Fraud Conviction Overturned in Connection with Executive's 401(k) Withdrawals

(Parker Tax Publishing September 2020)

A district court acquitted a company's executive vice president on charges of wire fraud in connection with false statements she made to the company's 401(k) plan administrator in order to receive early withdrawals from her 401(k) plan. The court concluded that, to be guilty of wire fraud, an individual must deprive someone of a property right by dishonest methods, and the court found that the government failed to show that another individual or entity had property rights in the vice president's 401(k) plan assets so that the vice president's deceit to obtain these funds deprived that individual or entity of a property right. U.S. v. Barringer, 2020 PTC 259 (W.D. Va. 2020).

Background

Teresa Barringer was the executive vice president of J & R manufacturing and in charge of the day-to-day operations of the company. She received a salary of as much as $250,000 per year. Her responsibilities ranged from managing vendor and customer communications to handling the business's bookkeeping. Starting from at least 2012, the business began to have financial liquidity issues. Barringer discussed potential solutions with the individual who owned J & R. She recommended reducing the workforce, adjusting the supply orders, or opening a line of credit with a lender. Barringer and the owner could not come to an agreement, and this indecision amplified the business' financial woes. Barringer eventually chose to use her personal funds to keep the business afloat, motivated by her desire to keep her well-paying job.

In 2014, Barringer fell behind on paying the company's payroll taxes to the IRS. As funds became tighter, and after the company received a notification from the IRS that it owed the taxes, Barringer decided to withdraw funds from her vested account in the company's 401(k) retirement plan. Barringer reached out to the provider of J & R's 401(k) plan AXA Equitable Life Insurance Company (AXA) for guidance on how to withdraw money from her account. She explained that she needed the funds to keep J & R in operation, but she was told that was not a permissible reason to make a withdrawal from her account. Rather than accept that answer, Barringer faxed forms to AXA seeking a hardship withdrawal on November 20, 2014. She claimed in her application that she needed the money to prevent foreclosure on her primary

residence, which was a permissible reason for withdrawal, although in fact she was ahead on her mortgage payments. Barringer signed the application as both the plan administrator who had the legal obligation to verify the accuracy of a participant's hardship withdrawal request and as a plan participant.

After receiving the distribution from her 401(k) account, rather than pay the required payroll taxes, Barringer used the money to pay company vendors and reimburse herself for the prior loans she had made to the company. These decisions led to the payroll taxes not being paid for the first three quarters of 2016. On September 2, 2016, she sought to withdraw the remainder of her 401(k) account. She did not claim a hardship withdrawal as before but instead claimed that she had left her job at J & R on August 31, 2016. However, in fact, she continued to

work at the business until October 28, 2016.

Barringer was interviewed by federal officers on July 25, 2019. During this interview, she repeated the false statements that she had made on the applications to withdraw funds from her 401(k) account. She also lied when she told the agents that she had not gotten paid after August 31, 2016, when in fact she had received checks from the company after that date. Barringer was indicted on four counts for willfully failing to pay over payroll taxes for the first three quarters of 2016. She was also charged with two counts of wire fraud for making false statements to AXA in order to obtain funds from her 401(k) account. Finally, Barringer was indicted on three counts for making false statements to federal agents. A jury convicted Barringer on all counts.

In U.S. v. Wynn, 684 F.3d 473 (4th Cir. 2012), the Fourth Circuit held that, to obtain a conviction for wire fraud under 18 U.S.C. Sec. 1343, the government must show that an individual (1) devised or intended to devise a scheme to defraud, and (2) used the mail or wire communications in furtherance of the scheme. The Supreme Court held in Carpenter v. U.S., 484 U.S. 19 (1987) that the element "to defraud" has "the common understanding of wronging one in his or her property rights by dishonest methods or schemes, and usually means the deprivation of something of value by trick, deceit, chicane, or overreaching."

Barringer filed a motion seeking a judgment of acquittal or a new trial. She argued that the government did not present evidence that she deprived, or intended to deprive, another individual or entity of something of value as is required to prove wire fraud because the government did not present evidence of who or what might have been deprived of a property interest by Barringer's deception. Barringer claimed that she believed she was the sole owner of her 401(k) plan assets. Barringer's motion for a new trial was based on a jury instruction indicating that a 401(k) plan has property rights in the assets of the plan until withdrawal occurs. As to the tax convictions, Barringer contended that the court erred by refusing to instruct the jury on the good faith defense, even though the court had provided such an instruction on the wire fraud charges. The government responded to Barringer's argument regarding the wire fraud convictions by asserting that AXA's relationship with J & R qualified as a property interest because AXA could be penalized by the IRS for releasing the 401(k) funds based on a fraudulent hardship withdrawal.

Analysis

The district court granted acquittal as to Barringer's wire fraud convictions but denied her motion for a new trial and upheld her other convictions. The court found that, while the record supported Barringer's convictions for her failure to pay payroll taxes and her false statements to the federal agents, the government did not show that another individual or entity had property rights in Barringer's 401(k) assets so that her deceit to obtain these funds deprived that other individual or entity of a property right.

The court held that AXA's contractual interest was not a qualifying property interest for purposes of the wire fraud statute. The court noted that the government did not claim AXA was the victim of a fraud or had suffered any loss or financial hardship due to Barringer's misrepresentations. The court observed that it was possible that the trustee designated by J & R, Reliance Trust Company, may have had a property interest in the 401(k) plan, but the court found that the government did not introduce any evidence about that relationship, nor was there any evidence that any misrepresentations were made to the trustee. The court therefore concluded that the government failed to prove an essential element of wire fraud - that someone was deprived of a property interest due to Barringer's misrepresentations.

The court found that its jury instruction that a 401(k) has property rights in the assets of a plan until withdrawal was erroneous but that, because the court was setting aside the wire fraud convictions, the erroneous instruction was harmless. The court also found that its decision not to include the good faith defense in its jury instruction regarding the tax charges was correct because it had found that Barringer's admissions of willfulness during both her witness interview and her trial testimony provided willfulness and negated any possible good faith defense.

For a discussion of permitted distributions from 401(k) plans, see Parker Tax ¶131,125.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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