by Hector Correa Gaviria and Berke Gursoy

On September 1st, 2023, District Court Judge Pamela Chen delivered a startling decision, overturning the honest services fraud convictions of Hernán Lopez, former Fox executive, and FullPlay Group, S.A., an Argentine sports marketing company. Lopez and FullPlay were convicted of federal wire fraud for bribing employees of the Fédération Internationale de Football Association (FIFA) and CONMEBOL (the South American soccer federation under the umbrella of FIFA) to secure lucrative broadcasting contracts for some of Latin America’s most prestigious soccer tournaments and World Cup qualifying matches.

In United States v. Full Play,[1] a federal jury found that Lopez and FullPlay used U.S. wires to defraud FIFA by depriving the international soccer organization of the right to its employees’ faithful and honest services in violation of 18 U.S.C. §§ 1343 and 1346 (jointly referred to as honest services wire fraud “HSF”). However, soon after this conviction, the Supreme Court in Percoco v. United States limited the scope of HSF.[2] They did so by restricting the sources of fiduciary duty that can support an HSF conviction, holding that a limited number of on-point pre-McNally cases was insufficient to sustain an HSF conviction.[3] Through this ruling, Percoco essentially established a limiting principle for HSF; however, it did not articulate a test for when an actionable fiduciary duty under HSF could be found.[4]

In the wake of Percoco, the defendants in Full Play filed a motion for acquittal on their honest services charges.  They argued that under Percoco, honest services fraud does not cover foreign commercial bribery because the statute requires defendants to induce a violation of the bribe-recipient’s fiduciary duty to the victim organization and because the type of fiduciary duty alleged in this case, a duty owed by foreign employees to a foreign employer, is not cognizable under §1346. Judge Chen agreed, holding that there was not “even a smattering” of pre-McNally cases to support the defendants’ HSF convictions.[5]

Though this case is under appeal, the judge’s ruling represents the difficulties of post-Percoco commercial bribery prosecutions through § 1346.[6] This article will argue that the Travel Act, 18 USC § 1952, represents an effective substitute for § 1346 that allows federal prosecution of commercial bribery through both HSF and state-level commercial bribery statutes.

Part I: A Turbulent History of Honest Services Fraud and Fiduciary Duties

There is no general anti-commercial bribery statute in the United States.[7] Historically, prosecutors have turned to HSF to fill this significant gap.[8] HSF first emerged as a theory of mail/wire fraud (“MWF”). Prior to 1987, all courts of appeal accepted that the clause “scheme or artifice to defraud” within the MWF statutes encompassed schemes to deprive victims of intangible rights, such as honest services.[9] Honest services are a loosely defined right, typically equated with a fiduciary duty.[10] Under an HSF theory, the Government must prove that the victim was deprived of the right to honest services, which typically involved employees, public or private, who “accepted a bribe or kickback in exchange for dishonest conduct.”[11]

In 1987, however, the Supreme Court rejected this consensus in McNally v. United States and cabined the MWF statutes to only apply to those schemes that defrauded victims of property rights, not intangible rights such as honest services.[12] Congress quickly responded to this decision and codified HSF by passing 18 USC § 1346, which provided that the mail fraud statute, 18 USC § 1341, and the wire fraud statute, 18 USC § 1343, included “a scheme or artifice to deprive another of the intangible right of honest services.”[13] However, in §1346, Congress left the term “intangible right of honest services” undefined,[14] and, in the absence of reliable legislative history, courts quickly were faced with the issue of defining exactly what the intangible right to honest services includes.[15]

