Intangible Rights Theories under Federal Fraud Statutes
The Supreme Court recently decided two public corruption cases involving what has come to be known as the “intangible right to honest services” theory under mail and wire fraud statutes, 18 U.S.C. §§ 1343, 1346, 1349. Percoco v. United States, No. 21-1158 (U.S. May 11, 2023); Ciminelli v. United States, No. 21-1170 (U.S. May 11, 2023). To understand the cases and the significance of their holdings requires some background on the particular fraud theory and the facts of the two cases.
Background. The mail and wire fraud statutes proscribe schemes or artifices “to defraud” or for “obtaining money or property by false or fraudulent promises.” By the mid-1980’s, appellate courts viewed the language to include “honest services fraud,” that is, kickback or bribery schemes under the theory that such conduct deprived the government and the public of the right to the honest services of government employees. Skilling v. United States, 561 U.S. 358, 401 (2010). Over time, the theory expanded to include private persons, not just government employees, until 1987 when the Supreme Court rejected the concept altogether, holding that the fraud statutes were limited in scope to protect just traditional property rights. McNally v. United States, 483 U.S. 350, 350 (1987).
With uncharacteristic speed, Congress attempted to revive the doctrine by enacting 18 U.S.C. § 1346 to include a “scheme or artifice to deprive another of the intangible right of honest services.” The Supreme Court upheld the new statute, noting that it covered the classic bribery and kickback schemes, but not necessarily all intangible rights of honest services whatever they might be thought to be. Skilling, 561 U.S. at 404-05.
Percoco. Joseph Percoco was a close advisor to New York Governor Andrew Cuomo who, for part of 2014, resigned his official position to manage the governor’s re-election campaign. While out of public office, he accepted substantial payments to help a real estate company with an issue it had with a state agency. Percoco contacted the key agency people, and the agency reversed its decision and sided with the real estate company. Percoco was indicted for a wire fraud conspiracy based on honest services fraud, and the trial court instructed the jury that although Percoco had no longer been in government at the time of the offense conduct, he could be found liable if (1) he dominated and controlled any governmental business, and (2) people in government actually relied on him because a special relationship he had with government. Slip Op at 4.
Justice Alito writing for the Court noted that in Skilling it upheld § 1346 notwithstanding a vagueness challenge but observed that such cases usually involved bribery and kickbacks and that the Court had specifically rejected the government’s contention that § 1346 could reach undisclosed self-dealing by public officials or private employees. Slip Op at 7. It reasoned that “Skilling’s teaching is clear. ‘[T]he intangible right of honest services’ must be defined with the clarity typical of criminal statutes and should not be held to reach all ill-defined category of circumstances simply because of a smattering of pre-McNally decisions.” Slip Op at 8. The Court found that the jury instructions that the trial court gave were vague, emphasizing that “domination” was too ill-defined and without sufficient definiteness for ordinary people to understand and to avoid arbitrary and discriminatory enforcement. Slip Op at 10. The government conceded the infirmity with the instructions but argued that the imprecision was harmless, offering new theories given the proofs at trial. The Court declined to save the case from dismissal, though. It reasoned that the jury instructions were substantially different from the government’s new theories and the Second Circuit had not affirmed on either of those theories anyway.
Justice Gorsuch, with whom Justice Thomas joined, concurred and went so far as to emphasize that the “honest services” theory itself is too vague to withstand constitutional scrutiny because it is simply an “aspirational phrase” that “leaves the public and lowers courts “guessing what kind of fiduciary relationships this Court will find sufficient to give rise to a duty of honest services.” Concurrence at 4, 5.
Ciminelli. Ciminelli owned a construction company which paid an intermediary each year to help it obtain state-funded jobs. Ciminelli and intermediaries developed requests for proposals (RFPs) to be used by the state that all but ensured that Ciminelli’s company would be selected as a preferred developer. When the scheme was discovered, those involved were indicted for wire fraud and conspiracy. The government relied on the Second Circuit’s “right to control” theory under which 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.” Slip Op at 3. Consistent with that theory, the trial court instructed the jury that “property” under § 1343 “includes intangible interests such as the right to control the use of one’s assets.” Id. Moreover, “economically valuable information” was defined to be “information that affects the victims’ assessment of the benefits or burdens of a transaction or relates to the quality of goods or services received or the economic risks of the transaction. Id. The Second Circuit affirmed the conviction on the basis that rigging the RFP process deprived the victims of potentially valuable economic information.
Justice Thomas writing for the Court first observed that historically the mail and wire fraud statutes were designed to redress violations of traditional property rights and that over time courts interpreted the statutes to protect “intangible interests unconnected to traditional property rights.” Slip Op at 5. After McNally held that the statutes were confined to traditional property rights, Congress amended the fraud statutes to cover “intangible rights,” from which the right-to-control theory then developed. The Court observed that the theory, as developed by the Second Circuit, holds that a defining feature of most property is the right to control the asset in question, so the protected property interests includes the victims right to control those assets. United States v. Lebedev, 932 F.3d 40, 48 (2d Cir. 2019). Thus, a “cognizable harm occurs where the defendant’s scheme denies the victim the right to control its assets by depriving it of information necessary to make discretionary economic decisions.” United States v. Binday, 804 F.3d 558, 570 (2d Cir. 2015).
The Court found that the right-to-control theory to be inconsistent with statutory text and McNally. It reasoned that the theory was one not long-recognized in property law and that the government had conceded that it was “unmoored” from the text of the federal fraud statutes. The Court also noted that the right-to-control theory was inconsistent with the “structure and history” of the federal fraud statutes in that Congress’ enactment of § 1346 revived only the “intangible rights to honest services” under McNally, not all other forms of intangible rights. Finally, the Court concluded that the right-to-control theory “vastly expands federal jurisdiction without statutory authorization.” Slip Op at 8. It observed that the theory “criminalizes traditionally civil matters and federalizes traditionally state matters.” Id. Accordingly, the Court declared the theory “invalid” and reversed.
The government urged the Court to affirm the conviction claiming sufficient record evidence to support a traditional property rights fraud. It declined to do so, however, noting that it was not its role to cherry pick evidence and assume the role of a jury. Justice Alito concurred noting, among other things, that he did not see the Court’s holding to preclude reprosecution under a different fraud theory.
Summary. In Percoco, the Court refused to expand the intangible rights theory to nongovernmental employees and rejected the Second Circuit’s two-part jury instruction for such liability. It left open the possibility for such liability under a different (and unarticulated) standard, however. In Ciminelli, the Court rejected the right-to-control theory outright as deviating too far from traditional property rights. It is noteworthy that in both cases the government conceded that the courts below had erred in relying upon those theories (previously urged by the government) but invited the Court to uphold the convictions based on supposed record support for traditional property rights theories. Although it is not clear under what circumstances nongovernmental people can be held liable for honest services fraud, it will necessarily be a high standard. And it would appear that the right-to-control theory for liability has gone into the dustbin of federal fraud jurisprudence.
Federal fraud offenses are complex and you need a lawyer with experience handling them if you are charged. Call us at 616-458-2212.
McNally was decided on June 24, 1987, and § 1346 was enacted as part of the Anti-Drug Abuse Act of 1988, which became effective November 18, 1988. Pub L 100-690, title VII, § 7603(b), 102 Stat. 4508 (Nov. 18, 1988).