Los Angeles Real Estate Litigation Lawyer Jeffer Mangels Butler & Mitchell LLP Home
The Supreme Court has imposed new restrictions on federal white collar fraud prosecutions in two related cases stemming from alleged corruption during the tenure of former New York Governor Andrew Cuomo, continuing a trend of push-back against what the Court perceives as federal prosecutorial overreach.
In rulings issued on May 11, 2023, the Court unanimously limited the Justice Department’s use of the honest services fraud statute against private citizens, and overturned federal prosecutors’ use of the “right-to-control” theory of wire fraud.
Buffalo Billion Initiative
Ciminelli v. United States involved Cuomo’s “Buffalo Billion” initiative administered through a nonprofit affiliated with the State University of New York. The initiative was intended to invest in upstate New York development projects; federal prosecutors alleged there was a criminal scheme involving the governor’s associates (a member of the nonprofit’s board of directors, and a construction company owner) making payments to a lobbyist with ties to the Cuomo administration, resulting in the construction company receiving Buffalo Billion contracts.
Federal prosecutors charged the participants with wire fraud and conspiracy to commit wire fraud under the so-called “right to control” theory, which reasons that wire fraud can be established by showing that the defendant schemed to deprive a victim of potentially valuable economic information necessary to make discretionary economic decisions. The district court’s jury instructions defined property as including “information that affects the victim’s assessment of the benefits or burdens of a transaction, or relates to the quality of goods or services received or the economic risks.” The defendants were convicted at trial and the U.S. Court of Appeals for the Second Circuit affirmed the convictions.
The Supreme Court rejected the Second Circuit’s right to control theory and reversed the convictions. In an opinion written by Justice Thomas, the Court found that federal fraud statutes criminalize only schemes to deprive people of traditional property interests, not the intangible interests the Second Circuit had relied on. The Court also declined to affirm Ciminelli’s convictions, on the ground that the evidence was insufficient to establish wire fraud under a traditional property-fraud theory.
Former Aide to Governor
In the second case, Percoco v. United States, the Court considered whether a private citizen with influence over government decision-making can be convicted for wire fraud on the theory that he deprived the public of its “intangible right of honest services.”
Joseph Percoco served as the executive deputy secretary to Cuomo from 2011 to 2016. During an eight-month break in 2014, he resigned from government service to manage the governor’s reelection campaign. During this time, he was alleged to have accepted payments totaling $35,000 to assist a real-estate development company in dealings with Empire State Development, a state agency.
Percoco was convicted of conspiracy to commit honest-services wire fraud. The district court instructed the jury that he could be found to have had a duty to provide honest services to the public during the time when he was not serving as a public official if the jury concluded that he controlled any governmental business or if anyone working in the government relied on Percoco’s relationships within it. The Second Circuit affirmed.
The Supreme Court reversed. In an opinion written by Justice Alito, the Court found the jury instructions did not define “the intangible right of honest services” with sufficient definiteness. The Court rejected the prosecution’s argument that the wire fraud statute should apply to cases involving undisclosed self-dealing by a public official or private employee, and reversed and remanded for further proceedings.
Trend of Cases Limiting Novel Prosecution Theories
Put in context, the decisions in Ciminelli and Percoco are part of a growing line of Supreme Court cases rejecting novel theories of federal fraud prosecution:
- McNally v. United States: the Court held that the federal mail fraud statute was limited in scope to the protection of property rights, rather than to the broad protection over citizens’ intangible rights to an honest and impartial government. McNally was later superseded when Congress passed legislation including honest services fraud in the mail and wire fraud statutes.
- Skilling v. United States (cited in Percoco): limited the honest services wire fraud statute to prohibit only those schemes that involve bribes or kickbacks, and not those that deprive citizens of the intangible right of honest services.
- McDonnell v. United States: the Court adopted a limited interpretation of the federal bribery statute and unanimously reversed the conviction of a former Virginia governor, holding that constituent services were not “official acts” under 18 U.S.C. § 201(a)(3).
- Kelly v. United States: the 2020 “Bridegate” decision received wide coverage in the mainstream press because it involved political retribution by appointees of former New Jersey governor Chris Christie. While not endorsing the actions of the governor’s aides, the court concluded, “not every corrupt act by state or local officials is a federal crime.”
More Decisions Urging Restraint Expected
Honest services fraud is an expansive construct of white collar crime that federal prosecutors have tried to revive over the years, leading the Supreme Court to repeatedly rein in novel and unsupported theories of prosecution.
With Ciminelli and Percoco, the Court is once again sending a clear message that federal prosecutors should exercise more restraint with novel theories of criminal liability. Going forward, we can expect more courts to challenge aggressive federal prosecutors in the white collar arena.
Just last week, for example, the U.S. Court of Appeals for the First Circuit reversed most of the trial convictions of two fathers found guilty of paying to get their children into an elite college, casting doubt on the legal theories underlying fraud charges against dozens of defendants in the “Varsity Blues” corruption scandal. We will continue to monitor developments impacting the rights of white collar litigants.
Authors:
Vince Farhat, Chair, White Collar Defense & Investigations Group
Lena Streisand, Associate, Litigation Group
JMBM’s White Collar Defense & Investigations Group is keenly focused on our clients’ business objectives and is committed to minimizing the disruption, anxiety, and public scrutiny that can arise from criminal and civil investigations and litigation. We are leaders in the representation of companies, boards of directors, management, and individuals in connection with a broad range of government investigations, enforcement actions, remediation and compliance, administrative proceedings, internal investigations and white collar criminal investigations and prosecutions.
This update is provided to our clients, business associates and friends for informational purposes only. Legal advice should be based on your specific situation and provided by a qualified attorney.
