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United States of America v. Leor Zahavi and David Blumenson

October 26, 2012

UNITED STATES OF AMERICA,
v.
LEOR ZAHAVI AND DAVID BLUMENSON, DEFENDANTS.



The opinion of the court was delivered by: J. Paul Oetken, District Judge:

MEMORANDUM AND ORDER

Presently before the Court are Defendants' motions to dismiss Counts Three and Four of the Indictment as unconstitutionally vague, or in the alternative, for failure to state a violation of 18 U.S.C. § 1014. Defendants have also moved for an order requiring the Government to produce a bill of particulars. For the following reasons, both motions are denied.*fn1

I.Counts Three and Four of the Indictment

Defendants argue that Counts Three and Four of the Indictment are unconstitutionally vague and legally defective. In relevant part, Count Four charges as follows:

From in or about August 2008, up to and including in or about June 2010, in the Southern District of New York and elsewhere, LEOR ZAHAVI and DAVID BLUMENSON, the defendants, knowingly made a false statement and report for the purpose of influencing the action of an institution the accounts of which are insured by the Federal Deposit Insurance Corporation, upon an application, advance, discount, purchase, purchase agreement, repurchase agreement, commitment, loan, and insurance agreement and application for insurance and a guarantee, and a change and extension of the same, by renewal, deferment of action and otherwise, and the acceptance, release, and substitution of security therefor, to wit, ZAHAVI and BLUMENSON, having fraudulently diverted more than $3 million in funds from the BOA Credit Line to ZAHAVI's personal use, misrepresented to Bank of America that funds from the BOA Credit Line had been used to purchase approximately $3.45 million in certain "personal seat licenses," in other to influence Bank of America in deciding what action to take in response to ADMIT ONE's default on the BOA Credit Line. (Title 18, United States Code, Section 1014)

Count Three, in turn, alleges Conspiracy to Make False Statements to Influence Bank Action on a Loan; in other words, Count Three alleges conspiracy to commit the same offense charged in Count Four. The two Counts stand or fall together on the proper interpretation of § 1014.

Defendants offer two grounds for their argument that Counts Three and Four are legally deficient. The first is based on the constitutional doctrine of vagueness. To satisfy due process, "a penal statute [must] define the criminal offense [1] with sufficient definiteness that ordinary people can understand what conduct is prohibited and [2] in a manner that does not encourage arbitrary and discriminatory enforcement. The void-for-vagueness doctrine embraces these requirements." Skilling v. United States, 130 S. Ct. 2896, 2927-28 (2010) (internal citation and quotation marks omitted). The second basis is a straightforward attack on the Government's position that § 1014 covers the alleged conduct: "Since federal crimes are solely creatures of statute, a federal indictment can be challenged on the ground that it fails to allege a crime within the terms of the applicable statute." United States v. Aleynikov, 676 F.3d 71, 75-76 (2d Cir. 2012) (internal citation and quotation marks omitted); see also Fed. R. Crim. P. 12(b) ("A party may raise by pretrial motion any defense, objection, or request that the court can determine without a trial of the issue."). Although these two challenges are analytically distinct, neither can be addressed without interpreting the statute.

Statutory interpretation begins with the text of the statute. 18 U.S.C. § 1014 provides: Whoever knowingly makes any false statement or report, or willfully overvalues any land, property or security, for the purpose of influencing in any way the action of . . . any institution the accounts of which are insured by the Federal Deposit Insurance Corporation . . . ., upon any application, advance, discount, purchase, purchase agreement, repurchase agreement, commitment, loan, or insurance agreement or application for insurance or a guarantee, or any change or extension of any of the same, by renewal, deferment of action or otherwise, or the acceptance, release, or substitution of security therefor, shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.

In short, 18 U.S.C. § 1014 requires the Government to establish: (1) that the defendant made a false statement or report to a lending institution; (2) that the lending institution's deposits were federally insured; (3) that the defendant knew that the statements he made were false; and (4) that the defendant made these false statements for the purpose of influencing in any way the action of that lending institution upon, inter alia, a loan, or any change or extension of the same, by renewal, deferment of action, or otherwise, or the acceptance, release, or substitution of security therefor.

For good reason, the parties devote a great deal of energy to textualist arguments. It is important to note at the outset, however, that this statute serves a critical role. Although Williams v. United States, 458 U.S. 279 (1982), provides clear proof that purpose rarely trumps plain text, especially in the criminal context, Justice Marshall's dissent helpfully illuminates the purpose of this scheme: "The broad statutory language clearly evinces its legislative purpose -- Congress hoped to protect federally insured institutions from losses stemming from false statements or misrepresentations that mislead the institutions into making financial commitments, advances, or loans. The statute was intended to be broad enough 'to maintain the vitality of the FDIC insurance program . . . and to cover all undertakings which might subject the FDIC insured bank to risk of loss.'" Id. at 294 (Marshall, J., dissenting) (citation omitted). Section 1014 is designed to protect the integrity of the system of credit generated and maintained by federally insured banks.

