U.S. v. Bailey

• Decision Date: 20 October 1994
• Docket Number: No. 92-50721,92-50721
• Citation: 41 F.3d 413
• Parties: UNITED STATES of America, Plaintiff-Appellant, v. Kenneth Steven BAILEY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 413

41 F.3d 413

UNITED STATES of America, Plaintiff-Appellant, v. Kenneth Steven BAILEY, Defendant-Appellee.

No. 92-50721.

United States Court of Appeals Ninth Circuit.

Argued and Submitted March 8, 1994.

Decided Oct. 20, 1994.

Miriam Krinsky, Asst. U.S. Atty., Los Angeles, CA, for plaintiff-appellant.

Mary F. Gibbons, Los Angeles, CA, for defendant-appellee.

Appeal from the United States District Court for the Central District of California.

Before: WIGGINS, T.G. NELSON, Circuit Judges, and REED, Jr., ^* District Judge.

WIGGINS, Circuit Judge:

Appellant United States of America (the "government") appeals the acquittal of Kenneth Steven Bailey ("Defendant") of charges involving production of, and trafficking in, counterfeit access devices in violation of 18 U.S.C. Sec. 1029(a). We have jurisdiction pursuant to 28 U.S.C. Sec. 1291 and reverse the district court.

I. Background

A. Facts

A cellular phone places a call by transmitting its permanently assigned identification number (known as the electronic serial number or "ESN"), its assigned phone number (the Mobile Identification Number or "MIN"), and the number being called to a nearby antenna or "cell." For a local customer, the local network confirms that the ESN and MIN match before completing the call.

To accommodate customers out of their service area, local cellular networks permit phones other than those subscribing to the local service to complete calls in "roaming" mode. At the time of Defendant's activities, roaming mode was more vulnerable to fraud than was the service to local subscribers. When a call was placed by a phone with an out-of-area MIN, the local service would first determine whether there was a roaming agreement between the local carrier and the carrier responsible for the MIN (the "distant carrier"); if there was, the local carrier would connect the call unless the ESN was found in a list of invalid ESNs, known as the "negative file." In roaming mode, the local carrier could not confirm that the ESN and the MIN matched.

Defendant modified cellular telephones so as to fool the local network into permitting calls placed by those phones to be completed in roaming mode, even though the call could never be billed. This sort of scheme is known in the industry as "tumbling the ESN." The process involves altering the programming embedded in the hardware of the telephone to cause the phone to send out random ESNs. By changing the MIN in the phone to one in another area, the user could force the phone to place calls in roaming mode. Then, by transmitting any ESN not listed in the negative file, the user could trick the local carrier into connecting the call. The liability of the distant carrier for calls by "tumbler" phones is not entirely clear. ¹ We assume solely for the sake of argument that the local carrier is not reimbursed by the distant carrier for such calls because the local carrier cannot establish that the call was made by a valid subscriber to the distant carrier's service.

Defendant read the program in the phone and rewrote it so that it randomly changed the ESN. He then encoded the program ("burned" it) into new chips ("EPROMs") that could replace the chips in the phones. Defendant was arrested after selling five of the modified chips to an undercover Secret Service agent. Defendant consented to a search of his motel room, which produced materials and equipment used to produce the chips, including extra chips, computer software, a data erase clip used to erase chips, and a receipt for purchase of Mitsubishi cellular phones. He admitted that he had produced and sold some 150 chips with his program to override the internal security program of the phone. The chips sold to the Secret Service agent contained modified versions of the original programs on the chips installed in Mitsubishi phones.

B. Prior Proceedings

Defendant was indicted on January 22, 1991, for manufacturing and trafficking in counterfeit access devices, in violation of 18 U.S.C. Sec. 1029(a)(1), and possession of equipment to make such devices, in violation of 18 U.S.C. Sec. 1029(a)(4). A superseding indictment also charged attempted manufacture of, and traffic in, counterfeit access devices in count one. During trial, Defendant moved for acquittal on the ground that the computer chips in question were not "counterfeit access devices" within the meaning of the statute. The motion was denied. On June 1, 1992, a jury convicted Defendant of both counts. Defendant made a Rule 29 motion for a judgment of acquittal on the same basis as his earlier motion. The district court granted that motion on November 9, 1992. The government timely appeals, joined by two amici, the Cellular Telecommunications Industry Association and the Communications Fraud Control Association, and challenges the district court's interpretation of the statute.

