[00:00:00] Speaker 04:
Good morning, Your Honors.

[00:00:01] Speaker 04:
May it please the Court, Matthew Dirks here on behalf of Alan Safahi.

[00:00:06] Speaker 04:
With the Court's permission, I'd like to reserve five minutes, three minutes for rebuttal.

[00:00:10] Speaker 02:
That's fine.

[00:00:10] Speaker 02:
Just keep your eye on the clock.

[00:00:11] Speaker 02:
That's fine.

[00:00:11] Speaker 04:
Thank you, Your Honor.

[00:00:15] Speaker 04:
Last year, the Supreme Court, in a unanimous opinion, reversed several wire fraud convictions, and it did so based on its concerns that the federal fraud statutes were expanding to criminalize traditionally civil matters and federalize traditionally state matters.

[00:00:33] Speaker 04:
Those concerns, in our view, are especially apt with this case.

[00:00:39] Speaker 04:
Now this appeal raises the singular question of when can a breach of contract be a crime?

[00:00:47] Speaker 04:
And we submit that a breaching party commits fraud only if that party never intended to perform under the contract.

[00:00:57] Speaker 04:
And to put that slightly differently, a breaching party can be convicted of federal criminal fraud only if the government proves beyond a reasonable doubt

[00:01:08] Speaker 04:
that at the time the contract was formed, that party possessed a fraudulent intent.

[00:01:16] Speaker 04:
That's true even if the subsequent breaches are knowing and intentional, and that's true even if the subsequent breaches are accompanied by knowingly false representations.

[00:01:29] Speaker 00:
That doesn't make much sense to me.

[00:01:31] Speaker 00:
A man that is in a contract not intending to breach the contract, but he finds he's made a bad deal and he starts stealing.

[00:01:38] Speaker 00:
That's not fraud?

[00:01:41] Speaker 04:
That, Your Honor, is a breach.

[00:01:43] Speaker 04:
As soon as the parties have a meeting of the minds, they enter into a valid contract.

[00:01:49] Speaker 04:
Everything else that happens under that contract, assuming it's relating to a benefit of the bargain, everything else would be a breach.

[00:01:58] Speaker 02:
So the subsequent embezzlement in Judge Bayer's hypothetical wouldn't be a crime.

[00:02:04] Speaker 02:
That's what I'm understanding you to say, as though the fact that the parties initially started out in contact is some kind of a force field that shields subsequent criminal conduct.

[00:02:15] Speaker 04:
Well, if, so embezzlement, let's say that the subsequent breach is a deprivation of a benefit of the contract.

[00:02:25] Speaker 04:
So one party says, I'm going to get you your widgets by Tuesday in the contract.

[00:02:30] Speaker 04:
Come Tuesday, the other party says, where are my widgets?

[00:02:32] Speaker 04:
And he says, they're on their way, even though they aren't.

[00:02:36] Speaker 04:
That, even though it's a knowingly false representation, would simply be part of it.

[00:02:40] Speaker 02:
It might be a breach also, but why isn't it criminal?

[00:02:43] Speaker 02:
If the government is able to show beyond a reasonable doubt that there's a criminal mindset, whatever the criminal standard is required by that particular crime, why wouldn't it be a crime?

[00:02:54] Speaker 04:
Well, so the question there, Your Honor, is,

[00:02:58] Speaker 04:
When was the misrepresentation made?

[00:03:00] Speaker 04:
And here, the government's theory has always been that the misrepresentation was at the time the contract was formed.

[00:03:07] Speaker 04:
And fraud requires fraudulent intent at the time of that misrepresentation.

[00:03:12] Speaker 02:
Let's just start with basic principle, if we could.

[00:03:14] Speaker 02:
If you could go back to Judge Bay's hypothetical, his hypothetical is that two individuals entered into a contract without fraudulent intent, and that at some point down the road, one of them starts to embezzle

[00:03:29] Speaker 02:
And it seems to me that under your argument, that subsequent conduct could never be criminal.

[00:03:37] Speaker 04:
If it's related to the contract, I mean, so if the embezzlement pertains to a provision of the contract, pertains to the performance of the contract, which is what the government has always claimed this case is about, then it is not a crime.

[00:03:52] Speaker 04:
It is a breach of contract.

[00:03:54] Speaker 02:
So it is a force field, the fact that the parties originally entered into a civil contract.

[00:03:59] Speaker 04:
Well, it would be a crime if the government could prove that at the formation of the contract, there was an intent never to perform under it.

