice or attempting to do so, places in any post office or authorized depository for mail matter, any matter or thing whatever to be sent or delivered by the Postal Service, or takes or receives therefrom, any such matter or thing, or knowingly causes to be delivered by mail according to the direction thereon, or at the place at which it is directed to be delivered by the person to whom it is addressed, any such matter or thing, shall be fined not more than $1,000 or imprisoned not more than five years, or both.

94 See 18 U.S.C. 1341, 1343, 2314.

95 See 120 Cong. Rec. S 15084, (Aug. 22, 1974 (daily ed.)).

In 1952, Congress enacted a statute (now 18 U.S.C. 1343) prohibiting fraud by wire, radio, or television, in terms nearly identical to those of the mail fraud statute. That law provides that:

[w]hoever, 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 communications in interstate or foreign commerce, any writings, signs, signals, pictures, or sounds for the purpose of executing such scheme or artifice, shall be fined not more than $1,000 or imprisoned not more than five years, or both.

Case law interpreting the wire fraud statute generally follows that with respect to mail fraud. The discussion below, while concentrating on mail fraud, is applicable to both mail or wire fraud unless otherwise stated.

The basic elements of a mail fraud violation under 18 U.S.C. 1341 are: (1) a scheme to defraud, and (2) use of the mails in furtherance of the scheme.96 Generally, the courts have held that there must be a specific intent to defraud,97 but that intent to use the mails to effect the scheme need not be shown if such use could reasonably have been foreseen.98 Thousands of cases prosecuted under the mail fraud statute have established, inter alia, the following principles:

A. The phrase "scheme and artifice to defraud" is to be broadly interpreted; for example, it has been held to reach a scheme calculated to deceive persons of ordinary prudence and comprehension even though no misrepresentation is made.99

B. Any scheme which involves elements of trickery or deceit is within the mail fraud statute.

C. A scheme to defraud may be shown by statements of half truths or the concealment of material fact, as well as by affirmative misrepresentation.

D. One who acts with reckless indifference as to whether a representation is true or false is as liable as if he had actual knowledge of the falsity.

E. The success or failure of the scheme is immaterial, and it is not necessary to show that any person was in fact defrauded.

F. A scheme to defraud encompasses false representations as to future intentions, as well as existing facts.

G. A promoter's sincere belief in the ultimate success of his enterprise will not excuse false representations.

H. The mail fraud statute was intended to protect the gullible, the ignorant and the over-credulous as well as the more skeptical. The "monumental credulity of the victim is no shield for the accused." 100

I. Proof of reliance on the false representation is not necessary. In addition to the mail and wire fraud statutes, the second paragraph of 18 U.S.C. 2314 punishes by up to ten years in prison:

96 Pereira v. United States, 347 U.S. 1 (1954).

E.g., Williams v. United States, 278 F.2d 535 (9th Cir. 1960).

98 E.g. Pereira v. United States, supra note 96, at 8-9 United States v. Sparrow, 470 F.2d 885, 889 (10th Cir. 1972), cert. denied, 411 U.S. 936 (1973). By contrast, under 18 U.S.C. 1343 no scienter need be shown as to the use of an interstate wire or other communication facility. See United States v. Blassingame, 427 F.2d 329, 330-331 (2d Cir. 1970), cert. denied, 402 U.S. 945 (1971).

99 Blachly v. United States, 380 F.2d 665, 673-674 (5th Cir. 1967).

Deaver v. United States, 155 F.2d 740 (D.C. Cir., cert. denied 329 U.S. 766 (1946).)

[w]hoever, 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, transports or causes to be transported, or induces any person to travel in, or to be transported in interstate commerce in the execution or concealment of a scheme or artifice to defraud that person of money or property having a value of $5,000 or more.