Accordingly, the Supreme Court has devoted itself since 1987 to steadily narrowing its reach in the ensuing three decades.[16] The first significant contraction of the statute occurred in 2010 with Skilling v. United States, where the Court addressed the threshold question of whether § 1346 was unconstitutionally vague.[17] Though the Court had concerns regarding the statute’s vagueness, the majority upheld it on narrowed ground stating § 1346 only criminalized bribe and kickback schemes since those were the “core” of Pre­­-McNally cases.[18] They then held that the definition of bribery in this context “draws content” from existing federal bribery-related statutes, including the federal public official bribery statute, § 201.[19] However, while the Court acknowledged that § 1346 requires a breach of fiduciary duty,[20] it did not concretely define the source and scope of this fiduciary duty. They did not, in the words of Justice Scalia, “solve the most fundamental indeterminacy: the character of the ‘fiduciary capacity’ to which the bribery and kickback restriction applies.”[21]  Indeed, Justice Scalia highlighted that at the time § 1346 was adopted, “there was no settled criterion for choosing among [different fiduciary duty requirements], [or] for conclusively settling what was in and what was out.”[22]

Part II: Percoco and Full Play

However, in Percoco, twelve years later, the Court turned to Scalia’s perspective and yet again narrowed the scope of § 1346 through by limiting the type of relationships that give rise to a cognizable fiduciary duty of honest services.[23]

Percoco involved former Governor Cuomo’s longtime Executive Deputy Secretary Joseph Percoco, who was charged with two counts of conspiracy to commit HSF.  The central issue in Percoco was whether Governor Cuomo’s associate owed a fiduciary duty to provide honest services to the public despite not being a formal government employee at the relevant times. The Supreme Court held that he did not and rejected the long-standing 2nd Circuit fiduciary duty theory that a person nominally outside government still had a fiduciary duty to the public if the accused exercised de facto control over government decisions and others relied upon the accused because of his special relationship in the government. 

1. Percoco as a Limitation

There are several ways one may interpret the Court’s holding in Percoco, the first being as Judge Chen did in Full Play, Percoco as a limitation on the scope of HSF.

Specifically, in Percoco, the Court stated 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 cases.”[24] They concluded that the Margiotta fiduciary duty test the Second Circuit had employed for over 40 years did not define “the intangible right of honest services with sufficient definiteness that ordinary people could understand the conduct that was prohibited.”[25] They did this while simultaneously not providing guidance for what the proper test should be. As a result, the extent of fiduciary duties that fall within HSF’s scope is today unknown. To quote Justice Gorsuch, “no one can say what sort of fiduciary relationship is enough to sustain a federal felony conviction.”[26] While it is safe to say “heartland” corruption cases, i.e., a public official who accepts bribes or kickbacks in exchange for official acts, are within the acceptable sources of liability, any factual variations from that ideal may be enough to place a theory of liability outside the territory of pre-McNally precedent.[27]

Such indeterminacy is at the core of Justice Chen’s opinion in Full Play. Her decision to exclude foreign commercial bribery from § 1346 is an attempt to constrain the statute and avoid expansive uses of federal power to prosecute foreign bribery schemes.[28] In Full Play, the Government’s theory as to the source of the executives’ fiduciary duty is that they were bound by the FIFA Code of Ethics and the later-enacted CONMEBOL Code of Ethics not to accept bribes. As such, the defendants’ bribes to those executives to earn the broadcasting contracts, a clear quid-pro-quo, induced a violation of the executives’ fiduciary duty of loyalty to CONMEBOL and FIFA.[29] The defendants were originally convicted under this theory. However, in the aftermath of Percoco, they moved to vacate their convictions on the claim that their alleged conduct was outside the scope of HSF.[30] The Court agreed.[31]

In her decision granting defendants’ motion for acquittal, Judge Chen reasoned that a foreign employee’s duty to his foreign employer was not actionable under HSF because, unlike in Percoco, there was not “even a smattering” of pre-McNally cases that would support applying HSF to foreign commercial bribery.[32] This absence of authority, per Judge Chen, compelled a conclusion that foreign commercial bribery stood outside the scope of HSF.[33] 

2. An Alternative View of Percoco

However, there is an alternative, more faithful, reading of Percoco. The Supreme Court’s decision was driven by concerns about finding a duty of honest services outside of clearly defined situations. Judge Chen correctly adopted those concerns. Nevertheless, the Court in Percoco defined the bounds of HSF fiduciary duty not only based on pre-McNally case law, but also on common law agency principles.