[00:04:06] Speaker 04:
And this is not a new construct that we've conceived for purposes of today's argument.

[00:04:12] Speaker 04:
This is something that is rooted in common law.

[00:04:15] Speaker 04:
This is something that the Countrywide Court discusses at length, going all the way back to Oliver Wendell Holmes, and he talks about that knowing malicious intentional breaches, so those including breaches where there's a misrepresentation, those are simply breaches.

[00:04:32] Speaker 04:
Once the parties have entered into a contract, it's a mutual promise to either perform or pay damages.

[00:04:39] Speaker 04:
And part of the reason we want that is we don't want the government prosecuting cases where there is a breach.

[00:04:47] Speaker 04:
And oftentimes breaches relate in or result in monetary losses.

[00:04:53] Speaker 04:
But again, we don't want to criminalize that.

[00:04:56] Speaker 04:
marketplace where the parties have a meeting of the minds and they agree, okay, if there's a breach down the road, then there's a contractual remedy, which by the way is precisely what happened here.

[00:05:07] Speaker 04:
So the very funds that were the subject of the fraud were recoverable by the bank under two separate provisions in the contract.

[00:05:17] Speaker 04:
And that's precisely what happened.

[00:05:18] Speaker 04:
The bank brought a civil action shortly after the close of this prepaid debit card program, and they settled civilly based on the terms of the contract.

[00:05:32] Speaker 04:
So I think there are reasons why we don't want the government prosecuting mere breaches.

[00:05:39] Speaker 04:
I'd also point the court to an opinion that was

[00:05:44] Speaker 04:
cited in the Countrywide case, and that's the Bridgestone Firestone case, Second Circuit from 1996.

[00:05:53] Speaker 04:
The citation is 98F313.

[00:05:56] Speaker 04:
And in that case, the court said common law fraud, so false representations intended to lull the plaintiff into never seeking to recover under an existing contract.

[00:06:14] Speaker 04:
Those were simply false statements, not sufficient even to support a claim of a civil fraud.

[00:06:25] Speaker 04:
And what we have here is the government claiming false statements that arose to criminal fraud again because there was no proof of an intent to defraud at the time the contract was formed.

[00:06:37] Speaker 04:
The subsequent actions

[00:06:39] Speaker 04:
may have been a breach, may have been an intentional breach, but could not rise to the level of criminal fraud.

[00:06:46] Speaker 02:
I have a question about the loss amount, and the courts pegged it, I think, at one and a half million dollars.

[00:06:53] Speaker 02:
Was there any place in the record, my understanding, as I should say, is that the business model with the prepaid debit cards is that there's always breakage.

[00:07:00] Speaker 02:
In other words, I think that means that sometimes, or predictably, that some folks won't use all the money loaded onto the card.

[00:07:08] Speaker 02:
Is that right?

[00:07:09] Speaker 02:
That's correct, Your Honor.

[00:07:11] Speaker 02:
Okay.

[00:07:11] Speaker 02:
Excuse me, is there any place in the record where anyone ever testified about the percentage or the likelihood of what that breakage would be?

[00:07:20] Speaker 04:
My recollection, and I don't have the record side at hand, I'm happy to submit it after the hearing, is that breakage could be around 10%.

[00:07:29] Speaker 02:
You think that's in the record?

[00:07:30] Speaker 04:
I do, Your Honor.

[00:07:32] Speaker 02:
When you come back, it would be helpful to me if I could figure out where that is in the record.

[00:07:36] Speaker 02:
Sure.

[00:07:36] Speaker 02:
Because I was looking for exactly that.

[00:07:39] Speaker 02:
Because otherwise, I think the trial court pegged the number at 1.5 instead of 2.7.

[00:07:44] Speaker 02:
Do I have those numbers right?

[00:07:47] Speaker 04:
Those numbers are right.

[00:07:48] Speaker 04:
And let me just, since we're on this topic, I'll talk briefly about that.

[00:07:53] Speaker 04:
The court in its order of conviction said that there was a potential loss of $2.7 million, meaning the delta between what Cardex received from the cardholders and what it passed on to the bank to pay the cards was $2.7 million.

[00:08:08] Speaker 04:
That figure came from a

[00:08:12] Speaker 04:
a report that was generated by some software that an employee of Mr. Safahis had created.

[00:08:17] Speaker 04:
That employee testified he could not verify that number.

[00:08:21] Speaker 04:
The bank, both bank witnesses' trial said they could not verify the $2.7 million number.

