Editor’s Note: The NYU Law Program on Corporate Compliance and Enforcement (PCCE) is following the recent U.S. Supreme Court decisions in Percoco v. United States and Ciminelli v. United States, which narrow the scope of honest services fraud and eliminate the so-called “Right to Control” theory in federal fraud cases, respectively. Together, these two cases continue a trend of circumscribing the federal government’s ability to prosecute domestic public corruption in the United States. In this post, white dollar defense attorneys and former prosecutors provide their reactions to these cases.
From left to right: Carrie Cohen, Brian Jacobs, Brendan Quigley, Isabelle Kirshner, and Brian Linder (Photos courtesy of the authors’ firms)
The Supreme Court’s Percoco and Ciminelli Decisions Follow its Previously-Expressed Concerns for Federalism in State and Local Corruption Cases
Supreme Court Again Narrows Scope of Honest Services Fraud in Reversing Percoco
For the past decade, when the Supreme Court has considered the honest services fraud statute, it has found its application to be unconstitutionally vague and/or too broad. The Court’s recent decision in Percoco v. United States, 598 U.S. ___ (2023), is no exception and continues the Court’s general reluctance to criminalize what it views as politics as usual. Percoco served as then-Governor Cuomo’s executive deputy secretary but left state service for eight months to manage Cuomo’s re-election campaign and, post-election, resumed his previous government position. During Percoco’s time managing the campaign, he accepted two payments totaling $35,000 from a real estate company with business before the state in exchange for assistance related to an issue with a labor union. The issue in Percoco was whether the jury was properly instructed that under the honest services fraud statute, private persons could owe a fiduciary duty to the public if they exercised control in and with the government. In finding this jury instruction impermissibly vague, the Supreme Court reasoned that such an instruction potentially could create a fiduciary duty to the public for a wide range of private individuals including “wise counselors,” “lobbyists,” and “political party officials” on whom public officials have long relied. In reversing Percoco’s conviction and remanding the case back to the district court, the Court did not foreclose the possibility that a person nominally outside public employment could have a fiduciary duty to the public but gave little guidance on what factors would create such a duty other than citing traditional notions of agency. Accordingly, while it is hypothetically possible that a private individual could be convicted of honest services fraud where the facts demonstrated that such person actually was an agent of the government at the time the bribe or kickback was accepted in exchange for an official act, the likelihood of all these necessary facts being present is extremely unlikely. Rather, going forward, federal public corruption prosecutions probably will focus on bribes or kickbacks accepted by public officials during their public service tenure.
Invalidating the “Right-To-Control” Theory of Fraud in Ciminelli
Given that even the government abandoned their own theory on appeal and instead argued harmless error, it is somewhat unsurprising that the Supreme Court in a 9-0 opinion rejected the often criticized “right-to-control” theory in federal wire fraud cases. But, even though the Supreme Court’s opinion had been widely anticipated, like the Court’s decisions during the past decade in the public corruption arena, the Ciminelli decision illustrates the Court’s reluctance to expand the wire fraud statute beyond traditional bribes or kickbacks. In U.S. v. Ciminelli, 598 U.S. __ 2023, the government charged a real estate developer and other state actors with wire fraud based on defendants’ purported scheme to deprive the state government of potentially valuable economic information necessary to make discretionary economic decisions. Consistent with that theory, the jury was instructed that the term “property” in the wire fraud statute “includes intangible interests such as the right to control the use of one’s assets,” by failing to disclose potentially valuable information. In finding such an instruction to be in error, the Supreme Court held that “the right to valuable economic information needed to make discretionary economic decisions is not a traditional property interest,” thereby invalidating the “right-to-control” theory in federal fraud prosecutions. Again, the Court demonstrated its concern that such a broad application of a federal fraud statute could criminalize everyday behavior, here, ordinary business disputes, verses, in Percoco decided the same day, politics as usual. While post-Ciminelli, federal fraud cases no longer can be based on a right to control theory, the laws of many states are broader and do not necessarily require a showing of pecuniary or potential pecuniary loss to the government or otherwise. Accordingly, the Ciminelli decision also is in line with previous Supreme Court decisions in the public corruption realm in which the Court has expressed federalism concerns when considering issues of corruption at the state or local level.
Carrie H. Cohen is a Partner and Global Co-Chair of the Investigations and White Collar Defense practice group at Morrison & Foerster LLP. Previously, she was a federal prosecutor in the Southern District of New York (SDNY) where she helped secure the first conviction of Sheldon Silver and also previously served as Chief of the Public Integrity Unit at the New York State Attorney’s General Office. Carrie teaches a seminar Public Corruption and the Law as an Adjunct Professor at the University of Pennsylvania Law School.
