Supreme Court, First Circuit Curtail Broad Government Theories in Federal Fraud Prosecutions

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Last week, the Supreme Court of the United States issued two opinions that vacated criminal convictions for honest services fraud and reshaped the ways in which the federal government can prosecute alleged offenders. Traditionally, federal mail and wire fraud prosecutions require the deprivation of money or tangible property. These statutes prohibit “any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises.” 18 U.S.C. §§ 1341 and 1343 (emphasis added). However, some courts, including the Second Circuit in particular, have expanded such prosecutions to include schemes intended to deprive a victim of valuable economic information needed to make discretionary economic decisions. Because this does not constitute a traditional property interest, the Supreme Court held that this theory cannot form the basis for a conviction under the federal mail and wire fraud statutes.

In the first case, Ciminelli v. United States, the Supreme Court struck down the Second Circuit’s “right-to-control” theory as applied to the federal fraud statutes. In overturning a conviction for honest services mail and wire fraud, the Court explicitly rejected the “right-to-control” theory as a basis for a conviction for all federal fraud statutes. In support of that holding, the Court reasoned that theory is inconsistent with the structure and history of the federal fraud statutes. The Court also explained that in treating information alone as the protected interest, the right-to-control theory vastly extends federal jurisdiction to deceptive actions traditionally governed by state law.

For federal fraud convictions previously secured through the Second Circuit’s right-to-control theory, Ciminelli may unlock an avenue for offenders to get those convictions vacated. Based on these recent decisions, these challenges may be even stronger for convictions in which the defendant was not a public employee at the time of the actions giving rise to prosecution. Lastly, Ciminelli further solidifies the Court’s approach to the honest services fraud statute as the only intangible right protected by the federal fraud statutes.

In a second related decision, Percoco v. United States, the Court ruled that the intangible duty of honest services codified in the federal fraud statutes does not extend a duty owed to the public by all private persons. Instead, the Court suggested that the existence of this duty depends on agency principles. Through those principles, an individual who is not a formal, public employee may still become an actual agent of the government through agreement and fiduciary duty to the public. In so ruling, the Court rejected the Second Circuit’s understanding that this duty and the honest services fraud provision attach if a private individual dominated and controlled any governmental business and had those in government relying on him because of his special relationship with the government. The Court characterized this standard as implying that the public has a right to a private individual’s services when that person’s clout exceeds an undefined threshold. Finding that standard too vague, the Court deferred to agency principles to resolve circumstances in which an individual only nominally outside of public employment either may or may not retain the requisite fiduciary duty to the public to become subject to the honest services fraud statute.

Going forward from Percoco, for private individuals prosecuted for honest services fraud, the foundation for such an action will depend on a more objective analysis of the duties tasked to that individual rather than the subjective and external view of that person’s connection to the government. Employment agreements, performance reviews, and other documentation of the duties private individuals performed outside of public employment will therefore become more critical pieces of evidence in these actions. However, Percoco does not hold that subjective factors cannot be used in this analysis, but rather dictates that the intangible right of honest services must be defined with the typical clarity of criminal statutes such that the public can understand what conduct it prohibits and the government can enforce it in a reasoned and nondiscriminatory manner. Some subjective appraisal of one’s duties may still be valid, so long as that analysis is not left completely unguided and without any pre-established factors. 

Similarly, the First Circuit in United States v. Abdelaziz last week held in a college admissions case that the government’s honest services theory was invalid as a matter of law and that it was an error for the district court to instruct the jury that admissions slots constitute property. First, the court rejected the government’s “categorical assertion” that college admissions slots qualify as property under the mail and wire fraud statutes. However, the First Circuit left open the possibility for the government to prove that such admission slots have been “historically been treated as property” or bear the “traditional hallmarks” of property. Similar to the Supreme Court’s opinions, the First Circuit expressed concern that the government’s “highly general argument would criminalize a wide swath of conduct,” noting that “embellishments in a kindergarten application could constitute property fraud proscribed by federal law.”

These cases should serve as cautionary tales to federal prosecutors looking to expand the scope of the federal mail and wire fraud statutes outside the traditional meaning of money or property.

In addition to Mark Moore and Michael Parente, this article was co-authored by Madison Hoover.