[00:08:28] Speaker 04:
The government's own case agent contradicted that and said that at most, the delta between what Cardex received and what it passed on was about 1.5 million.

[00:08:36] Speaker 02:
Who said that?

[00:08:37] Speaker 04:
The government's case agent, Agent Demetriaco, who was an IRS agent who testified at trial for the government.

[00:08:44] Speaker 02:
Do you have a record site for that?

[00:08:46] Speaker 04:
I do, Your Honor.

[00:08:51] Speaker 02:
Or I don't want to take up your time.

[00:08:52] Speaker 02:
Maybe you want to come back in rebuttal with where I can find that in the record.

[00:08:56] Speaker 04:
But either way, no matter whether it's the 2.7 or the 1.5, the reality is those are potential losses.

[00:09:03] Speaker 04:
That's not actual loss to the bank, because that's .

[00:09:05] Speaker 02:
.

[00:09:05] Speaker 02:
.

[00:09:05] Speaker 02:
I appreciate that, but the judge just needed to have a reasonable estimate, and I'm trying to figure out where it came from.

[00:09:11] Speaker 00:
It's not a loss to the bank, but it is a loss to the cardholders.

[00:09:15] Speaker 04:
It could have been a loss to the cardholders.

[00:09:18] Speaker 04:
Who knows?

[00:09:18] Speaker 04:
So one of the problems, Your Honor, is that we don't know how many cards were out there.

[00:09:23] Speaker 04:
When did those cards expire?

[00:09:25] Speaker 04:
Were people using the cards?

[00:09:26] Speaker 04:
Were they stuck in drawers?

[00:09:27] Speaker 04:
Were they never going to be used again?

[00:09:28] Speaker 04:
There was no evidence as to any of that.

[00:09:31] Speaker 04:
So theoretically, sure, it could have been a loss to the cardholders, but the government introduced no evidence at all of that.

[00:09:38] Speaker 04:
And again, any

[00:09:41] Speaker 04:
underfunding on the cards, there were express contractual provisions making Cardex viable.

[00:09:48] Speaker 00:
Are you telling me that the government didn't call any witness card holder to say, I had a card for $100 and then it was canceled?

[00:09:56] Speaker 04:
They did not call a single card holder witness, Your Honor.

[00:10:00] Speaker 02:
Okay.

[00:10:00] Speaker 02:
Counsel, you wanted to reserve five minutes.

[00:10:02] Speaker 02:
Thank you, Your Honor.

[00:10:03] Speaker ?:
You bet.

[00:10:12] Speaker 03:
Good morning.

[00:10:12] Speaker 03:
May it please the court.

[00:10:13] Speaker 03:
My name is Rob Reese.

[00:10:14] Speaker 03:
I represent the United States in this appeal.

[00:10:17] Speaker 03:
What I thought I would start with is the first issue that was raised about the contractual element that Mr. Safahi would like to interpose.

[00:10:25] Speaker 03:
And where I'd like to start is just with the evidence because I think it makes everything easier.

[00:10:30] Speaker 03:
That way we don't have to address our forfeiture argument or even whether it's an element.

[00:10:36] Speaker 03:
And the evidence was replete in this case that he in fact did possess

[00:10:41] Speaker 03:
the intent to defraud from the moment that he entered into the contract, which could just avoid these other issues.

[00:10:50] Speaker 03:
In addition to some of the evidence that we've pointed to in our briefing, for example, the extremely strong motive evidence and the $2.5 million that he owed to Key Bank, which in this particular case was an integral part of the fraud.

[00:11:04] Speaker 03:
In fact, one of those payments to Key Bank was one of the wires, then count three,

[00:11:11] Speaker 03:
Um, there's something that I didn't emphasize in my, um, briefing, but that I did want to bring up that's in the court's, uh, order of conviction on page 13.

[00:11:21] Speaker 03:
And that's in a exhibit presented by the defense in this case, exhibit a, which is, uh, one of the consultants who created the FOD program and the FOD program, the funding on demand program is the false set of books essentially that were created

[00:11:39] Speaker 03:
to report a lower balance to the bank.

[00:11:45] Speaker 03:
Right on line 16 of page 13, that consultant, Mony Nong, as introduced by the defense, was getting paid for work on the FOD program already by June 2013.

[00:12:00] Speaker 03:
That's the same month that the contract was signed.

[00:12:04] Speaker 03:
So in other words, the evidence clearly shows

[00:12:08] Speaker 03:
that at the time Safahi was causing the contract to be signed with Sunrise Banks in June 2013, he was already paying his consultant, Moni Nong, who testified at trial, money to create that system.

