United States District Court — United States v. Rafael Martinez, No. 22 Cr. 251 (LJL)

Source document: UNITED STATES DISTRICT COURT; document type: Defense reply brief (motion to dismiss Count One; oral argument then scheduled for 2023-01-17).

Full text

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

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UNITED STATES OF AMERICA
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- v. -

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22 Cr. 251 (LJL)
RAFAEL MARTINEZ,

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ORAL ARGUMENT SCHEDULED FOR

Defendant.

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JANUARY 17, 2023

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REPLY IN SUPPORT OF DEFENDANT
RAFAEL MARTINEZ’S MOTION TO DISMISS
COUNT ONE OF THE INDICTMENT

Dated: January 6, 2023

MORVILLO, ABRAMOWITZ,

New York, New York

GRAND, IASON & ANELLO, P.C.
 Elkan Abramowitz

 Telemachus P. Kasulis
 Russell J. Feldman
565 Fifth Avenue

New York, New York 10017

WILLKIE FARR & GALLAGHER LLP

Michael S. Schachter

Randall Jackson

787 Seventh Avenue

New York, New York 10019

Attorneys for Defendant Rafael Martinez
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TABLE OF CONTENTS
TABLE OF AUTHORITIES .......................................................................................................... ii
PRELIMINARY STATEMENT .................................................................................................... 1
ARGUMENT .................................................................................................................................. 1
I.
Count One Charges a Scheme to Defraud the SBA, Not the Company or
the Federal Reserve ....................................................................................................... 3
II.
The Fees MBE Generated from Servicing Loans after SBA Approval Do
Not Make the Alleged Conduct Wire Fraud ................................................................. 5
III.
The Funds MBE Received from the Company and the Federal Reserve
after Being Approved by the SBA Also Do Not Make the Alleged
Conduct Wire Fraud ...................................................................................................... 7
CONCLUSION ............................................................................................................................. 10

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TABLE OF AUTHORITIES
Page(s)
Cases
Cleveland v. United States,
531 U.S. 12 (2000) ...................................................................................................... 2, 5, 6
Kelly v. United States,
140 S. Ct. 1565 (2020) ................................................................................................ 2, 6, 7
McNally v. United States,
483 U.S. 350 (1987) ............................................................................................................ 2
Sanabria v. United States,
437 U.S. 54 (1978) .............................................................................................................. 4
United States v. Aleynikov,
676 F.3d 71 (2d Cir. 2012).................................................................................................. 4
United States v. Blaszczak.
--- F.4th ---, 2022 WL 17926047 (2d Cir. Dec. 27, 2022) .................................................. 6
United States v. Greenberg,
835 F.3d 295 (2d Cir. 2016)................................................................................................ 8
United States v. Pirro,
212 F.3d 86 (2d Cir. 2000).................................................................................................. 4

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PRELIMINARY STATEMENT
The government is confused.  Count One of the Indictment clearly and unequivocally
alleges that Rafael Martinez did “fraudulently obtain the approval of the [SBA] for his company,
[MBE], to be a non-bank lender through the [PPP], and then . . . used that approval to obtain
millions of dollars in capital to issue PPP loans and earn lender fees.” Indictment ¶ 1 (emphasis
added).  Count One does not allege that Mr. Martinez defrauded the Federal Reserve.  Count One
does not allege that Mr. Martinez defrauded the private entity the government refers to as the
“Company.”  Indeed, the Indictment never mentions the Federal Reserve or the Company.  Instead,
Count One alleges that Mr. Martinez deceived the SBA into approving MBE to act as a non-bank
lender.  Performing as a non-bank lender is exactly what MBE did, by obtaining capital to
successfully issue PPP loans and generating fees.

