On May 12, 2023, the Supreme Court issued two decisions reversing convictions in federal criminal fraud cases arising out of alleged corruption relating to development projects in New York State. While the decisions clearly curbed prosecution theories that had been used for decades, particularly in the Second Circuit, they also provided both the government with a roadmap for bringing similar cases in the future by linking its prosecution theories more closely to common-law agency and property theories.
The Federal Wire and Mail Fraud Statutes
The wire fraud statute, 18 U.S.C. § 1343, and the mail fraud statute, 18 U.S.C. § 1341, prohibit the use of certain instrumentalities of interstate commerce (i.e., the "wires" or the mail respectively) to further "any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises." Although both have been go-to statutes for DOJ for decades, the wire-fraud statute has become even more important over the last 30 years, given the widespread use of the internet, and hence "the wires," making it easier for DOJ to establish federal jurisdiction over even local fraud schemes.
At the same time, the Supreme Court has pushed back, particularly on the definition of "property." This trend began in the Court's 1987 decision, McNally v. United States, 483 U.S. 350, in which the Court rejected the government's theory that the "property" included "intangible rights" to honest government services and instead protected only actual "property rights." Congress swung the pendulum back somewhat a year later, passing a law defining "scheme or artifice to defraud" in the mail and wire fraud statutes as including schemes to deprive another of "the intangible right of honest services." The Supreme Court nudged back again in 2004, in Skilling v. United States, when it held that the "honest services" theory applied only when a defendant "who, in violation of a fiduciary duty, participated in [traditional] bribery or kickback schemes," and did not prohibit undisclosed conflicts of interest or mere self-dealing.
In addition, following McNally, the Second Circuit repeatedly affirmed wire fraud and mail fraud convictions based on a "right to control" theory, reasoning that "property interests" include "the interest of victim in controlling his or her own assets." See, e.g., United States v. Lebedev, 932 F.3d 40, 48 (2019).
The Court's May 11 Decisions
The Court's May 11 decisions dealt with both the honest services theory and the definition of "property."
The honest services case, Percoco v. United States, asked whether a private citizen with influence over government decision making could be convicted of wire fraud under a theory that he deprived the public of the "intangible right of honest services." The defendant, Percoco, had served as a long-time top aide to New York's former governor, but left government service for seven months in 2014 to run the governor's re-election campaign. During this period, a developer seeking state funding for a project allegedly paid Percoco $70,000 so Percoco could use his influence to help the developer avoid having to enter into a "Labor Peace Agreement" with local unions.
While reversing Percoco's honest-services wire-fraud conviction, the Supreme Court rejected his argument that "a person nominally outside public employment can never have [a] fiduciary duty to the public," as to be potentially liable for honest services fraud, because private citizens may still "enter into agreements that make them actual agents of the government." Still, the Court analyzed the jury instructions in Percoco's case, which told the jury it could find that Percoco owed a duty of honest services to the public based on his level of "domin[ation]" and "control" over government business and "people['s]" "rel[iance]" on him. The Court found these instructions raised vagueness concerns about what conduct was and was not prohibited, and instead indicated that future cases should look to traditional concepts of agency law in determining whether a private citizen owes a duty of honest services to the public.
The second case, Ciminelli v. United States, rejected the "right to control" theory the Second Circuit had approved in since the 1990s and instead reiterated that "property" under the wire fraud statute "reaches only traditional property interests." Ciminelli owned a construction company that wanted to bid on development projects in upstate New York. Ciminelli and two confederates with close ties to a state-run development agency allegedly conspired to shape the agency's requests for proposal to "treat unique aspects" of Ciminelli's company "as qualifications for preferred-developer status." With that status, Ciminelli's company won a $750 million project.
The Court reversed the wire fraud conviction, holding the "right to control theory cannot be squared with the text of the federal [mail and wire] fraud statutes, which are limited to the protection of property rights," adding "the so-called right to control is not an interest that had long been recognized as property when the wire fraud statute was enacted." The Court then rejected the government's argument that Ciminelli's wire fraud conviction could be upheld because there was sufficient evidence under even a traditional-property theory. The Supreme Court declined this invitation which, in its words, "asks us to assume not only the function of a court of first-view, but also of a jury."
Takeaways
Both cases highlight the significance of traditional notions of agency law and property law in mail and wire fraud cases. Percoco indicates that agency law defines when a private actor may owe fiduciary duties to the public. Ciminelli reinforces that the wire and mail fraud statutes protect only "traditional" property interests. Thus, we expect to see the government attempt to sharpen its theories in future fraud and corruption prosecutions around these common-law concepts.
At the same time, Justice Thomas's rejection of the right to control theory because it "is not an interest that had long been recognized as property when the wire fraud statute was enacted," will lead to a host of questions in investigations and prosecutions involving, for example, emerging technologies and intellectual property. The companion mail fraud statute, on which the wire fraud statue was based and which contains parallel language, was enacted in 1872. The wire fraud statute is more recent, having become law in 1952, but still eons ago in terms of technological developments.
Finally, the Court's rejection of the invitation to affirm the Ciminelli conviction because the evidence was sufficient under a traditional property theory provides useful restraints of the government's ability to argue new or alternative theories of conviction on appeal.
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