In rejecting the 2nd Circuit reliance and de-facto control theory, the Court conducted a two-step analysis. First, it conducted a regular vagueness analysis. It found that the Margiotta theory, “without further constraints” was overinclusive in that it extended a fiduciary duty to individuals such as lobbyists who “exercise[] very strong influence over government decisions” but “lack[] any formal government position. Second, and most notably, it used common law agency principles, citing the Restatement (Third) of Agency, to define the type of fiduciary duty cognizable under § 1346. The court essentially found a cognizable fiduciary duty when the person acts as an agent of the principal. The Restatement (Third) of Agency further defines an agency relationship as a fiduciary relationship “when one person (a “principal”) manifests assent to another person (an “agent”) that the agent shall act on the principal’s behalf and subject to the principal’s control, and the agent manifests assent or otherwise consents so to act.” This “well-established” principle, the court held, is sufficient to find that non-public employees owe a fiduciary duty to provide honest services to the public when such employees act as agents of the government through delegated authority. Under this approach, Percoco’s conviction was not upheld simply because at the time of the alleged bribe, he was not acting as an agent of the government nor was he exercising any government function with the acquiescence of government personal, he was simply acting for himself without a duty to the public. 

This view of Percoco would therefore not “require” Judge Chen to find that § 1346 does not extend to foreign commercial bribery simply because of the absence of pre-McNally precedent. Instead, by incorporating common law agency principles into § 1346, Percoco would permit lower courts to find a duty to provide honest service if there is sufficient delegation, control, and consent between the principal and the agent. To clarify, the Court in Percoco did not address the issue of honest-services fraud in the private sector (involving private employees and employers), but rather public sector honest-services fraud where a private individual is charged in connection with violating a supposed duty to the public at large.

Other courts have taken this same approach. In United States v. Milovanovic, the Court of Appeals for the Ninth Circuit explained that the existence of a fiduciary duty in § 1346 cases “is a fact-based determination that must ultimately be determined by a jury properly instructed on this issue.”[34] This is because “although the bulk of the pre-McNally honest-services cases involved employees, [there is] no reason the principle they establish would not apply to other persons who assume a legal duty of loyalty comparable to that owed by an officer or employee to a private entity.”[35] And as the court suggested, the appropriate jury instructions should follow traditional (or as the court put it in Percoco, “well-established”) principles of agency law.[36] District Courts in the Second Circuit and others have also followed this approach.[37]

Part III: The Travel Act as an Alternative Source of Liability

Our federal courts are not wholly new to the question of whether a foreign employment relation creates a fiduciary relation, a violation of which, induced through bribery, forms the basis of a federal prosecution.         

The Travel Act, 18 USC § 1952, was enacted in 1961 as part of the Government’s crackdown on organized crime.[38] It has three elements: (1) interstate or foreign travel or use of any facility in interstate or foreign commerce; (2) with an intent to engage in conduct that furthers an “unlawful activity,” and (3) followed by the commission or attempt to commit one of the enumerated acts, which constitute the furtherance of an “unlawful activity.”[39] Per § 1952(b), “unlawful activity” includes “bribery … in violation of the laws of the State in which committed or of the United States.”[40] Helpfully, the Supreme Court in Perrin v. United States interpreted this clause and held that the Travel Act criminalizes “the generic definition of bribery.”[41] The Court explained that Travel Act bribery covers “all relations … recognized in a society as involving special trust,” including individuals acting in a private capacity (commercial) and state and local officials (public) exercising governmental power.[42] Specifically, the majority in Perrin concluded that Congress intended to include federal and state anti-bribery law violations under the plain meaning of the Travel Act’s bribery prohibition.[43] And that this included the states’ commercial bribery laws.[44]

