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April 11 — A man who misled the parties in a real estate deal about the other side's underlying interest in the deal didn't violate the federal mail and wire fraud laws, a divided U.S. Court of Appeals for the Seventh Circuit ruled April 8.
The decision is significant because it clarifies that buyers and sellers don't break the law if they engage in “sharp dealing” by deceiving each other about their true preferences, priorities or the bottom-line terms they say they are willing to accept.
“Congress could not have meant to criminalize deceptive misstatements or omissions about a buyer's or seller's negotiating positions,” the court said in an opinion by Judge David F. Hamilton.
Deception in commercial negotiations certainly can support a mail or wire fraud prosecution if a party misrepresents a material fact, the court said.
“For example, a seller or his agent may not falsely tell potential buyers or investors that a piece of property has no history of environmental problems if soil and groundwater contamination on the property was discovered the year before,” the court said.
On the other hand, not every instance of sharp dealing or unethical conduct qualifies as a scheme or artifice to defraud, the court said.“Congress could not have meant to criminalize deceptive misstatements or omissionsabout a buyer's or seller's negotiating positions.”
For example, it said, suppose a seller is willing to accept $28,000 for a car listed at $32,000; and a buyer is actually willing to pay $32,000, but he offers just $28,000.
Suppose further the buyer and seller barter back-and-forth with untruthful expressions like “I won't pay more than $29,000,”“I'll take $31,000 but not a penny less,” or “this is my final offer” and the parties ultimately settle on a price of $30,000, the court said.
Each side undoubtedly gained from the deliberate misrepresentations about their respective negotiating positions, the court said, but they clearly are not both guilty of defrauding the other of $2,000 because negotiating parties—particularly the sophisticated businessmen in this case—don't expect total candor about negotiating positions, “as distinct from facts and promises about future behavior.”
The alleged deception in this case falls into this “negotiating position” category, the court said.
David Weimert arranged a sale of his employer's stake in a real estate development to its partner in the project, the Burke Group. Weimert persuaded Burke to allow him to buy a minority interest in the property by falsely telling Burke that this would match the terms being offered by another potential seller, according to the court.Source Documents
Burke took the deal reluctantly because it didn't want to be partners with this other buyer, the court said.
In turn, Weimert told his superiors that Burke was only interested in the deal if Weimert took the ownership stake. The board waived the conflict based on Weimert being both a buyer and seller, and it too signed off on the deal.
While later testifying before the Securities and Exchange Commission, Weimert admitted that Burke had not insisted on his involvement and he was convicted on five counts of wire fraud, under 18 U.S.C. § 1343.
“The government's evidence of deception—all of it—addressed not material facts or promises but rather parties' negotiating positions, which are not material for purposes of mail and wire fraud,” the court said.
Hamilton tipped his hand at oral argument when he stubbornly pressed the government to explain why Weimert's “bluffing” about “what terms are important in this deal to whom” qualified as wire fraud.
When buyers and sellers negotiate prices and other terms, they frequently misstate their negotiating position to gain leverage in the deal, Hamilton said.
“These are capitalist acts among consenting adults,” Hamilton observed.
Hamilton told the government that this prosecution was “breaking new ground” regarding a statute that is already “dangerously broad.”
Judge William J. Bauer joined Hamilton's opinion.
In dissent, Judge Joel M. Flaum argued that Weimert committed wire fraud because he deceived his own company and took a portion of the deal for himself.
This wasn't a routine arms-length deal among independent parties, but instead involved a company executive misleading his own board of directors, Flaum said.
But the majority stressed that Weimert had made it clear that he was negotiating out of self-interest and had disclosed his conflict.
Weimert's dealings were “sharp and self-interested,” but they didn't amount to wire fraud, the majority said.
Stephen J. Meyer, Madison, Wis., argued on behalf of Weimert. Antonio M. Trillo, of the U.S. Attorney's Office, Madison, argued on behalf of the government.
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