That is not wire fraud.  It has been black letter law since the Supreme Court’s decision in
Cleveland that the object of the alleged deception the government charged in Count One – approval
by a government agency to conduct a regulated business – is not property under the wire fraud
statute.  This holding was confirmed by the high court’s decision in Kelly and reiterated as recently
as last week by the Second Circuit in United States v. Blaszczak.  There is a separate statute that
criminalizes alleged lies to the Small Business Administration, as the government well knows
since it is charged in Count Two of the Indictment.  But Count One does not state a claim under
18 U.S.C. § 1343 and the government’s arguments to the contrary are unpersuasive.
ARGUMENT
Tellingly, the government’s opposition does not engage with the central contention of Mr.
Martinez’s motion – namely, that the SBA’s right to approve MBE as a non-bank lender is not
“property” under the wire fraud statute.  The government presumably does not dispute this notion
because it cannot.  In an unbroken line of cases from McNally to Kelly, the Supreme Court has
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held that the federal mail and wire fraud statutes are limited to deceptive schemes that deprive a
victim of traditional money or property. Cleveland v. United States, 531 U.S. 12, 18-19 (2000)
(citing McNally v. United States, 483 U.S. 350, 358 (1987)).  The Court has admonished that the
definition of “property” is not to be read expansively, as “stray[ing] from traditional concepts of
property” would “approve a sweeping expansion of federal criminal jurisdiction in the absence of
a clear statement by Congress.” Cleveland, 531 U.S. at 24.  In Cleveland, the Court held that the
government’s intangible right to permit or preclude the operation of a business was not such a
“traditional” interest. Id. at 23.  In Kelly, the Court could not have been clearer: “[A] scheme to
alter [a] regulatory choice is not one to appropriate the government’s property.”  Kelly v. United
States, 140 S. Ct. 1565, 1572 (2020).
Faced with this authority, the government shifts the goalposts.  First, it maintains the Court
should not – and perhaps even cannot – entertain Mr. Martinez’s motion because the Indictment
alleges a scheme to defraud the Federal Reserve and the Company and those allegations must be
accepted as true.  Second, the government suggests that the fees MBE generated from operating
as a non-bank lender could constitute “money or property” under the wire fraud statute.  And if
not that, the government avers in a third point, perhaps the money that the Company and the
Federal Reserve provided to MBE to fund loans to minority-owned businesses could suffice?
These contentions are without merit and misapprehend controlling law.  Mr. Martinez’s
motion to dismiss Count One should be granted.

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I.
Count One Charges a Scheme to Defraud the SBA, Not the Company or the Federal
Reserve

The grand jury was very clear in Count One about what was allegedly obtained through
fraud:  Rafael Martinez did “fraudulently obtain the approval of the [SBA] for his company,
[MBE], to be a non-bank lender through the [PPP].”  Indictment ¶ 1.  The Indictment does not say
that Mr. Martinez fraudulently obtained funds from the Company and it does not say that he
fraudulently obtained funds from the Federal Reserve.  The Indictment notes that Mr. Martinez
“used the approval” by the SBA to obtain capital to begin making PPP loans – but that is hardly
fraudulent activity.  An entirely innocent individual who engaged in no deception of the SBA in
connection with a non-bank lender application would still “use the approval” of the SBA to obtain
funding for outgoing PPP loans.  That is the way the business is supposed to work.

This reality makes the government’s description of its allegations in the Indictment
problematic.  For example, the government claims that “Count One charges a scheme [to] deceive
the SBA, the Company, and the Federal Reserve in order to obtain ‘millions of dollars’ in capital
and lender fees.”  (Gov. Opp. at 12.)  That is not what Count One says.  Count One alleges no
efforts to deceive the Company or the Federal Reserve, and the only “property” it alleges was
“fraudulently obtain[ed]” was the approval of the SBA.  Indictment ¶ 1.  Similarly, the
government’s contention that Mr. Martinez “not only defrauded the Federal Reserve of ‘money,’
he also defrauded a private entity, the Company, of $100 million” is entirely absent from the
Indictment.  (Gov. Opp. at 13.)

The government goes further, claiming that “Count One is properly read to allege that
Martinez made false statements to the SBA and the Company, and relied on false pretenses –
MBE’s supposed status as a legitimate PPP lender – to obtain money from both the Company and
the Federal Reserve.”  (Gov. Opp. at 13.)  This is doubly wrong.  There is nothing in the Indictment
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alleging Mr. Martinez made any false statements to the Company, nor anything about Mr. Martinez
using “false pretenses.”  The Indictment simply states that Mr. Martinez “used th[e] approval” of
the SBA to obtain funding for loans, which is presumably a concept the government wishes to
avoid because it demonstrates Count One’s fatal reliance on government “approval” as the object
of the alleged wire fraud.

The government recasts the Indictment in an effort to ward off consideration of the actual
allegations returned by the grand jury.  We agree with the prosecution that the Court must accept
the factual allegations in the Indictment as true on a motion to dismiss, United States v. Aleynikov,
676 F.3d 71, 76 (2d Cir. 2012), but that means the allegations as the grand jury stated them, not as
the government might wish them to be, see United States v. Pirro, 212 F.3d 86, 92 (2d Cir. 2000)
(“[T]he indictment must be considered as it was actually drawn, not as it might have been drawn.”)
(citing Sanabria v. United States, 437 U.S. 54, 65-66 (1978) (“The precise manner in which an
indictment is drawn cannot be ignored[.]”)).  Instead, the government provides the Court with
nearly forty citations not to the Indictment but to the Complaint in its “Background” section of the
opposition.1  Those factual assertions – many of which Mr. Martinez disputes – are not properly
before the Court, as they by and large are not included in the Indictment and were not found by
the grand jury.  They are irrelevant to this motion, cannot be considered in assessing whether Count
One states a claim, and should not be accepted as true by the Court.

