In Control: Supreme Court Reigns-In Second Circuit Fraud Theories

On May 11, 2023, the Supreme Court issued two opinions limiting the reach of the federal fraud statutes and eliminating often-used theories from the government’s arsenal.

In Ciminelli v. US, 598 U. S. __ (2023), the Supreme Court decided that the “right to control” theory—long used by prosecutors in the Second Circuit—can no longer be used to support wire fraud convictions.  The Court overturned the conviction of Louis Ciminelli, a participant in a scheme to rig bids for New York state-funded projects, known as the “Buffalo Billion” initiative. As part of the scheme, requests for proposals were strategically drafted to give preferential treatment to Ciminelli’s company. At trial, the government argued that Ciminelli and his co-defendants were guilty of wire fraud under the right-to-control theory because they deprived the entity responsible for awarding the state-funded projects of certain information necessary to make an informed decision about the bid awards. The Second Circuit affirmed the conviction and the government’s use of the right-to-control theory.

Writing on behalf of a unanimous court, Justice Clarence Thomas held that the wire fraud statue only reaches traditional property interests and the right to valuable economic information needed to make discretionary economic decisions—known as the “right to control”—is not a traditional property interest. The right-to-control theory, therefore, “cannot form the basis for a conviction under the federal fraud statutes.”

Percoco v. US, 598 U. S. ___ (2023) dealt with the scope of honest services fraud, traditionally reserved for public employees accepting a bribe or kickback that did not necessarily result in a financial loss for the government employer, but did deprive the government of the right to receive honest services. Joseph Percoco—a former aide to New York Governor, Andrew Cuomo, left his government position temporarily and assumed a private role as the Governor’s campaign manager. During this period, he accepted $35,000 in payments from a real-estate developer in exchange for using his influence to persuade a state agency to drop a funding requirement applicable to the developer.

Based on the Second Circuit’s decision in US v. Margiotta, 688 F.2d 108 (2d Cir. 1981), the trial court instructed the jury that Percoco, despite being a private citizen at the time of the alleged bribes, owed a duty of honest services if: 1) he dominated and controlled any governmental business; and 2) people working in the government relied on him because of a special relationship he had with the government.

The Supreme Court held that the instructions were improper because the implication that a private person has a duty of honest services whenever the person’s “clout exceeds some ill-defined thresh-hold [was] too vague.” The Court explained that the jury instructions did not sufficiently clarify what conduct was prohibited, and therefore could permit arbitrary and discriminatory enforcement. Importantly, although the Court reversed Percoco’s conviction because the standard under Margiotta was vague, it did not agree that a private citizen could never be guilty of honest services fraud. The Court left open the option of criminal liability for individuals who are not formally employed by the government, but enter into agreements authorizing them to act as agents on the government’s behalf.

The Supreme Court’s decisions in Ciminelli and Percoco are the latest in a trend limiting the scope of the federal wire fraud statutes. Taken together, they reflect the Court’s commitment to interpreting federal fraud statutes narrowly and relying on Congress to decide which conduct to punish. Individually, Ciminelli represents a backwards step for prosecutors (especially in the Second Circuit) who have had success in recent years obtaining convictions against defendants under an arguably easier to prove right-to-control theory.  See US v. Johnson, 945 F.3d 606, 612 (2d Cir. 2019) (obtaining conviction for wire fraud based on deprivation of victim’s right to control its financial assets); see also US v. Gatto, 986 F.3d 104, 126 (2d Cir. 2021) (obtaining a conviction for wire fraud based in part on victim’s deprivation of information resulting in the loss of the right to control the scholarships it awarded). Under the Supreme Court’s holding in Ciminelli, future prosecutions under the federal wire fraud statutes will be limited to cases involving the alleged deprivation of traditional property interests.

Percoco, on the other hand, did not completely close the door on the government’s ability to bring honest services fraud charges against private citizens. Although the Supreme Court invalidated the Margiotta “domination and control” test as too vague, it stopped short of holding that a private citizen can never be guilty of honest services fraud. Exactly when such a circumstance could arise is less clear. The Court declined to hold whether charges could be brought against a private citizen under hypothetical circumstances raised by the government. The Court did note, however, that as an agent for the government, a private citizen could owe a fiduciary duty to the government and, thus, to the public it services.