Article

Note: Daryl Miles Brown (Fraudster) enticed multiple investors (Investors) into investing between US$30,000 and US$300,000 each with the Fraudster's enterprise. Fraudster falsely stated he held securities trading licenses, was a former professional (U.S.) footballer, and had access to hundreds of millions of dollars. Investors were told that "their investments would be safely placed in an escrow account and would be used only to 'leverage' short-term investments such as stand-by letters of credit, which would double or triple their investments in one month", but Fraudster withdrew funds from the escrow account to fund his "lavish lifestyle."

Fraudster visited Citigroup offices in New York with the intention of using standby LCs in his possession to "leverage securities". Instead, Fraudster held "an unscheduled meeting with a Citigroup employee who advised that the stand-by letter of credit documents [Fraudster] and [his associate] brought with them were not legitimate." Fraudster testified that before the meeting he did not know his LCs were not legitimate investments. Even so, after learning that the documents were not legitimate, Fraudster misrepresented to Investors that their investments had been successful.

Fraudster was charged with "organizing and managing an extensive scheme to defraud". After a trial in the United States District Court for the Western District of Missouri, a jury convicted Fraudster of, among other charges, seven counts of wire fraud. On appeal, the Court of Appeals for the 8th Circuit, Wollman, Loken, and Hansen, JJ., affirmed.

Fraudster argued that there was insufficient evidence that he intended to defraud Investors because he did not know that his LCs were not legitimate investments. The appellate court ruled that there was ample evidence of the intent to defraud in that "the essence of the scheme was to obtain investor monies with no intent to invest as promised, and to divert a substantial portion of the invested funds to [Fraudster's] personal use."

Comment: Although not clearly stated in the opinion, LCs are not investment instruments. If, as the opinion states, Fraudster was taking Investors' money for "short-term investments such as stand-by letters of credit," then, even if the Fraudster's LCs had been legitimate documents, Investors could not expect to somehow "double or triple" their investments through the use of LCs.

[JEB/pbl]

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