Monday, May 15th, 2023

Supreme Court Reverses Two Second Circuit Fraud Decisions

On May 11, 2023, the Supreme Court decided Ciminelli v. United States, 21-1158 and Percoco v. United States, No. 21-1158, reversing the Second Circuit in two fraud decisions  resulting from the multi-defendant trial of alleged corruption surrounding the Cuomo administration. The Supreme Court continues its curtailment of amorphous theories of federal fraud to prosecute government corruption cases.

In Ciminelli, the Supreme Court rejected the Second Circuit’s “right to control” theory of  federal fraud, in which “property” under the fraud statutes “includes intangible interests such as the right to control the use of one’s assets.” Under this theory, Ciminelli was convicted of wire fraud for a bid-rigging scheme on the theory that he deprived the victim of “potentially valuable economic information” “necessary to make discretionary economic decisions.” Op. at 1-4. The Court reversed his conviction.

The Supreme Court reiterated the rule of Cleveland v. United States, 531 U.S. 12, 14 (2000) that “the federal fraud statutes criminalize only schemes to deprive people of traditional property interests.” “Because ‘potentially valuable economic information’ ‘necessary to make discretionary economic decisions’ is not a traditional property interest,” the Court held that “the right-to-control theory is not a valid basis for liability” under the wire fraud statute. Op. at 1-2.

The Supreme Court viewed the Second Circuit’s “right to control theory” as part of the lower federal courts’ pattern “for decades” of applying the fraud statutes “to protect intangible interests unrelated to traditional property rights,” requiring the Court’s intervention in cases like McNally v. United States, 483 U.S. 350 (1987) and Skilling v. United States, 561 U.S. 358 (2010). Op. 5-6. The theory was first recognized, the Court explained, “decades after the wire fraud statute was enacted and over a century after the mail fraud statute was enacted,” based on the idea that a person’s property rights include his interest in controlling his property. Op. 6-7. But no authority was ever cited that “established ‘potentially valuable economic information’ as a traditionally recognized property interest”and “the Second Circuit has not since attempted to ground the right-to-control theory in traditional property notions.” Op. 7. The Court explained that it has “consistently rejected such federal fraud theories that ‘stray from traditional concepts of property.’” Id.

The Court also found the right-to-control theory inconsistent with “the structure and history of the federal fraud statutes.” After McNally “put an end to federal courts’ use of the mail and wire fraud statutes to protect an ever growing swath of intangible interests unconnected to property,” Congress responded by reviving “only the intangible right of honest services.” Op. at 8 (emphasis in original). Its silence about other intangible interests, the Court ruled, “forecloses” the expansion of the wire fraud statute to the right to control. Id.

The right-to-control theory also “vastly expands federal jurisdiction without statutory authorization.” Treating mere information as the protected interest, “almost any deceptive act could be criminal” and traditionally civil and state matters become federal crimes. Op. 8.  Because the federal fraud statutes reach only “traditional property interests,” and the right to valuable economic information is not a traditional property interest, “the right to control theory cannot form the basis for a conviction under the federal fraud statutes.” Op. 9.

Finally, the Supreme Court rejected the government’s argument that it could affirm the convictions on a traditional property theory that was not presented at trial. Op. at 9. The Court may not, it explained “cherry-pick facts presented” and “apply them to elements of a different wire fraud theory.” Op. 9. That would be assuming the role of jury. Id.

Practice note: There is a lot to work with here. The broad rule that “the federal fraud statutes” protect “only traditional property interests” is useful in any context where the government charges federal fraud outside of its traditional property moorings. Some examples that come to mind are using Title 18 fraud to charge insider trading without all the elements of insider trading, and charging a 371 conspiracy “to defraud the United States” for acts that do not involve an effort to obtain government property.

In Percoco, the Court held that the Second Circuit’s theory, established pre-McNally in United States v.  Margiotta, 688 F.2d 108 (1982) that a private person could defraud the public of its right to “honest services” if he “dominated and controlled” government business and others relied on his “special relationship” with the government is too vague. Percoco’s conviction based on that jury instruction was reversed. Percoco committed the alleged offense – taking a bribe – during a break from government service to work on Cuomo’s re-election campaign.  The government obtained a conviction on the theory that during that time he still dominated government and those working with him relied on his “special relationship” with the government. Op. At 9-10.

The Supreme Court discussed the history of the court-made doctrine of “honest services fraud,” its rejection of that doctrine in McNally v. United States, 483 U.S. 350 (1987), Congress’s subsequent enactment of the “honest services” fraud statute, 18 U.S.C. 1346, and the Court’s narrowing of that statute in Skilling v. United States, 561 U.S. 358, 401(2010) to the “core” conduct of bribes and kickbacks from a third party who had not been deceived. Id. at 5-7. It held that the Second Circuit was wrong to conclude after Skilling that “Congress effectively reinstated the Margiotta theory cases by adopting statutory language that covered the theory.” Id. at 7.  Skilling rejected pre-McNally doctrine that honest services fraud included undisclosed self-dealing and made clear that “‘The intangible right of honest services’ must be defined with the clarity typical of criminal statutes and should not be held to reach an ill-defined category of circumstances simply because of a smattering of pre-McNally decisions.” Id. at 8.

Noting that most pre-McNally honest services prosecutions involved actual public officials, the Court allowed that it was possible for a person not employed by the government to have a fiduciary duty to the public through an actual agency agreement. Id. at 8-9. But the Margiotta theory of “dominance and control of government business” and the reliance of others on a “special relationship” swept too broadly and could cover close friends, family members and advisors who did work for the government at all and lobbyists from whom the public had no right to disinterested service. Id. at 9-10. This  “standard is too vague.” Id. at 10.

By the time the case was argued at the Supreme Court, the government no longer defended the instructions as correct but argued the convictions should be affirmed on the theory that Percoco had been selected to work for government in the future and exercised the functions of a government position with the acquiescence of government personnel. These theories were not presented to the jury and the Court declined to address their validity.

Justice Gorsuch (joined by Thomas), concurred on the ground that the statute prohibiting “honest services fraud” is itself intolerably vague. Embracing the dissent in Skilling that would have struck down section 1346, Justice Gorsuch lamented the need for the Court to constantly rewrite the statute to narrow it. “Under our system of separated powers, the Legislative branch must do the hard work of writing federal criminal laws. . . . Congress must do more than invoke an aspirational phrase and leave it to prosecutors and judges to make things up as they go along.”

This is an invitation for vagueness challenges in “honest services” cases.



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