Letter in Support of Motion to Dismiss Count One (Doc. 51) — United States v. Rafael Martinez (S.D.N.Y.)
- Document type
- Indictment
- Date
- 2023-02-03
- Case
- United States v. Rafael Martinez,
Summary
A letter brief to Judge Lewis J. Liman of the U.S. District Court for the Southern District of New York in United States v. Rafael Martinez, 22 Cr. 251 (LJL), filed February 3, 2023 as Document 51 in Case 1:22-cr-00251-LJL. Counsel for Mr. Martinez submit it in support of his motion to dismiss Count One, a wire fraud count, of the Superseding Indictment. The letter states that the Superseding Indictment differs from the original indictment returned May 2, 2022 only in the to wit clause of Count One. Relying on Cleveland, Kelly, Loughrin, Berroa and Blaszczak, it argues that the alleged object of deceiving the SBA was approval for MBE to become a non-bank PPP lender, and that later funding and lender fees were not obtained by means of that deception under 18 U.S.C. § 1343. It is signed by counsel from two law firms.
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Case 1:22-cr-00251-LJL Document 51 Filed 02/03/23 Page 1 of 8
tkasulis@maglaw.com
(212) 880-9555
February 3, 2023
Hon. Lewis J. Liman
United States District Judge
Southern District of New York
500 Pearl Street
New York, New York 10007
Re: United States v. Rafael Martinez,
22 Cr. 251 (LJL)
Dear Judge Liman:
We represent Rafael Martinez in the above-captioned case and submit this letter in
support of Mr. Martinez’s motion to dismiss Count One of the newly-returned Superseding
Indictment. The government’s efforts to evade Cleveland and Kelly by tinkering with its “to wit”
clause cannot save Count One from its pursuit of an invalid theory. Count One does not charge a
wire fraud and it must be dismissed. 1
The Superseding Indictment
The Superseding Indictment is identical to the original indictment returned on May 2,
2022 (the “Original Indictment”), save for a single sentence.
The Original Indictment’s to wit clause for Count One read, in relevant part: 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.” Original Indictment ¶ 1.
The corresponding to wit clause in Count One of the Superseding Indictment reads: Mr.
Martinez “engaged in a scheme to fraudulently obtain millions of dollars in capital from an
1
For ease of reference, Mr. Martinez has styled this letter as in further support of his motion to dismiss the
Indictment even though its arguments address the new superseding instrument. If the Court prefers, we would be
happy to resubmit the letter as a new motion to dismiss Count One of the Superseding Indictment.
Case 1:22-cr-00251-LJL Document 51 Filed 02/03/23 Page 2 of 8
Hon. Lewis J. Liman
February 3, 2023
Page 2
insurance company (the ‘Company’) and the Federal Reserve Bank of San Francisco, in order to
issue loans through the Paycheck Protection Program (the ‘PPP’), and thereby to fraudulently
earn PPP lender fees, through false and fraudulent pretenses, representations, and documents,
including by making false statements to the United States Small Business Administration (the
‘SBA’) in order to obtain approval for [MBE] to become a non-bank PPP lender.”) Superseding
Indictment ¶ 1.
ARGUMENT
The government has adopted the kitchen sink approach. Faced with black letter law
holding that a scheme to obtain government approval is not wire fraud, the prosecution
rechristens its allegation as a scheme to obtain money from everyone after that approval was
granted. In so doing, the Superseding Indictment embraces the two theories that Mr. Martinez
addressed in his Reply Brief of January 6, 2023: namely, (a) that funds received from the
Company and the Federal Reserve were the property sought by Mr. Martinez through the alleged
deception of the SBA; and (b) that fees generated by MBE for servicing PPP loans in the
ordinary course of its business were the property sought by Mr. Martinez through the alleged
deception of the SBA. See generally Reply Brief at 5-9.
The government is missing the point. These theories are invalid, regardless of how they
are articulated in the accusatory instrument. It cannot be the case that deception of the
government to obtain its approval or information is transmuted into wire fraud simply because
that approval or information impacted the flow of funds. If that were a viable approach, the
Supreme Court would not have dismissed the wire fraud charge in Cleveland. It would not have
dismissed the wire fraud count in Kelly. And the Second Circuit would not have dismissed the
wire fraud count in Blaszczak.