[00:12:22] Speaker 03:
So this court can simply avoid the issues brought by the defense just based on the evidence, which demonstrates clearly that he did in fact possess the intent to defraud Sunrise Banks

[00:12:35] Speaker 03:
from the very beginning and before he caused that contract.

[00:12:38] Speaker 00:
The FOD program was to report to the bank that the amount actually spent by the cardholder was all that had been received.

[00:12:50] Speaker 03:
Exactly.

[00:12:51] Speaker 03:
The FOD program, as I said, is really the false set of books.

[00:12:54] Speaker 03:
Now in this case, because they collected all the money on the cards from their clients, Safai and his company had to create a second set of books that accurately

[00:13:05] Speaker 03:
represented what they had collected so that the cardholders and the clients could see those balances.

[00:13:11] Speaker 03:
So the FOD was that second false set of books and that's in the excerpts of record I can point to as well.

[00:13:18] Speaker 03:
There's testimony in the excerpts about that exhibit A by the defense that was introduced by the defendant in this case.

[00:13:27] Speaker 00:
Now, going back to whether it's... Did that person testify at the trial?

[00:13:31] Speaker 03:
He did.

[00:13:32] Speaker 03:
Mone Nong was his name.

[00:13:33] Speaker 03:
He was a consultant.

[00:13:34] Speaker 00:
And did he testify that he was working on the FOD program before the contract was entered into between Sunrise and Safahi?

[00:13:44] Speaker 03:
The contract was entered into on June 21st, I believe, of 2013.

[00:13:51] Speaker 03:
And the invoices don't specify a particular date.

[00:13:54] Speaker 03:
But the invoices actually in Exhibit A go back.

[00:13:58] Speaker 00:
Well, you're talking about invoices from the man who was working on the FOD program.

[00:14:02] Speaker 03:
Correct.

[00:14:02] Speaker 00:
And what do the invoices say?

[00:14:04] Speaker 03:
Well, the invoice that's specifically referenced by the judge in her order says that he had a June 2013 invoice that specifically in the invoice details worked on FOD that very same month.

[00:14:22] Speaker 03:
Now, I don't think we have a particular day, but those invoices go back at least two months prior to that.

[00:14:28] Speaker 03:
They don't specify FOD in particular, they just say work referenced.

[00:14:33] Speaker 03:
But it only makes sense, especially on this court's review of the evidence taking all inferences towards the court who wrote the order of conviction and towards the government's evidence.

[00:14:43] Speaker 00:
What about the invoices tells me that this man was working on FOD rather than something else?

[00:14:49] Speaker 03:
Now, the particular invoice that Judge Ilston cites in her order, that June 2013 invoice, it references FOD.

[00:14:57] Speaker 03:
It actually says FOD on the invoice.

[00:14:59] Speaker 03:
And that's what she cites it for saying in her order.

[00:15:02] Speaker 03:
Going back to the question of whether this is an element, I'd just like to follow up on Judge Bea, your question about, doesn't this just erase a lot of criminal activity?

[00:15:13] Speaker 03:
And the answer is absolutely.

[00:15:15] Speaker 03:
Almost every employee in this country has an employment contract.

[00:15:19] Speaker 03:
And that would mean, for example, that any embezzlement is no longer a crime because they have a contract for a certain amount of pay.

[00:15:27] Speaker 03:
They've taken more than they were supposed to pay.

[00:15:30] Speaker 03:
But unless you can prove that back at the moment they were hired, uh, that they had the intent to embezzle from their employer, then they can't be guilty.

[00:15:40] Speaker 03:
So this, this bubble of innocence, uh, as you've pointed out is, is extremely troubling and more importantly doesn't exist.

[00:15:48] Speaker 03:
Um, there is no case law that the defendant has pointed to that suggests that this element exists anywhere in the law with the only cases that he cited to really being civil cases.

[00:15:59] Speaker 03:
Now they are adjacent to criminal cases in the sense that they might, one of them I believe is a civil Rico case, but no U S versus case that's ever said this before.

[00:16:09] Speaker 03:
And multiple ninth circuit cases that set forth the elements of wire fraud that never mentioned this.

[00:16:16] Speaker 03:
So it's just something that doesn't exist.

[00:16:18] Speaker 03:
It's a concern if it were to exist.

[00:16:22] Speaker 03:
One of the questions is, what is a contract and when would it count?

