Knowingly, Willfully and Materiality

Knowingly, Willfully and Materiality

In United States v. Phillips, ___ F.3d ___, 2013 U.S. App. LEXIS 18430 (7th Cir. 2013) (en banc), here, the Seventh Circuit reversed convictions under "18 U.S.C. § 1014 [enhanced version available to subscribers], which criminalizes 'knowingly mak[ing] any false statement ... for the purpose of influencing in any way the action of' any specified private and public entity that provides, or regulates the provision of, financial services; among the entities are federally insured banks." The charged misconduct, as submitted to the jury, was lying on the loan application signed by one of the defendants and submitted to a lender which blatantly exploited so-called "liar's loans" -- stated income loans without regard to whether the income was correctly stated because the loans would then be packaged as securities, thus transferring the risk of default from the nominal lender to unwitting investors. (This genre of loan was at the center of the financial crisis starting in 2008.) There is no question that, on an objective level, the information in the loan application the signing defendant signed and submitted to the bank was incorrect. The defendants wanted to show, however, that based on the information they received from the loan broker, the information requested used terms of art (e.g., the stated income of the applicant could include the income of other persons who will contribute to servicing the loan) and hence they (1) did not make false statements at all and certainly did not knowingly do so for the purpose influencing the loan. The trial judge excluded the testimony. The Seventh reversed in an opinion by Judge Posner [enhanced version available to subscribers].

I am going to essentially quote Judge Posner's reasoning in full. I think it is helpful to focus on the tax crime discussion I include after the quote:

We take up the issue of influencing first, and then the issue of knowing falsehoods. Suppose you're an actress and you habitually subtract three years from your true age because you're worried about movie producers' discriminating against aging actresses. You're 40 but pretend to be 37. You know the bank doesn't care whether you're 40 or 37—you're wealthy and the bank is eager to have you as a customer—but you don't like your true age to appear on any document; a bank employee might read it and discover the lie and post his discovery on Facebook or Twitter, and within hours the whole world would be privy to your secret. You would have made a knowingly false statement on your bank application by listing your age as 37, and rather than just pinning the application to your wall you had submitted it to the bank. Under the district judge's interpretation of section 1014—an erroneous interpretation that warped the trial in this case—you would be guilty of a felony punishable by a prison sentence of up to 30 years and a maximum fine of up to $1,000,000.

View Jack Townsend's opinion in its entirety on the Federal Tax Crimes blog site.

For additional insight, explore Tax Crimes, authored by Jack Townsend and available at the LexisNexis® Store


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