There is already a crime in the federal code for attempting to deceive the Small Business
Administration. The government has charged it in Count Two of the Superseding Indictment.
The Court should end the government’s impermissible efforts to also repackage those allegations
as wire fraud. Count One must be dismissed.
I. Applicable Law
Title 18, United States Code, Section 1343 makes it a crime to participate in “any scheme
or artifice to defraud, or for obtaining money or property by means of false or fraudulent
pretenses, representations, or promises.” The government must show not only “the defendant
engaged in deception but also that an object of that deception was money or property.” See Kelly
v. United States, 140 S. Ct. 1565, 1571 (2020).
The federal circuits are split over the question of whether wire fraud requires
“convergence” – that is, whether the party deceived must be the party that possesses the money
Case 1:22-cr-00251-LJL Document 51 Filed 02/03/23 Page 3 of 8
Hon. Lewis J. Liman
February 3, 2023
Page 3
or property that is the object of the scheme. See, e.g., United States v. Blumeyer, 114 F.3d 758,
767-68 (8th Cir. 1997) (convergence not required); United States v. Lew, 875 F.2d 219, 221 (9th
Cir. 1989) (convergence required). Convergence is not required in the Second Circuit. United
States v. Greenberg, 835 F.2d 295, 306 (2016).
Even in circuits not requiring convergence, however, not every deception of an entity to
obtain money from a third party is cognizable. In United States v. Loughrin, the Supreme Court
analyzed the phrase “by means of” in the federal bank fraud statute. 134 S. Ct. 2384, 2392-95
(2014); see also 18 U.S.C. § 1344(2) (whoever executes a scheme to “obtain any of the moneys,
funds, credits, assets, securities, or other property owned by, or under the custody or control of, a
financial institution, by means of false or fraudulent pretenses, representations, or promises”
commits a crime) (emphasis added). In that case, the defendant provided stolen or altered checks
to a retailer in exchange for goods, knowing that the retailer would then present the check to the
bank the funds were drawn upon for payment. Id. at 2387.
Writing for the majority, Justice Kagan noted that “it is not enough that a fraudster
scheme to obtain money from a bank and that he make a false statement [to a third party]. The
provision as well includes a relational component: The criminal must acquire (or attempt to
acquire) bank property ‘by means of’ the misrepresentation. That phrase typically indicates that
the given result (the ‘end’) is achieved, at least in part, through the specified action, instrument,
or method (the ‘means’), such that the connection between the two is something more than
oblique, indirect, and incidental. . . . In other words, not every but-for cause will do.” Id. at 2393
(emphasis added). The majority concluded that the “by means of” language in the bank fraud
statute can only be satisfied where “the defendant’s false statement is the mechanism naturally
inducing a bank (or custodian of bank property) to part with money in its control.” Id. When the
alleged deception is to a third party – not directly to the bank – that relationship is established
only when the deception itself is also passed along to the bank. Id. (“But no less is the
counterfeit check the ‘means’ of obtaining bank funds when a defendant like Loughrin offers it
as payment to a third party like Target. After all, a merchant accepts a check only to pass it along
to a bank for payment; and upon receipt from the merchant, that check triggers the disbursement
of bank funds just as if presented by the fraudster himself.”) (emphasis added). 2
The mail fraud and wire fraud statute contain the same “by means of” limitation. See 18
18 U.S.C. § 1341 (mail fraud to “obtain[] money or property by means of false or fraudulent
pretenses, representations, or promises) (emphasis added); 18 U.S.C. § 1343 (wire fraud to
“obtain[] money or property by means of false or fraudulent pretenses, representations, or
promises”) (emphasis added). Accordingly, courts have begun to extend the rationale of
Loughrin to mail and wire fraud cases.
2
Justice Scalia correctly noted the meaningful limitation this rule places upon the statute. See Loughrin,
134 S. Ct. at 2396 (majority’s reading of “by means of” as “not just proximate-cause-like directness—the fraudulent
statement literally must ‘reach the bank’”) (Scalia, J., concurring) (citing Loughrin, 134 S. Ct. at 2394, n. 8.).