[00:16:26] Speaker 03:
Contracts can be oral, of course.

[00:16:28] Speaker 03:
Any defendant who, if this did exist, is now going to say, I had a contract.

[00:16:32] Speaker 03:
It may not have been written, but it existed.

[00:16:34] Speaker 03:
So you have to prove when my intent existed at the time of the oral contract that I'm asserting exists.

[00:16:44] Speaker 03:
What happens when contracts are amended?

[00:16:46] Speaker 03:
What happens when contracts are noticed to be in default, like in this case, when there is specific issues about the contract being noticed formally to the parties, and yet the theft still occurs, the fraud still occurs?

[00:17:03] Speaker 03:
In this case, of course, the money laundering conviction was the defendant at the very end of the case

[00:17:09] Speaker 03:
taking money even still after being told, formally notified of his breach of the contract, that he was still taking money to purchase his house.

[00:17:19] Speaker 03:
That's the money.

[00:17:19] Speaker 02:
Could you go to the loss amount, please?

[00:17:21] Speaker 02:
Yes, of course.

[00:17:22] Speaker 02:
Where that came from.

[00:17:23] Speaker 02:
There's testimony about $1.5 million, is that right?

[00:17:26] Speaker 02:
Or the amount of the breakage, percentage of the breakage, where do I get to $1.5 million?

[00:17:30] Speaker 03:
I don't have a site for the percentage of the breakage, which is, I think what you asked my colleague here.

[00:17:35] Speaker 03:
Um, but 10% sounds about right.

[00:17:37] Speaker 03:
We actually did both try the case.

[00:17:38] Speaker 03:
And so I'm sure we could find it.

[00:17:40] Speaker 02:
He thought there was 10% in the record somewhere in the testimony, but he also mentioned testimony of an IRS agent.

[00:17:45] Speaker 03:
Yes.

[00:17:46] Speaker 03:
Now that's a little different.

[00:17:47] Speaker 03:
So in the court's order of conviction, um, which comes directly from evidence submitted by Safahi himself, uh, it was a $2.7 million Delta.

[00:17:58] Speaker 03:
Our agent at trial testified that on a very much more of an accounting standpoint, when he went through all the bank accounts available to him, he found more than $1.5 million in money that was taken.

[00:18:11] Speaker 03:
Let me address for a minute the breakage.

[00:18:15] Speaker 02:
Oh, wait a minute.

[00:18:17] Speaker 02:
What do you mean?

[00:18:18] Speaker 02:
1.5 million, I think, was the total shortfall.

[00:18:22] Speaker 02:
But there was never an expectation that that was all going to be drawn down by the customers, right?

[00:18:26] Speaker 02:
That's the business model.

[00:18:27] Speaker 02:
Well, and so I'm trying to get back to 1.5 million and I'm not sure I understood your answer.

[00:18:33] Speaker 03:
So let me let me try to go back.

[00:18:35] Speaker 03:
So the 2.7 was the full Delta, right?

[00:18:39] Speaker 03:
So if I took 2.7 million dollars from his clients because he required them to fully fund the cards, right?

[00:18:45] Speaker 03:
and gave 2.7 million less.

[00:18:47] Speaker 02:
That's the part I do understand.

[00:18:48] Speaker 02:
But Safahi was going to get to keep part of that 2.7, even if everything had been on the up and up, if I understand the business model correctly, because there's this breakage and that's how he makes his money, right?

[00:18:57] Speaker 03:
I would disagree with that, Your Honor, because the day that he sent that 2.7 million delta, it was when he revealed his fraud to the bank, is the day or within a day or two of when he shut his business down.

[00:19:13] Speaker 03:
There was no business left to take that breakage.

[00:19:16] Speaker 02:
Okay, so we're getting our wires crossed here.

[00:19:19] Speaker 02:
I'm asking a question about, before we get to the facts of this case, just sort of how this business works when you do these prepaid debit cards.

[00:19:26] Speaker 02:
And I understood opposing counsel to tell me that the breakage is typically 10%.

[00:19:30] Speaker 03:
The breakage would typically be 10% for an ongoing business.

[00:19:35] Speaker 03:
Okay.

[00:19:35] Speaker 03:
That can be collected by the business in one of two ways.

[00:19:39] Speaker 03:
The first way would be pre-collecting the breakage in a partially funded contract.

[00:19:43] Speaker 03:
That's what he had with KeyBank the first time.

[00:19:45] Speaker 02:
That's the other business, yeah.