Though there have been few cases prosecuted under this provision since its enactment in 1956,101 the Committee believes that the coverage should be retained for the reasons stated by Congress at that time: 102 [T]he Department of Justice has found that our present Federal laws are inadequate when it comes to dealing with the criminal who utilizes travel by the victim in the perpetration of the scheme to defraud that individual of his money. Such criminals avoid prosecution under the mail fraud statutes (sec. 1341 U.S.C., title 18) by not using the mails. Also delay on the part of the victim in reporting his being hoaxed makes prosecution under the present provisions of section 2314 of title 18 for the transportation in interstate commerce of money taken from the victim more difficult. Delay makes it possible for the criminal to move far from the scene of the swindle and dispose of the money which constitutes the necessary evidence to establish elements of the crime.

This proposed legislation is intended to remedy this present lack in the law. Few people carry on their persons the large amounts of money sought by these confidence men, and it is therefore necessary for the victim to travel in interstate commerce to his home in order to get the money for the false venture described by the confidence man as a part of the scheme. This travel by the victim not only serves to provide a means of carrying the money to the criminal by the agency of the victim himself, but because the victim is induced to travel away from home, the time incident to his travel and return may also occasion an additional delay which can be used by the criminal to escape from the scene.

The committee recognizes the need for the amendment proposed by this bill, and agrees with the position taken by the Attorney General in this matter. Accordingly, this committee recommends that the bill be favorably considered.

3. The Offense

Subsection (a) (1) provides that a person is guilty of an offense if, having devised a scheme or artifice (A) to defraud, or (B) to obtain property of another by means of a false or fraudulent pretense, representation, or promise, he engages in conduct with intent to execute such scheme or artifice.

This provision, insofar as possible within the confines of proposed Code style and structure, is designed to duplicate current law. More

101 E.g., United States v. Hassel, 341 F. 2d 427 (4th Cir. 1965); United States v. Scoratow, 434 F.2d 1288 (5th Cir. 1970), cert. denied, 401 U.S. 955 (1971).

102 H. Rept. No. 2474, 84th Cong., 2d Sess., p. 3 (1956).

over, as previously mentioned, the Committee wishes to retain the case law that has developed around the current statutes and therefore intends that the concept of a "scheme or artifice to defraud or to obtain property of another by means of a false or fraudulent pretense," etc., be read to incorporate the body of judicial decisions construing the equivalent language in 18 U.S.C. 1341, 1343, and 2314.

The conduct contains two elements. The first consists of engaging in conduct "having devised a scheme or artifice to be defraud, or to obtain property of another 103 by means of a false or fraudulent pretense, representation, or promise." The second consists of engaging in any conduct. Since no culpability standard is designated herein, the applicable state of mind that must be proved with respect to each element is at least "knowing," i.e., that the defendant was aware of the nature of his actions.104

The element that the conduct must be engaged in "with intent to execute such scheme or artifice" states the particular purpose for which it must be shown that the conduct was performed.

While it is apparent that section 1731 (Theft) and this section overlap, some overlap is necessary to insure complete coverage. Whereas the general theft statute covers obtaining property of another by fraud, this section covers all schemes to defraud, whether or not property is actually obtained. It is true that attempted thefts and conspiracies to commit theft (by fraud or otherwise) under section 1731 can be reached via the applicable provisions of chapter 10. But section 1734 also covers what can be called "one-man conspiracies" that might not amount to "attempts" under section 1001; that is, any conduct engaged in with intent to execute the fraudulent scheme, whether or not sufficient to constitute an "attempt." will permit conviction under this section. This broader coverage of "white collar" crime, in addition to the desirability of preserving the well-understood judicial interpretations of existing fraud laws, justifies independent retention of the mail, travel, and wire fraud statutes in this section.

The Committee has accordingly rejected the approach taken by the National Commission to restrict the fraud provisions to the general theft section and to specify the various acts and omissions which have traditionally constituted fraud.105 Despite the Commission's inclusion of a catch-all phase ("any other scheme to defraud"), there is a great risk that under such a formulation courts might be inclined to compel prosecutors to bring their cases under the more particularized provisions of the statute.

The complex and sophisticated schemes prosecuted in Federal courts defy precise definition or categorization. Indeed, the "fertility of man's invention in devising new schemes of fraud is so great that courts have always declined to define it . . . lest the craft of man should find ways of committing fraud which might evade such a definition." 106

Mail and wire fraud schemes typically involve a combination of false statements, half truths, failure to reveal material facts, lulling transactions, and the like. The following examples of the subtle and

103 The term "property of another" is defined in section 111. It has been fully explained in connection with section 1731 and reference should be made to the discussion there. 104 See sections 303(b) (1) and 302(b) (1).