Case 1:22-cr-00251-LJL Document 51 Filed 02/03/23 Page 4 of 8
Hon. Lewis J. Liman
February 3, 2023
Page 4
In United States v. Berroa, the First Circuit considered several defendants convicted of
mail fraud in connection with their obtaining of licenses to practice medicine through falsified
applications to the Puerto Rico Board of Medical Examiners. 856 F.3d 141, 147-48 (1st Cir.
2017). As the Court observed, Cleveland “squarely precluded” the government from seeking
convictions on the theory that the defendants fraudulently obtained the Board’s permission to
practice medicine. Id. at 149. And so “[p]resumably cognizant of this restriction, the
government charged a scheme to . . . use[] their fraudulent licenses to obtain payment for
medical services and issue prescriptions.” Id. In this “effort to circumvent Cleveland,” however,
the government ran “headlong into . . . Loughrin.” Id.
In reaching the conclusion that Loughrin should apply with equal force to mail fraud
cases, the court noted that the government had offered “no explanation at all for why the same
‘by means of’ language should be read differently in these two contexts.” Id. at 150; see also
Smith v. City of Jackson, 544 U.S. 228, 233 (2005) (“[W]hen Congress uses the same language
in two statutes having similar purposes, . . . it is appropriate to presume that Congress intended
that text to have the same meaning in both statutes.”); United States v. Saks, 964 F.2d 1514, 1520
(5th Cir. 1992) (“It is well settled that Congress modelled § 1344 on the mail and wire fraud
statutes, and that the usual practice is to look to precedents under those statutes to determine its
scope and proper interpretation.”). The First Circuit then lost little time in holding that deception
of a government agency in an effort to conduct a business that will thereafter generate income is
not mail fraud because the receipt of those moneys was not “by means of” the deception of the
government. Id. at 149-50. 3
II. Discussion
The wire fraud theory in the Original Indictment was straightforward, if impermissible:
the grand jury charged that Mr. Martinez lied to the Small Business Administration in order to
obtain its permission for MBE to conduct business as a non-bank lender. After Mr. Martinez
explained that such an allegation was unlawful in light of Cleveland and Kelly, the government
shifted gears, now claiming that lies to the SBA were designed to (a) cause the Company and the
Federal Reserve to fund MBE’s loans to minority-owned businesses, and (b) cause MBE to
generate fees from servicing those loans.
3
The Sixth Circuit appears to have reached a somewhat different conclusion in its recent decision in United
States v. Palma, 2023 WL 241834, at *4 (6th Cir. January 18, 2023). In that case, the defendant allegedly
participated in a conspiracy to deprive car purchasers of property by deceiving a government agency regarding the
performance of its vehicles. Id. at *1-2. In holding that the district court improperly granted the defendant’s motion
to dismiss, the court attempted to distinguish Berroa principally by noting that (a) Berroa dismissed a substantive
offense while Palma involved a conspiracy charge, and (b) Berroa involved individuals attempting to obtain a
license to practice a legitimate business while the defendant in Palma sought “to induce customers who otherwise
would not have bought the vehicles to do so.” Id. at *4.
Case 1:22-cr-00251-LJL Document 51 Filed 02/03/23 Page 5 of 8
Hon. Lewis J. Liman
February 3, 2023
Page 5
But as with the prosecution in Berroa, the government evades Scylla to find Charybdis.
The funding obtained from the Company and the Federal Reserve, and the fees generated by the
operation of MBE’s business, were not money obtained “by means of” the alleged misstatements
to the SBA. Instead, the Company and the Federal Reserve provided those funds to MBE so that
MBE could pass them along to PPP loan applicants (which it did). Similarly, the fees were
revenue generated by the legitimate operation of MBE’s business, as with the defendants in
Berroa. The wire fraud theory in Count One fails for the same reason it failed in Cleveland,
Kelly, and Blaszczak: because the true object of the alleged deception was government
information or imprimatur. Accordingly, Count One must be dismissed.