[00:19:47] Speaker 03:
Yeah, but he collected too much and that's why he had the two and a half million dollar deficit.

[00:19:52] Speaker 03:
Right.

[00:19:52] Speaker 03:
Sunrise Banks, which at trial said our own regulations require us to collect all of this.

[00:19:58] Speaker 02:
Up front.

[00:19:58] Speaker 03:
Up front.

[00:19:59] Speaker 02:
Yes.

[00:20:00] Speaker 03:
Fully funded business.

[00:20:01] Speaker 03:
The breakage doesn't exist until, and this is also in the record, until way later down the line, once a certain expiration date on the card has been reached and it is,

[00:20:13] Speaker 03:
effectively at that point considered unspent funds that have been forfeited.

[00:20:19] Speaker 00:
Then Sunrise has to give it back to Kardex.

[00:20:21] Speaker 03:
Then Sunrise would have to give it back to Kardex.

[00:20:23] Speaker 03:
But in this case, because it was a fully funded contract, he wasn't entitled to the breakage until a later point in time.

[00:20:31] Speaker 03:
but he shut his business down.

[00:20:32] Speaker 03:
So he was entitled to no breakage, and he shut his business down with a humongous debt.

[00:20:37] Speaker 02:
But your IRS agent, it sounds like, didn't testify to 2.7.

[00:20:40] Speaker 02:
He testified to 1.5?

[00:20:42] Speaker 03:
Correct.

[00:20:43] Speaker 03:
More than 1.5.

[00:20:44] Speaker 03:
And the 1.5 that he testified to was a much more detailed, in real time, like an accounting analysis.

[00:20:53] Speaker 02:
The point that I want to make- But in real time, do you mean he was- forgive me for interrupting.

[00:20:57] Speaker 02:
So was the snapshot, as of the day that the business was shut down?

[00:21:01] Speaker 03:
The 2.7 was their own accounting when he basically took the amount he was reporting to his customers versus the account he gave to the bank.

[00:21:09] Speaker 03:
That's 2.7.

[00:21:10] Speaker 03:
Our agent went into the bank accounts in an accounting style fashion and tried to recreate in a line item how much money did he take in?

[00:21:22] Speaker 03:
trying to strip out anything that he was deserved.

[00:21:24] Speaker 02:
Counsel, that's what I do understand.

[00:21:26] Speaker 02:
I just want to know when the IRS took that in real time, when you say in real time, do you mean it was a snapshot as of the day the business was shut down?

[00:21:33] Speaker 03:
I don't know if it was the day that, but in post hoc, yes.

[00:21:37] Speaker 03:
After everything was shut down, once the crime was being investigated and by the time it went to trial, he had done an accounting of more than $1.5 million worth of actual losses

[00:21:48] Speaker 03:
taking anything, any benefit for the defense out of the side.

[00:21:52] Speaker 03:
Now, the point that I do want to make, though, is that both of those are greater than 1.5 million, which is the threshold at which Judge Elston declined to find and instead found that it was somewhat less than 1.5 million.

[00:22:09] Speaker 03:
which was two levels less under the guidelines.

[00:22:12] Speaker 01:
Right, but I think the concern is that she didn't provide any reasons for that.

[00:22:16] Speaker 01:
She just said it was prudent.

[00:22:19] Speaker 01:
And so how do we get to 1.5?

[00:22:21] Speaker 01:
I know you can argue well.

[00:22:23] Speaker 01:
The agent said 1.55.

[00:22:24] Speaker 01:
There's 2.7 that you argued for.

[00:22:28] Speaker 01:
But where do we get the justification for 1.5?

[00:22:32] Speaker 03:
I think that in this case, given that the record shows that it's at least one point, more than 1.5, the 2.7 is in the order of conviction, this court can say it's a harmless error.

[00:22:46] Speaker 03:
And given that if this were to be remand, she can't really give more time than she already gave, that it's truly harmless.

[00:22:54] Speaker 03:
She found a level that was lower.

[00:22:57] Speaker 03:
than what the record established.

[00:23:00] Speaker 03:
She believed that that was prudent.

[00:23:02] Speaker 03:
That resulted in lower guidelines, which she went even below that.

[00:23:06] Speaker 03:
And so therefore, if there were to be a remand, at best, he would have a higher guidelines amount.

[00:23:13] Speaker 01:
Yeah, I understand the practical concerns.

[00:23:14] Speaker 01:
They just, if we're trying to require district judges to provide a reason for the loss amount, and the reason is prudence,

[00:23:28] Speaker 01:
Only, I understand why she did it.