II. Discussion

A. Issue on Appeal

We review de novo the district court's interpretation of section 1029. United States v. Brannan, 898 F.2d 107, 109 (9th Cir.), cert. denied, 498 U.S. 833, 111 S.Ct. 100, 112 L.Ed.2d 71 (1990). That statute provides that "[w]hoever ... knowingly and with intent to defraud produces, uses or traffics in one or more counterfeit access devices" is guilty of an offense if it affects interstate commerce. 18 U.S.C. Sec. 1029(a)(1). "Access device" is defined as "any card, plate, code, account number or other means of account access that can be used, alone or in conjunction with another access device, to obtain money, goods, services, or any other thing of value, or that can be used to initiate a transfer of funds (other than a transfer originated solely by paper instrument)." 18 U.S.C. Sec. 1029(e)(1). " '[C]ounterfeit access device' means any access device that is counterfeit, fictitious, altered, or forged, or an identifiable component of an access device or a counterfeit access device." 18 U.S.C. Sec. 1029(e)(2).

The district court decided that Defendant's handiwork did not constitute an "access device" within the meaning of the statute. The court explained its conclusion by stating that

[w]hat legislative history there is indicates that the purpose of this legislation was to prevent access to accounts.... [I]f you follow the Government's line of reasoning then even a crowbar could be an access device because you could use it to pry open an ATM machine. I mean that's a line of--that's a conclusion if you follow the Government's line of thinking, anything that you can use to get into a system that has accounts is an access device. And a crowbar would fit that definition perfectly as much as an EPROM.

The district court seemed persuaded by the idea that there was no evidence that the distant carrier ever suffered a direct accounting loss (i.e., had to disburse funds) due to the tumbling. It seemed to believe that the inability to bill for the calls was just a failure to collect additional revenue from potential customers, and that there was no additional cost to providing the additional calls. That characterization of the transaction apparently led the court to follow United States v. McNutt, 908 F.2d 561 (10th Cir.1990), cert. denied, 498 U.S. 1084, 111 S.Ct. 955, 112 L.Ed.2d 1043 (1991).

McNutt involved the sale of satellite TV descramblers that used electronic addresses "cloned" from a legitimate unit to allow decryption of pay television services. The Tenth Circuit ruled that such activity did not violate Sec. 1029 because the cloned descramblers did not actually debit the accounts of legitimate subscribers and the statute did not protect against indirect economic harms caused by "free riding." 908 F.2d at 564. More recently, the Tenth Circuit itself has relied on McNutt to hold that the modification of cellular phones to permit "tumbling" is not violative of Sec. 1029. United States v. Brady, 13 F.3d 334 (10th Cir.1993).

We disagree with the conclusion of the district court. The district court erred at two points in its conclusion. First, the phones do access an account, and it is irrelevant that no third party ever ended up footing the bill. Second, its characterization of the transaction was incorrect (there was a cost), and McNutt is properly distinguished.

B. Account

On appeal, Defendant argues that no "account" was involved because the ESNs broadcast by his invention did not correspond to accounts of real customers. The government responds that the statute was not meant to be so narrowly construed. The statute, unfortunately, does not define "account." The McNutt court looked to the dictionary and came up with a definition: "a formal record of debits and credits." 908 F.2d at 563 (quoting Random House Dictionary of the English Language 13 (2d ed. 1987)). We feel that definition does not really capture the meaning of the word as used in the statute. After all, it seems unlikely that Congress was worried about the literal numbers on a ledger; instead, the purpose of the statute is to deal with the abuse of new technologies that increasingly allow individuals and businesses access to goods and services without immediate payment by cash or familiar, paper instruments. When the statute refers to "account access," it evidently means access to the privileges permitted by virtue of the maintenance of an account. An alternative dictionary definition provides a better starting point for our purposes. "[A] formal business arrangement providing for regular dealings or services (as banking, advertisement, or store credit) and involving the maintenance of an account." Webster's Ninth New Collegiate Dictionary 50 (1984). See also Black's Law Dictionary 18 (6th ed. 1990) ("A detailed statement of the mutual demands in the nature of debit and credit between parties, arising out of contracts or some fiduciary relation."). In other words, an account is a contractual relationship that makes possible the provision of goods, services, or money based on payment, or the expectation of payment, at some...