At least one circuit has gone further and interpreted the Travel Act to criminalize violations of state anti-bribery statutes that require a fiduciary duty violation, when such fiduciary relationship is not governed by U.S. law. In United States v. Welch, the 10^th Circuit upheld a Travel Act conviction against members of the Salt Lake City Bid Committee for the 2002 Olympic Winter Games who conspired, in violation of Utah’s commercial bribery statute, to bribe members of the International Olympic Committee (IOC) to win the bid for the Winter Olympics.[45] The conduct of the defendants in Welch was essentially the same as that of the defendants in Full Play: paying bribes to agents of international sporting organizations for certain material benefits. The court in Welch rejected a similar argument to the one defendants made in Full Play that as a matter of Swiss law, an IOC member is not an “agent or fiduciary” or the organization. The court explained that the existence of a fiduciary relationship is a question of fact to be resolved by the jury, guided by common law agency principles—the same principles that the Supreme Court used in Percoco.[46]

Therefore, under Perrin, the government can base a Travel Act prosecution on a single instance of commercial bribery, provided they can establish a sufficient interstate nexus and if the conduct occurred in a state with a commercial anti-bribery statute.[47]

Conclusion

Judge Chen’s decision in Full Play follows a long line of decisions that have wrestled with novel applications of the honest services fraud statute. It is a principled attempt to define a short and rather obscure law that prohibits schemes to deprive another of the intangible right of honest services. However, though principled and reasonable, it represents an incomplete reading of the relevant Supreme Court precedent. It ignores crucial language from Percoco which suggests that the fiduciary duty requirement of honest services fraud should incorporate “well-established” agency law principles, and it overlooks guidance from other federal courts about how to address a novel application of the statute. Nevertheless, prosecutors should take Judge Chen’s decision as a warning sign and consider the Travel Act as an alternative source of liability for bribery schemes such as the one involved in Full Play in order to avoid similar District Court decisions and acquittals.

Footnotes

[1] United States v. Full Play Grp., S.A., No. 15CR252S3PKC, 2023 WL 5672268 (E.D.N.Y. Sept. 1, 2023).

[2] See generally Percoco v. United States, 598 U.S. 319 (U.S., 2023).

[3] Id. at 328-329.

[4] See Id. at 334-335.

[5] Id. at 25.

[6] See Daniel Koffman & Isabelle Sun, What’s Next After the Remarkable Decision Setting Aside Guilty Verdicts In The FIFA Prosecution?, N.Y.L.J. (Sept. 18, 2023), https://www.law.com/newyorklawjournal/2023/09/18/whats-next-after-the-remarkable-decision-setting-aside-guilty-verdicts-in-the-fifa-prosecution/.

[7] Jeffrey Boles, Examining the Lax Treatment of Commercial Bribery in the United States: A Prescription for Reform, 51 Am. Bus. L.J. 119, 135 (2014).

[8] Stephen C. Thompson, The Application of Honest Services Fraud to International Commercial Bribery, 47 N.Y.U. J. Int’l L. & Pol. 685, 686 (2015).

[9] Percoco, 598 U.S. at 326 (quoting Skilling v. United States, 561 U.S. 358, 401 (2010)).

[10] See Pamela Mathy, Honest Services Fraud After Skilling, 42 St. Mary’s L.J. 645, 655 (2011).

[11] Full Play, 2023 WL 5672268 at 30*.

[12] See McNally v. United States, 483 U.S. 350, 360-361 (1987).

[13] Full Play, 2023 WL 5672268 at 30-31*; 18 U.S.C. §1346 (1988).

[14] See Kelly v. United States, 140 S. Ct. 1565, 1571 (2020) (explaining that “the vagueness of th[e] language” in § 1346 compelled the Supreme Court to adopt a subsequent “limiting construction” to preserve its constitutionality).

[15] Lisa L. Casey, Twenty-Eight Words: Enforcing Corporate Fiduciary Duties through Criminal Prosecution of Honest Services Fraud, 35 Del. J. Corp. L. 1, 50 (2010).

[16] See Emily Bamesberger et al., Offside! Federal Judge Overturns FIFA Convictions in Latest Attack on the Federal Honest Services Fraud Statute, Vinson & Elkins LLP (Sept. 29, 2023), https://www.velaw.com/insights/offside-federal-judge-overturns-fifa-convictions-in-latest-attack-on-the-federal-honest-services-fraud-statute/.