[00:23:34] Speaker 01:
I'm just not sure that the record justifies a 1.5.

[00:23:37] Speaker 01:
And I accept your argument that evidence may indicate much more than that.

[00:23:44] Speaker 03:
And I think it does.

[00:23:45] Speaker 03:
And certainly, I expressed some frustration myself at the sentencing.

[00:23:50] Speaker 03:
That doesn't mean that it shouldn't be affirmed.

[00:23:53] Speaker 03:
And of course, the arguments that we made below

[00:23:57] Speaker 03:
now, I think, really are harmless.

[00:23:59] Speaker 03:
And we've let that go.

[00:24:00] Speaker 03:
We didn't appeal the loss amount on our end.

[00:24:04] Speaker 03:
And because of the manner in which she can't give him really any more time than she did, I think it is truly harmless, as frustrating as it certainly it was to the government at the sentencing.

[00:24:19] Speaker 03:
I did want to give just a moment on the constructive amendment, and only to point out

[00:24:25] Speaker 03:
as it relates back to the issue of the contract element, it's a little ironic that Safahi's argument is, I signed a contract so I can't be guilty, but I didn't sign a contract, therefore the indictment was amended or varied from.

[00:24:43] Speaker 03:
I did want to point out, aside from that irony about whether he signed the contract or not, which would be an issue in any case if this court were to find that to be an element,

[00:24:54] Speaker 03:
That the Gord contract is not in the indictment.

[00:24:58] Speaker 03:
It's an agreement.

[00:24:59] Speaker 03:
Every fraud has a pretense or a premise.

[00:25:03] Speaker 03:
And in this case, the agreement and the pretense, the premise was that he would pay them in full.

[00:25:08] Speaker 03:
And that was, the record is overwhelmingly supports that that was the pretense.

[00:25:16] Speaker 03:
That was the agreement.

[00:25:17] Speaker 03:
He was asked multiple times, even in person, aren't you paying in full?

[00:25:22] Speaker 03:
Absolutely.

[00:25:22] Speaker 03:
Testimony of trial.

[00:25:24] Speaker 03:
Like, did he seem surprised that that was the agreement or that that was the understanding?

[00:25:27] Speaker 03:
Not at all.

[00:25:28] Speaker 03:
He just simply said he paid even more.

[00:25:31] Speaker 02:
Thank you, counsel.

[00:25:31] Speaker 02:
Thank you very much.

[00:25:32] Speaker 02:
Appreciate your advocacy.

[00:25:38] Speaker 04:
Your honor, the record site for the case agent's testimony is 2ER-261-262.

[00:25:43] Speaker 04:
2ER-261-262.

[00:25:45] Speaker 04:
And he testified that he went through the bank accounts for the entire duration of the contract, November 2013 through September 2014, and that was the delta he came up with.

[00:25:56] Speaker 04:
So it was not a snapshot.

[00:25:58] Speaker 04:
It was his accounting of the entire amount.

[00:26:01] Speaker 02:
Thank you.

[00:26:02] Speaker 04:
far more reliable number than the $2.7 million figure that no one could verify.

[00:26:08] Speaker 04:
Bank couldn't verify it.

[00:26:09] Speaker 04:
The creator of the software couldn't verify it.

[00:26:12] Speaker 04:
So that number, we don't know where it came from.

[00:26:14] Speaker 04:
It was spit out by a piece of software that Mr. Safahi, by the way, did not create.

[00:26:19] Speaker 04:
As for the breakage, the 10%, I was mistaken, relates to the average fees that Cardex received.

[00:26:27] Speaker 04:
There's, I don't think, any evidence in the record as to what breakage typically was.

[00:26:31] Speaker 02:
Well, that explains why I can't find it.

[00:26:32] Speaker 02:
Thank you.

[00:26:33] Speaker 04:
You're welcome, Your Honor.

[00:26:35] Speaker 04:
Now, as to loss amount, again, the 2.7 figure is potential loss.

[00:26:41] Speaker 04:
And the district court recognized that in her order.

[00:26:43] Speaker 04:
That was potentially what the bank was going to have to spend on cards.

[00:26:47] Speaker 04:
But it does not constitute actual loss.

[00:26:50] Speaker 04:
The bank shut the cards down within 72 hours of learning

[00:26:54] Speaker 04:
of receiving that report.

[00:26:57] Speaker 04:
So the most that the bank's actual loss could have been was any spends on the cards in those 72 hours.