Percoco and Ciminelli May Drive Prosecutors to Rely on Other Federal Laws
In Percoco and Ciminelli, the Supreme Court has continued its efforts to narrow the scope of certain federal anti-corruption laws. Beyond the main opinions, Justice Gorsuch’s concurring opinion in Percoco warrants particular attention. The concurrence highlights how, in cases involving the honest services fraud statute, Section 1346 of Title 18, “prosecutors and lower courts” are left “in a bind” because they “must continue guessing” what constitutes honest services fraud. Justice Gorsuch identifies the “main victims” as “private citizens,” who are left without fair notice of what conduct could result in “decades in federal prison.” Someday, Justice Gorsuch notes, Congress may “set things right by revising” the honest services fraud statute “to provide the clarity it desperately needs.” In the meantime, he calls on the Court to “decline further invitations to invent rather than interpret this law.”
Until the perhaps far-off day when Congress acts on Justice Gorsuch’s prompt, one more immediate impact of Percoco—and Justice Gorsuch’s concurrence—could be in pre-indictment negotiations between defense counsel and federal prosecutors. With his critique of the honest services fraud statute, Justice Gorsuch has provided defense attorneys with additional leverage to attempt to obtain pre-indictment resolutions in corruption cases, where the government may perceive increased litigation risk. At the same time, another impact of Justice Gorsuch’s concurrence, and of Percoco and Ciminelli generally, could be to push federal prosecutors to increase their reliance on other statutes covering conduct similar to that covered by the honest services fraud statute. For example, certain schemes are covered not only by Section 1346, but also by the federal program fraud statute, 18 U.S.C. § 666, and by the Travel Act, 18 U.S.C. § 1952, and prosecutors may turn to these statutes with increasing frequency. In fact, in the recent decision in the so-called “Varsity Blues” case, the First Circuit endorsed a broad reading of Section 666 to cover payments made to the same organization allegedly harmed by the defendants, noting that “[t]he Supreme Court has explained that courts should give effect to § 666’s expansive, unqualified language,” and contrasted Section 666’s “clear text” with the ambiguity of Section 1346. United States v. Abdelaziz, No. 22-1129, 2023 WL 3335870, at *11, *19 (1st Cir. May 10, 2023).
Brian A. Jacobs is a Partner at Morvillo Abramowitz Grand Iason & Anello PC and a former federal prosecutor at the SDNY.
Ciminelli May Lead to a Focus on Which Property Interests Were Generally Recognized at the Time Federal Fraud Statutes Were Enacted
Ciminelli reinforces that prosecutions under the mail and wire fraud statutes must relate to schemes aimed at obtaining money or “traditional” property interests.
On the one hand, Ciminelli is yet another recent example where courts have pared back government attempts to broaden the definition of “property” under the mail and wire fraud statutes. Other examples include the Supreme Court’s 2020 decision in Kelly v. United States (the so-called Bridgegate case) where the Court indicated that the regulatory rights of “allocation, exclusion, and control” do not create a property interest and the Second Circuit’s decision in United States v. Blaszczak regarding confidential data from the U.S. government’s Centers for Medicare & Medicaid Services.
On the other hand, 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” appears to break some new ground for courts assessing whether something is, in fact, a property interest. The focus on “when the . . . 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.
Brendan Quigley is a Partner at Baker Botts LLP, a former federal prosecutor at the SDNY, and a former combat-arms officer in the U.S. Marine Corps.
Expect More Vagueness Challenges in Honest Services Cases
by Isabelle Kirshner and Brian D. Linder
In Percoco, the Court reversed the decision of the Second Circuit upholding a wire fraud conviction based on the theory, articulated 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. Percoco committed the alleged offense – taking a bribe – during a break from government service to work on then Governor Cuomo’s re-election campaign. In reversing the conviction, the Court revisited a theme woven into its previous opinions concerning “honest services” fraud: is the intangible right to honest services theory sufficiently unambiguous so as to provide notice to people as to the consequences of their conduct? And once again, the Court rejected an honest services fraud theory that had long been approved by the lower courts, concluding that the Margiotta standard – focusing on whether a private individual “dominated and controlled governmental business” and that government employees actually relied on him because of his special relationship – was too vague. Similarly, in the companion Ciminelli case, the Court rejected the long-espoused “right to control” theory.
In just one paragraph, the Court had little trouble concluding that the Percoco jury’s instructions, based on Margiotta, lacked sufficient definiteness and was susceptible to arbitrary and discriminatory enforcement. Margiotta stood as the law of the Second Circuit for over forty years. And yet, incredibly, before the Supreme Court, the government did not even defend the trial court’s instructions, arguing instead that a private individual owes a duty of honest services when the person has been “selected to work for the government” or when the person “exercises the functions of a government position with the acquiescence of relevant government personnel.” Does this provide greater clarity?
Justice Gorsuch’s concurring opinion, joined by Justice Thomas, echoed Justice Scalia’s concurring opinion in Skilling v. United States (that was joined by his mentor Justice Kennedy), concluding that a statute that criminalizes “a scheme or artifice to deprive another of the intangible right of honest services” is hopelessly vague and offends Due Process. Sounds like an invitation for vagueness challenges in “honest services” cases.
Isabelle Kirshner and Brian D. Linder are Partners at Clayman Rosenberg Kirshner & Linder LLP. Kirshner is also a former prosecutor at the Manhattan District Attorney’s Office and Linder is also a former staff attorney at the Criminal Appeals Bureau of The Legal Aid Society.
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