105 See Final Report. §§ 1732 (b), 1741 (a).

106 37 Am. Jur. 2d, Fraud and Deceit, § 1, pp. 17-18; see also Blachly v. United States, supra note 99, at 671.

varied machinations that have been prosecuted in Federal courts illustrate the wisdom of retaining current law: advance fee rackets; 107 schemes involving breach of fiduciary or official duties or breach of trust; 108 chain referral schemes; 109 charitable frauds; 110 schemes to obtain cash or credit through checks and check-kiting; 111 correspondence school schemes; 112 credit card schemes; 113 debt consolidation schemes; 114 franchise schemes; 115 schemes to defraud insurance companies; 116 schemes to defraud investors; 117 land sale schemes; 118 loan application schemes;119 merchandising schemes;120 marital schemes; 121 planned bankruptcy schemes; 122 work-at-home schemes.123

An injunctive remedy, broader than the one presently available to the Postmaster General, has been included in the procedural part of the proposed Code 124 in order to provide a means by which an allegedly fraudulent activity can be enjoined pending criminal prosecu tion. It parallels the effective provision for injunctive relief long used by the Securities and Exchange Commission in combating securities fraud.125

Subsection (a) (2) provides that a person is guilty of an offense if he transfers, or receives anything of value for, a right to participate in a pyramid sales scheme, or receives compensation from a pyramid sales scheme.

The term "pyramid sales scheme" is defined in subsection (b) (2) to mean a plan or operation, whether or not involving the sale or distribution of property, under which a participant, upon payment of anything of value, obtains a right to receive compensation, (A) for his introduction of another person into participation in such plan or operation, or (B) for such other person's introduction of another person into participation in such plan or operation.

The term "compensation" is defined in subsection (b) (1) to include payment based on a sale or distribution made to a person who is a participant in a pyramid sales scheme or who, upon such payment, obtains the right to become a participant.

Finally, the phrase "sale or distribution" is defined in subsection (b) to include a lease, rental, or consignment.

At present there is no existing Federal law specifically prohibiting the operation of a pyramid sales scheme, although several States have such statutes. The Securities and Exchange Commission has had some success in persuading courts that pyramid schemes are "securities"

107 United States v. Uhrig, 443 F. 2d 239 (7th Cir.), cert. denied 404 U.S. 832 (1971) 108 United States v. Gurule, 437 F. 2d 239 (10th Cir. 1970), cert. denied 403 U.S. 904 (1971).

109 Blachly v. United States, supra note 99.

110 Koolish v. United States, 340 F. 2d 513 (8th Cir.), cert. denied 381 U.S. 951 (1965). 111 Williams v. United States, supra note 97.

112 Babson v. United States, 330 F. 2d 662 (9th Cir.), cert. denied, 377 U.S. 993 (1964). 113 Adams v. United States, 312 F. 2d 137 (5th Cir. 1963).

114 United States v. Bertin, 254 F. Supp. 937 (D. Md. 1966).

115 Irwin v. United States, 338 F. 2d 770 (9th Cir. 1964), cert. denied 381 U.S. 911 (1965).

116 United States v. Unger, 295 F. 2d 889 (7th Cir. 1961).

117 United States v. Culver, 224 F. Supp. 419 (D. Md. 1963).

118 Lustiger v. United States, 386 F. 2d 132 (9th Cir. 1967), cert. denied, 390 U.S. 951 (1968).

110 United States v. Young, 232 U.S. 155 (1914).

120 United States v. Press, 336 F. 2d 1003 (2d Cir. 1964), cert. denied 379 U.S. 965 (1965).

121 Pereira v. United States, supra note 96.

122 Jacobs v. United States, 395 F. 2d 469 (8th Cir. 1968).

123 United States v. Baren, 305 F. 2d 527 (2d Cir. 1962).

124 Section 4021.

125 See 15 U.S.C. 774.

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