[00:27:04] Speaker 04:
We have no idea what that is.

[00:27:05] Speaker 04:
There was no evidence submitted in the record on that.

[00:27:09] Speaker 04:
So I don't see how the district court could have concluded that the damages to the bank were anything in reality.

[00:27:20] Speaker 04:
And I just want to go back to the FOD issue and the software creators testimony.

[00:27:25] Speaker 04:
He did not testify at trial that he was asked to create FOD before the contract was signed.

[00:27:31] Speaker 04:
The record is silent on that.

[00:27:32] Speaker 04:
And there's no evidence.

[00:27:33] Speaker 02:
There is an invoice that says FOD the same month, isn't there?

[00:27:36] Speaker 04:
Same month, but we don't know if that was before or after the contract was.

[00:27:40] Speaker 02:
Don't we construe the evidence in light most favorable to the government?

[00:27:44] Speaker 04:
Well, it's an absence of evidence here.

[00:27:46] Speaker 04:
I mean, I don't know how the court could conclude that the FOD work began before the contract was signed if the evidence doesn't say that.

[00:27:56] Speaker 04:
It says it was sometime in June, contract signed June 21.

[00:27:59] Speaker 04:
All right.

[00:28:00] Speaker 04:
That would just have to be an inference that the court would have to make without any evidentiary basis.

[00:28:07] Speaker 04:
And I do want to respond to the government's claim that we're trying to add another element.

[00:28:11] Speaker 04:
I suspect the government made the same argument 25 years ago when the Supreme Court decided that the fraud statutes contain a materiality requirement.

[00:28:21] Speaker 04:
And the Supreme Court rejected that and said, yes, they do, even though the statutes don't contain the word material.

[00:28:27] Speaker 04:
We're going to look to common law.

[00:28:29] Speaker 04:
Common law fraud required that misrepresentations be material.

[00:28:33] Speaker 04:
The Supreme Court therefore adopted that

[00:28:35] Speaker 04:
and we now recognize the fraud statutes have a materiality requirement.

[00:28:40] Speaker 04:
The same applies with fraud where it's premised on the basis of a contract breach.

[00:28:45] Speaker 04:
And we cite a number of cases to suggest that that's exactly what common law held.

[00:28:53] Speaker 04:
We know that the Second Circuit and the Seventh Circuit have both recognized that, primarily in the civil context.

[00:29:01] Speaker 04:
But if it can't give rise to civil fraud, then certainly it can't give rise to criminal fraud.

[00:29:07] Speaker 01:
So what do you make of the district court's observation in denying bail, pending appeal, that the fraudulent misrepresentation consisted of ongoing misrepresentations and not merely a violation of the contract?

[00:29:20] Speaker 04:
Well, that the whole scheme to defraud

[00:29:23] Speaker 01:
Well, I know, but I mean, that we're reviewing the district court decision and she says, no, there were misrepresentations after, the convictions were based on misrepresentations made after it, not just the violation of the contract.

[00:29:38] Speaker 04:
The misrepresentations related specifically to what service was being provided under the contract, whether it was full funding or partial funding, and the misrepresentations

[00:29:48] Speaker 04:
directly related to whether full funding was being provided.

[00:29:51] Speaker 04:
So there's no way to separate the misrepresentations from performance under the contract, which makes this far different than the example my colleague used of embezzlement in employment situations.

[00:30:02] Speaker 04:
There you have straight theft.

[00:30:04] Speaker 04:
The employee is not claiming additional pay owed.

[00:30:08] Speaker 04:
He's stealing from the company.

[00:30:09] Speaker 04:
No one doubts that that's a crime.

[00:30:11] Speaker 04:
Here, there's no independent crime.

[00:30:14] Speaker 04:
He's providing partial funding.

[00:30:17] Speaker 04:
The contract arguably required full funding.

[00:30:21] Speaker 04:
Other than that, there's no crime.

[00:30:23] Speaker 04:
He's making misrepresentations about it, but he's making misrepresentations about performance of a contractual provision.

[00:30:30] Speaker 04:
And because the government failed to prove fraudulent intent at the time the contract was formed, again, no evidence Mr. Safahi even knew about the contract.

[00:30:43] Speaker 04:
employees until December 2013 and no evidence that he had any communications with his own employees directing them to enter into the contract at that time.

[00:30:53] Speaker 02:
Thank you both.

[00:30:54] Speaker 02:
We'll take that case under advisement and we'll stand in recess for the day.