Accordingly, any claim by the government that the Court should deny Mr. Martinez’s
motion because it must accept the factual allegations in the Indictment as true is doomed to fail.

1 The government does so while criticizing Mr. Martinez’s opening brief for “ignor[ing] the
actual allegations in the Indictment, while seeking to assert facts outside the Indictment[.]” (Gov.
Opp. at 14-15).
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Instead, the allegations in the Indictment make clear that the only “property” the grand jury found
to have been defrauded was the “approval” of the SBA – which, as set forth in Mr. Martinez’s
opening brief, is no “property” at all for purposes of the wire fraud statute.2
II.
The Fees MBE Generated from Servicing Loans after SBA Approval Do Not Make
the Alleged Conduct Wire Fraud

The government next suggests that because the “object of the scheme was profit,” the fees
MBE generated for servicing PPP loans are sufficient to meet the property or money requirement
for wire fraud.  See, e.g., Gov. Opp. at 10; id. at 9 (“The ‘money or property’ fraudulently obtained
as a result of the scheme alleged in Count One [includes] . . . the resulting tens of millions of
dollars in loan fees that accrued to MBE . . . .”).  This reductive argument is baseless and contrary
to binding precedent.
In Cleveland, the defendants engaged in a deceptive scheme to obtain video poker licenses.
531 U.S. at 15-17. They did so not for the sake of obtaining a license in and of itself, of course,
but to profit from operating a business granted that license.  And the Cleveland defendants did, in
fact, profit to the tune of several million dollars. See 531 U.S. at 22 (noting that the state collected
32.5% of net revenue from each video poker machine operated at truck stops and the defendants
paid $1.2 million from 1993 to 1995 for the state’s “proper share of revenue,” thereby implying
that defendants made approximately $3.69M in revenue over that same period).  But the Supreme
Court refused to consider those monies the object of the wire fraud.  Instead, the Court correctly
focused on what the deception sought to procure – i.e., government approval to run a video poker

2 The government concedes in Footnote 5, for example, that the Indictment does not support one
of the arguments it wishes to make and so it must rely on the Complaint.  See Gov. Opp. at 15 n.
5 (“While not specifically alleged in the Indictment, the Complaint makes clear, and the
Government expects to prove at trial . . . .”).  This is improper.
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business – not the amounts of money that would (and did) flow into the business once it started
operating based on that approval.  Cleveland, 531 U.S. at 20-27 (stating that the “question
presented is whether, for purposes of the federal mail fraud statute, a government regulator parts
with ‘property’ when it issues a license” and for the reasons discussed therein, holding that “such
a license is not ‘property’ in the government regulator’s hands”). Since government approval to
run a video poker business cannot be property, in the same way that SBA approval to serve as a
third-party lender cannot be property, the wire fraud charge was dismissed. See Cleveland, 531
U.S. at 26-27.
The Second Circuit’s recent decision in Blaszczak confirms this point. United States v.
Blaszczak. --- F.4th ---, 2022 WL 17926047 (2d Cir. Dec. 27, 2022).  In that case, a jury convicted
the defendants of wire fraud for deceptively obtaining confidential information from the federal
Center for Medicare and Medicaid Services. Blaszczak, 2022 WL 17926047, at *1-2.  Like the
defendants in Cleveland, the defendants in Blaszczak did not deceive a government agency for
their own amusement; they did it to profit on the information through subsequent insider trading
in the securities of health care companies. Id. at *2.  But that they sought to (and ultimately did)
monetize this government information did not transform their deceptive scheme – which did not
otherwise obtain “property” – into wire fraud. See id. at *2, *12.  In remanding the wire fraud
counts to the district court for dismissal, the Second Circuit held that, “As the Supreme Court
recognized in Cleveland and emphasized in Kelly, the government’s right to determine ‘who
should get a benefit and who should not . . . do[es] “not create a property interest”’” under the wire
fraud statute. Id. at *11 (quoting Kelly, 140 S. Ct. at 1572) (quoting Cleveland, 531 U.S. at 23).
The same is true here.
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The Supreme Court’s decision in Kelly further reinforces a consistent theme: when
determining whether the defendants committed property fraud, courts must focus carefully on what
the deception sought to procure. In Kelly, the defendants engaged in a deceptive scheme to reduce
the toll plaza lanes that accessed the George Washington Bridge in order to exact political
retribution against a local mayor. 140 S. Ct. at 1568-70. The Court examined whether the object
of the defendant’s dishonest scheme was the Port Authority’s “money or property.” Id. at 1572-
74. Finding that the defendants sought to procure a reallocation of the bridge’s access lanes (and
not the incidental use of the Port Authority employees’ labor), the Court concluded that “a scheme
to alter such a regulatory choice is not one to appropriate the government’s property” and reversed
the defendants’ wire fraud convictions. 140 S. Ct. at 1572, 1574.
III.
The Funds MBE Received from the Company and the Federal Reserve after Being
Approved by the SBA Also Do Not Make the Alleged Conduct Wire Fraud