A. The monies obtained by MBE were not “by means of” the alleged deception of the
SBA
The purpose of Mr. Martinez’s application to the SBA for MBE to serve as a non-bank
lender was to obtain the permission of the SBA for MBE to serve as a non-bank lender. It was
not to obtain money from the Company or the Federal Reserve. Those were steps that MBE had
to take in order to conduct its business once it was authorized by the SBA in order to do its job in
the PPP program. Nor was it to generate fees. Of course Mr. Martinez anticipated that MBE’s
work as a non-bank lender would be profitable, but that is nothing other than a natural
consequence of running a business – one authorized by the government or otherwise.
In attempting to suggest that the true object of Mr. Martinez’s alleged deception of the
SBA was anything other than obtaining the approval of the SBA – in a naked and belated effort
to avoid Cleveland – the government funs afoul of Loughrin and Berroa. As in those cases, the
subsequent money that MBE brought in was in no way “by means of’ the alleged deception of
the SBA. Instead, the funds from the Company and the Federal Reserve came because those
entities made independent business decisions that they wished to fund PPP loans (because it
would be – and was – profitable to do so). And the profits that MBE generated were “by means
of” the hard work it did performing its designated and approved function in the PPP program, not
because of any alleged misstatements to the government.
As the Berroa court observed, it cannot be the case that Cleveland can be avoided simply
by claiming that the defendant hoped to later bring in funds based on having received
government approval to conduct a business. Indeed, “medical licenses, much like the gaming
licenses at issue in Cleveland, almost invariably are sought and obtained in an effort to realize
some monetary profit.” Berroa, 856 F.3d at 151. The same is true here. The reality is that Mr.
Martinez made representations to the SBA in order to secure its approval to conduct a lawful
business, as the government charged in the Original Indictment. The government maintains that
those representations were materially deceptive. The prosecution is entitled to pursue that theory
under the crime charged in Count Two of the Superseding Indcitment. But whether that is true
or false, that allegation cannot support a wire fraud charge because the object of the alleged
deception was regulatory approval and not the subsequent funding and operation of the business.
Case 1:22-cr-00251-LJL Document 51 Filed 02/03/23 Page 6 of 8
Hon. Lewis J. Liman
February 3, 2023
Page 6
B. The government’s position is inconsistent with Cleveland, Kelly, and Blaszczak
The government’s argument also proves too much. If the government were correct that
the funds from the Company and the Federal Reserve or the fees generated from MBE’s business
could satsify the “money or property” element of wire fraud based on earlier alleged deception of
the SBA, there is no reason that the wire fraud counts in Cleveland and Kelly and Blaszczak
should have been dismissed. Instead, those cases demonstrate that the government’s efforts to
plead around their real theory – that Mr. Martinez deceived the SBA in order to obtain its
approval – cannot succeed.
In Cleveland, the defendants sought to offer video poker gaming at their truck stop in
Louisiana. Cleveland v. United States, 531 U.S. 12, 15-16 (2000). In order to do so, they needed
to obtain a license from the state, which they procured by deceiving the gaming board as to their
qualifications. Id. The defendants operated video poker machines at their business for years,
making millions of dollars and providing a fixed portion to the state. Id. at 16, 22 (32.5% of
revenue from machines to state by statute).
In rejecting the government’s claim that this conduct constituted wire fraud, the Supreme
Court never suggested that the revenues that the defendants made from using the license would
satisfy the statute. Indeed, such an argument – like the one later rejected by the First Circuit in
Berroa – is inherently weaker than the argument the Court did consider: that a portion of that
revenue was provided to the state, demonstrating the economic character of the license. That
argument failed as well. See id. at 23 (“Even when tied to an expected stream of revenue, the
State’s right of control does not create a property interest any more than a law licensing liquor
sales in a State that levies a sales tax on liquor.”) (emphasis added). Accordingly, there is no
reason to suggest that the fees MBE generated from operating its lawful business based on the
permission granted by the SBA can satisfy the “money or property” element of wire fraud.