[17] See generally Skilling, 561 U.S. 358.

[18] Skilling v. United States, 561 U.S. 358, 404 (2010)

[19] Id. at 412.

[20] Id. at 407.

[21] Id. at 407 (Scalia, J., concurring).

[22] See id. at 421.

[23] See generally Percoco, 598 U.S. 319.

[24] Id. at 328-39 (citing Skilling, 561 U.S. at 408).

[25] Isabelle Kirshner & Brian D. Linder, Expect More Vagueness Challenges in Honest Services Cases, NYU School of Law Program on Corporate Compliance and Enforcement: Compliance & Enf’t Blog (May 18, 2023), https://wp.nyu.edu/compliance_enforcement/2023/05/18/experts-react-to-supreme-court-decisions-on-honest-services-fraud-and-the-right-to-control-theory/; Percoco, 598 U.S. at 331 (quoting McDonnell v. United States, 579 U.S. 550, 576 (2016).

[26] See Kirshner & Linder, supra note 24; Percoco, 598 U.S. at 337 (Gorsuch, J., concurring).

[27] See Full Play, 2023 WL 5672268 at 30*; Percoco, 598 U.S. at 330; Koffman & Sun, supra note 6.

[28] See generally Full Play, 2023 WL 5672268.

[29] Id. at *23-25.

[30] Id. at *27-28.

[31] See id. at *47 (quoting Percoco, 598 U.S. at 328–29).

[32]See id. at *48.

[33] Id.

[34] United States v. Milovanovic, 678 F.3d 713, 723 (9th Cir. 2012), as amended (May 22, 2012).

[35] Id. (citing United States v. Williams 441 F.3d 716, 723–24  (9th Cir. 2006)).

[36] Id. at 773, n. 9.

[37] See e.g., United States v. Harper, No. 13-CR-601 RJD, 2015 WL 6029530, at 3 (E.D.N.Y. Oct. 15, 2015); United States v. Tanabe, No. CR 11-0941 SBA, 2012 WL 5868968, at *4 (N.D. Cal. Nov. 19, 2012).

[38] See Steven G. Shapiro, Travel Act, 24 Am. Crim. L. Rev. 735 (1987).

[39] 18 U.S.C. § 1952 (1961). See also D. Anthony Rogriguez and Michael P. Kniffen, Liability Under the Travel Act for Commercial Bribery, 28 No. 8 WL J.  Corporate Officers & Directors Liability 1; Hon, supra note 23.

[40] 18 U.S.C. § 1952 (1961).

[41] Perrin v. United States, 444 U.S. 37, 49 (1979)

[42] Id. at 45 & n.11.

[43] See id. at 42 (“[I]t is clear beyond doubt that Congress intended to add a second layer of enforcement supplementing what it found to be inadequate state authority and state enforcement.”).

[44] Id. at 50.

[45] United States v. Welch, 327 F.3d 1081 (10th Cir. 2003).

[46] Id. at 1102—03.

[47] See id. at 49. (affirming a Travel Act conviction on the basis of a violation of a state’s commercial bribery law); Jeffrey Boles, Examining the Lax Treatment of Commercial Bribery in the United States: A Prescription for Reform, 51 Am. Bus. L.J. 119, 138 (2014).

Hector Correa Gaviria is an incoming law clerk at Winston & Strawn LLP and Berke Gursoy is an incoming law clerk at Sullivan & Cromwell LLP. Both Gaviria and Gursoy are 2024 graduates of NYU Law and former Student Fellows with the NYU Program on Corporate Compliance and Enforcement. Gaviria is also a former Student Editor of this blog.

The views, opinions and positions expressed within all posts are those of the author(s) alone and do not represent those of the Program on Corporate Compliance and Enforcement (PCCE) or of the New York University School of Law. PCCE makes no representations as to the accuracy, completeness and validity or any statements made on this site and will not be liable any errors, omissions or representations. The copyright of this content belongs to the author(s) and any liability with regards to infringement of intellectual property rights remains with the author(s).