Both parties acknowledge that § 1014 is a remarkably broad statute. Although the Supreme Court in Williams adopted a narrow approach to the law, partly out of fear that a broader reading would "make a surprisingly broad range of unremarkable conduct a violation of federal law," id. at 285 (Blackmun, J.), that caution did not trump the breadth of the statutory language in the more recent case of United States v. Wells, 519 U.S. 482 (1997). In Wells, over a dissent by Justice Stevens listing a battery of innocent conduct that could be criminalized by its interpretation, the Court held that the false statement requirement in § 1014 does not contain a materiality element. Id. at 489-499. Looking to the plain text, the Court emphasized that the statute's "its terms cover 'any' false statement that meets the other requirements in the statute." Id. at 490. The Court also turned aside the objection that it should infer a materiality term to "to avoid the improbability that Congress intended to impose substantial criminal penalties on relatively trivial or innocent conduct." Id. at 498. Because "a statement made 'for the purpose of influencing' a bank will not usually be about something a banker would regard as trivial," and because § 1014 applies only "if the speaker knows the falsity of what he says and intends it to influence the institution," the Court explained that "an unqualified reading of § 1014 poses no risk of criminalizing so much conduct as to suggest that Congress meant something short of the straightforward reading." Id. at 498-99. Thus, the Court identified the statutory requirements of knowledge and purpose as limits sufficient to cabin any concerns regarding unduly expansive liability.

The heart of Defendants' argument concerns element (4), which as described above requires that the defendant made the false statements for the purpose of influencing in any way the action of the lending institution upon, inter alia, a loan, or any change or extension of the same, by renewal, deferment of action, or otherwise, or the acceptance, release, or substitution of security therefor. In sum, Defendants assert that even if the Government can prove the other elements of this offense, it cannot prove that their purpose was to influence the requisite kind of "action" by Bank of America. Their Reply Brief lays out their interpretation of the statute: "The only false statements criminalized by this statute are those made with the intent to influence the following bank's lending actions: (1) credit approval; (2) a change or extension of credit; (3) the acceptance or substitution of security; or (4) a release from debt obligations." (Reply Memorandum of Law in Support of Omnibus Pretrial Motions On Behalf of Defendants Leor Zahavi and David Blumenson, Dkt. No. 40, at 2-3.) In their briefs and at oral argument, Defendants have explained in detail that they lacked any of these purposes and must therefore fall beyond the statute's compass.

The main problem with this argument is that it hinges on a faulty reading of § 1014's plain text. In straightforward language, the statute covers false statements made to a federally insured bank "for the purpose of influencing in any way" that bank's "action" upon a loan. 18 U.S.C. § 1014 (emphasis added). Given that a loan does not cease to exist even after a default occurs, the plain text of the statute directly applies to "actions" that a bank might take upon a loan even after default. Those actions include foreclosure and liquidation, release of the loan, or sale of the loan note to a third party. Nothing in the statute suggests reason to believe that the choice among this intertwined set of potential actions does not constitute "action . . . upon . . . [any] loan" of the sort that one might be criminally punished for intentionally seeking to influence with knowingly false statements. Nor does the statute offer a reason to believe that default constitutes a magical moment at which the loan ceases to exist or what qualifies as "action" changes. In other words, making false statements to a bank with the intent of influencing that bank's choice among a set of post-default actions it may choose to take upon a defaulted loan does fall within the statutory language.

Defendants offer several reasons to doubt this conclusion, but none succeed. Their principal argument is that such a broad reading of "influencing in any way" impermissibly renders a different portion of the statute a nullity, specifically the subsequent enumeration of "actions" a bank might take in response to the prohibited false statements: "any change or extension of any [loan], by renewal, deferment of action or otherwise, or the acceptance, release, or substitution of security therefor." If the earlier portion of § 1014 covers false statements made with the purpose of influencing action in "any" way, Defendants ask, is it not redundant to list a specific set of actions later in the statute? Defendants further emphasize that the subsequent enumeration opens with text that appears to be a disjunctive "or," the implication of which is that § 1014 covers one class of action when it refers to "influencing in any way," and then covers a different class of action with the enumerated terms. Since that is nonsensical, Defendants argue that the reference to bank "action" that ...


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