In Kelly, the defendant state workers closed lanes on the George Washington Bridge in
order to exact political revenge upon a local mayor. Kelly v. United States, 140 S. Ct. 1565,
1568-70 (2020). The government claimed that the defendants aimed to deprive the Port
Authority of its property interest in those lanes and “of the costs of compensating the traffic
engineers and back-up toll collectors who performed work relating to the lane realignment.” Id.
at 1572. The first argument failed for the same reason the wire fraud charge was dismissed in
Cleveland: the allotment of lanes, whether honestly or deceptively, was an exercise of regulatory
authority and could not constitute “property.” Id. at 1572-73. Critically, the government’s
“costs” argument failed no better. As the Court noted, the “property must play more than some
bit part in a scheme: It must be an ‘object of the fraud.’ Or put differently, a property fraud
conviction cannot stand when the loss to the victim is only an incidental byproduct of the
scheme.” Id. at 1573 (citation omitted). Cutting through the government’s arguments about the
financial loss to the Port Authority, the Court identified the true goal of the deception in Kelly: to
influence a government regulatory decision.
Case 1:22-cr-00251-LJL Document 51 Filed 02/03/23 Page 7 of 8
Hon. Lewis J. Liman
February 3, 2023
Page 7
The same is true here. The government has already honestly stated in the Original
Indictment what it truly believes was the object of the alleged deception in this case: the
obtaining of the SBA’s regulatory permision for MBE to conduct business as a non-bank lender.
See Original Indictment ¶ 1. Everything else the government alleges follows the SBA’s decision
and is evidence only of MBE operating its business in the manner authorized by the SBA. MBE
received funding from the Company and the Federal Reserve in order to make the loans it was
authorized to make. MBE generated fees from servicing the loans it was authorized to service.
As Mr. Martinez has previously noted – and the government has not contested – there is no claim
in the Original Indictment, the Superseding Indictment, or anywhere else that MBE serviced
loans in any way other than it was authorized to do. It is not even clear that the Company or the
Federal Reserve have any “loss” at all, given that the PPP loans were all guaranteed by the SBA.
Accordingly, it is an ineluctable conclusion here that “any loss to the victim is only an incidental
byproduct” of Mr. Martinez’s efforts to obtain SBA approval. See Kelly, 140 S. Ct. at 1573.
Finally, Blaszczak also proves an insurmountable hurdle to the governemnt. In that case,
an insider at the Centers for Medicare and Medicaid Services deceptively tipped confidental
government information through an intermediary to hedge fund employees, who used it to
engage in insider trading in the equity markets. United States v. Blaszczak, 56 F.4th 230, 233-34
(2d Cir. 2023). The Second Circuit held that this conduct is not wire fraud because the object of
the deception was “to obtain and promptly utilize” government regulatory information. Id. at
244. That the information obtained was thereafter deployed to make money in the securities
markets was irrelevant to the Court of Appeals; the issue was what was obtained through the
deception – viz., the government information.
Because that government information was not property in light of Cleveland and Kelly,
and the money that was made using that property was at best “incidental” to the true object of the
scheme, the wire fraud charge could not stand. The same is true here, where the funding of MBE
by the Company and the Federal Reserve and the profits MBE generated were not the focus of
the alleged deception, which was to obtain the permission of the SBA to conduct the business in
the first place. The government’s efforst to recast its allegations to avoid the pitfalls of the
Original Indictment only further demonstrate that the activity here may not be charged as wire
fraud. Accordingly, Count One must be dismissed.
Case 1:22-cr-00251-LJL Document 51 Filed 02/03/23 Page 8 of 8
Hon. Lewis J. Liman
February 3, 2023
Page 8
CONCLUSION
For the reasons set forth herein and in Mr. Martinez’s motion papers regarding the
Original Indictment, Count One of the Superseding Indictment must be dismissed.
Respectfully submitted,
MORVILLO ABRAMOWITZ GRAND IASON &
ANELLO, P.C.
/s/ Telemachus P. Kasulis
Telemachus P. Kasulis
Elkan Abramowitz
WILLKIE FARR & GALLAGHER LLP
Michael S. Schachter
Randall Jackson
Counsel for Rafael Martinez
cc: AUSA Katherine C. Reilly
AUSA Micah F. Fergensen
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