Finally, the government pairs the prior flawed argument with the suggestion that the
“nearly one billion dollars in fraudulently obtained capital” from the Company and the Federal
Reserve can satisfy the “money or property” element based on the alleged deception of the SBA.
(Gov. Opp. at 9.)  The government is again in error.
It is worth first identifying what the “billion dollars” is.  According to the government,
$100 million of this is funding provided by the Company to MBE to fund PPP loans two weeks
after MBE was approved by the SBA as a non-bank lender.  (Gov. Opp. at 7.)  The remaining
funds were provided by the Federal Reserve for the same purpose between one and two months
later (id.), as it became clear that the minority-owned businesses that MBE was servicing were
going to need significant additional PPP relief.  The funds that the Company and the Federal
Reserve sent to MBE were precisely the funds that MBE needed to perform the critical, time
sensitive work the SBA had authorized it to perform.  Nowhere in the Indictment – nowhere – does
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the government allege that MBE did not perform its function or that it misused these funds in any
way.
A return to the Indictment at this juncture is instructive.  Count One alleges that Mr.
Martinez did “fraudulently obtain the approval of the [SBA] for his company, [MBE], to be a non-
bank lender through the [PPP], and then . . . used that approval to obtain millions of dollars in
capital to issue PPP loans and earn lender fees.” Indictment ¶ 1 (emphasis added).  This allegation
is correct in one important respect:  Mr. Martinez did use the approval of the SBA to conduct
MBE’s non-bank lending operations and obtain the capital needed to perform the business
authorized and expected by the SBA.  This scenario is directly analogous to Cleveland, where the
defendants obtained a gaming license through deception and then used that license to acquire
money from third parties by operating their video poker business.  Just as the defendants’ receipt
of funds in Cleveland did not render the activity wire fraud, the same is true here.
The government’s reliance on United States v. Greenberg is misplaced. In that case, the
Second Circuit joined many of its sister courts in confirming the unremarkable proposition that
“the party whose money or property is the object of the scheme” need not be the party “whom a
fraudster seeks to deceive.”  United States v. Greenberg, 835 F.3d 295, 306 (2d Cir. 2016).  But
the government attempts to use Greenberg to argue that the Indictment sufficiently pleads wire
fraud by alleging that Mr. Martinez lied to the SBA “in an effort to obtain money from the
Company and the Federal Reserve.”  (Gov. Opp. at 14.)  This cannot be the case, otherwise it
would have been wire fraud for the defendants in Cleveland to have lied to the state in a successful
effort to obtain money from their future video poker customers, and it would have been wire fraud
for the defendants in Blaszczak to have deceived CMS to obtain government information for
successful use in “executing securities transactions in [health care company] stock.”  See
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Blaszczak Indictment ¶ 81 (wire fraud count).  Neither of those activities were wire fraud, as the
Supreme Court and the Second Circuit recognized, because the focus of the schemes was obtaining
the government license or information.  The same is true here, where the alleged fraud was focused
on deception to obtain government approval to run a business – and later that government approval
was subsequently used to engage in profitable business operations.3

3 Indeed, it is not clear what limiting principle could apply to the government’s expansive reading
of Greenberg to undercut Cleveland, Kelly, and Blaszczak.  If an individual lies to the SBA to
become approved as a non-bank lender and he later uses proof of that status and its promise of
income to obtain a home mortgage, can the government claim wire fraud because although the
SBA was deceived the real victim was the bank?  If the individual uses the proof of his non-bank
lender status and promise of income to get a car loan, is the car dealership a victim of wire fraud?
The answer to these questions must be no, for the same reason this theory would not and did not
work in Cleveland and Blaszczak.  A plan to monetize the value of wrongfully obtained
government information or imprimatur cannot create a wire fraud where it would otherwise not
exist.
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CONCLUSION
For these reasons, as well as those presented in his opening brief, Mr. Martinez respectfully
submits that Count One of the Indictment must be dismissed.
Dated: January 6, 2023

New York, New York

MORVILLO, ABRAMOWITZ,
GRAND, IASON & ANELLO, P.C.

By:  /s/ Telemachus P. Kasulis

Elkan Abramowitz

 Telemachus P. Kasulis
 Russell J. Feldman
565 Fifth Avenue

New York, New York 10017

WILLKIE FARR & GALLAGHER LLP

Michael S. Schachter

Randall Jackson

787 Seventh Avenue

New York, New York 10019

Attorneys for Defendant Rafael Martinez

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