Legal Briefs

Ellison v. United States

By Paul Kamenar, Ilya Shapiro, and Manuel Klausner
March 14, 2018

Can the government convict you of a crime without showing you had any understanding of the wrongdoing? Mark Ellison was convicted without any such showing and is asking the Supreme Court to take his case.

The case arises out of the tumult of 2008. A real estate company called DBSI went under during the Great Recession, like many other real estate companies at the time. But while for many this unhappy moment meant solely financial losses, for Ellison and his codefendants it meant criminal charges. Section 10(b) of the federal securities law outlaws “any manipulative or deceptive device” used to sell securities. Combined with SEC Rule 10(b)-5, this provides the primary avenue by which the government punishes securities fraud.

The government claims that Ellison and his coworkers defrauded DBSI’s customers in selling them the real-estate investment vehicles that ultimately went bust. But the jury found each innocent on most of the charges, convicting only under the “catch-all” provision of Rule 10(b)-5(c), which outlaws any fraud done “willfully”—but according to the Ninth Circuit ‘willfully’ in this context “does not require that the defendant know that the conduct was unlawful.”

This runs contrary to traditional principles of criminal law. Normally crimes require not just a bad act but also a culpable mental state, what lawyers call mens rea. The difference between murder and manslaughter, for example, is typically whether the perpetrator intended to cause the death or not. But too often these days the government has dispensed with or watered down this traditional requirement, exposing more and more citizens to criminal liability for conduct it is less and less clear should be criminalized.

In addition to watering down the mens rea requirement, the court of appeals determined that the threshold for what did or did not rise to the level of fraud depended on an open-ended test of whether a hypothetical reasonable investor might consider the information “important” in making an investment decision. The Supreme Court and most other circuits, however, have maintained that courts must consider whether, after considering the “total mix” of all the information provided in a case-specific context, the piece of information at issue was “material” to an actual investor’s actual investment decision. Following a test of materiality based on whether some theorized investor might possibly sorta-kinda-coulda thought the information was maybe material expands criminal liability past the horizon.

This case represents yet another example of the overcriminalization that has run rampant throughout our legal system. Defense lawyer and Cato adjunct scholar Harvey Silverglate has estimated that each of us unwittingly commits three felonies a day. When criminality is that capricious, the government can exploit it at its whim, punishing those who displease it through selective prosecution. This is an arrangement more befitting a banana republic than the land of the free.

Cato, joined by the Reason Foundation and four law professors, has filed a brief supporting Ellison’s petition. The Supreme Court should take Ellison v. United States and begin to roll back the rising tide of overcriminalization that threatens the liberty of every citizen.

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