Tag Archives: Skilling

Government Fraud Theories Take It On The Chin – Update for May 15, 2023

Leave a comment

We post news and comment on federal criminal justice issues, focused primarily on trial and post-conviction matters, legislative initiatives, and sentencing issues.

SUPREME COURT NIXES FEDERAL POLITICAL FRAUD CASES

Fraud170406Nobody likes fraud. Prior to the 1987 decision in McNally v. United States, everyone agreed that federal wire fraud and mail fraud statutes prohibited all kinds of it, including any number of intangible frauds that the Government argued were crimes even if the object of the fraud was not to deprive the government or taxpayers of money.

Honest Services Fraud:  “Honest-services” fraud is fascinating stuff. Most cases prosecuted under federal mail fraud and wire fraud statutes for honest-services fraud involve public employees accepting a bribe or kickback that did not necessarily result in a financial loss for the government or taxpayer but did deprive the government of the right to receive the “honest services” of a government official or employee. In some cases, courts have ruled that the employee did not even have to hold a public position. 

The whole idea of “honest services fraud” that didn’t cost the public a dime was rejected in McNally. But Congress quickly plugged the hole with 18 USC § 1346, which defined mail and wire fraud as “include[ing] a scheme or artifice to deprive another of the intangible right of honest services.” Decades later in Skilling v US, fallout from the Enron scandal, the Supreme Court clarified that “the intangible right of honest services” in § 1346 relates to “fraudulent schemes to deprive another of honest services through bribes or kickbacks supplied by a third party who had not been deceived.” 

money170419Joe Percoco had managed former New York Gov. Andrew Cuomo’s re-election campaign, but he was a private citizen (about to return to the governor’s office) when he called the head of a state development agency and urged him to let a real estate development go forward without the developer having to buy a “labor peace” agreement with the local unions. A day after Joe made the call, state officials reversed their decision that the developer needed to such an agreement, saving  the developer a lot more money than the $30,000 he had paid Joe. 

Joe was convicted of fraud for taking money in exchange for helping to facilitate the real estate construction project. The fraud was “depriving members of the public of the intangible right to ‘honest services’.”

In a unanimous ruling, the Supreme Court threw out Joe’s conviction, holding that the jury instructions used to convict him were too vague. 

The Supreme Court rejected the argument that a person nominally outside public employment could never have a fiduciary duty to the public to provide honest services, but it held that a jury instruction that Joe had such a duty ‘if he dominated and controlled any governmental business and people working in the government actually relied on him because of his special relationship with the government” were too vague. The justices said the instruction did not define “’the intangible right of honest services’ with sufficient definiteness that ordinary people could understand what conduct was prohibited.”

moneyhum170419The Court held that by “rejecting the Government’s argument that § 1346 should apply to cases involving ‘undisclosed self-dealing by a public official or private employee,’ the Skilling Court made clear 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 few pre-McNally decisions. The fact that Joe was influential was simply not enough to put him on notice that being hired to make a persuasive phone call was a federal crime.

Right to Control:   In the other Supreme Court criminal-law decision last week, Louis Ciminelli had steered the terms of a $750 million development project so that his company’s bid would be successful. The government could not prove that the state lost a dime over what other contractors would have bid but argued Lou had deprived the state of its “right to control” the bid process.

The Supreme Court rejected any notion that any “right to control” theory resided in the wire fraud statute. The Court expressed federalism and overcriminalization concerns in narrowing the scope of § 1343, holding that “the fraud statutes do not vest a general power in the Federal Government to enforce (its view of) integrity in broad swaths of state and local policymaking. Instead, these statutes protect property rights only. Accordingly, the Government must prove not only that wire fraud defendants engaged in deception, but also that money or property was an object of their fraud.”

Percoco v. United States, Case No 21-1158, 2023 US LEXIS 1889 (May 11, 2023)

Ciminelli v. United States, Case No 21-1170, 2023 US LEXIS 1888 (May 11, 2023)

– Thomas L. Root

Fraud Takes the Stage at Supreme Court – Update for November 28, 2022

Leave a comment

We post news and comment on federal criminal justice issues, focused primarily on trial and post-conviction matters, legislative initiatives, and sentencing issues.

SCOTUS TO HEAR TWO CRIMINAL FRAUD ARGUMENTS TODAY

Fraud170406The Supreme Court will hear arguments today on two criminal fraud cases that explore whether people who work privately for government officials owe a duty of honest services to the public under what the Wall Street Journal calls “the ill-defined honest-services fraud statute.”

In the first case, former state official Joseph Percoco was serving as campaign manager for former New York Gov. Andrew Cuomo at the time he accepted a $35,000 payment from a real-estate developer to help obtain government approval for a project. The government declared him to be “functionally a public official” because he had clout with state agencies. Thus, the US Attorney said, Joe committed honest-services fraud.

Joe complained in his Supreme Court brief that the 2nd Circuit’s“functionally a public official” rule could have “sweeping implications not only for lobbyists and donors but also for the family members of public officials, who ‘hold unparalleled access and influence’ and whose ‘independent business interests may be in a position to benefit from state action,'” according to SCOTUSBlog.

ambiguity221128The federal prosecutorial approach to fraud has created confusion in lower courts for years. In the last decade, the “right of honest services” has been especially pernicious: nowhere in the statute or a definitive Supreme Court ruling is the “right of honest services” defined.  In fact (as Joe has argued), the Supreme Court’s 2010 Skilling v. United States decision and 2016 McDonnell v. United States have pretty much established that bribery laws are “concerned not with influence in the abstract, but rather with the sale of one’s official position.” Private citizens cannot take official action or use their positions to bring about government action, Joe contends, because they have no such positions. Thus, they cannot violate federal fraud laws.

In Skilling v. United States, the Supreme Court limited criminal liability for fraud to kickback and bribery schemes, but at the time three Justices – Scalia, Thomas and Kennedy – believed the law’s vagueness made it unconstitutional. Lower courts have held that public officials owe a “right of honest services” to their constituents, but the Supreme Court has never ruled that private individuals owe a fiduciary duty to the public.

Last week, the Wall Street Journal complained,

Was Mr. Percoco paid to leverage his political clout? Of course. His simultaneous employment as Cuomo’s campaign manager and a business consultant is certainly sketchy. But the government’s theory… could be used to prosecute any powerful lobbyist, including former lawmakers who don’t act in the putative public interest…This would present First Amendment concerns since citizens have the right to petition their government. It would also impair due process for private citizens who have no way of knowing if they are covered by the honest-services law.

In the second case, the government charged contractor Louis Ciminelli, a Cuomo campaign contributor, with conspiracy to commit fraud by rigging a construction contract for a state-subsidized solar panel plant. A member of a nonprofit overseeing the project drafted the proposal to favor Lou’s construction firm. There was no evidence Lou directed the proposal’s terms, nor that either the state or nonprofit suffered any loss of property as a result of Lou’s firm being chosen.

moneyhum170419But the government claimed Lou defrauded the nonprofit of its “right to control its assets” by “exposing it to the risk of economic harm through false representations about the fairness and competitiveness of the bidding process.” Prosecutors did not produce evidence linking Lou to any bribes or kickbacks. Instead, the prosecutors discussed deprivation of a “right to control”: Lou’s deception deprived the nonprofit board of its right to control the funds and the allocation process.”

As the Wall Street Journal put it, “If you’re struggling to understand the government’s convoluted theory, you’re not alone.”

SCOTUSBlog said Lou’s “main wrongdoing appears to be his ‘sneaking to the front of the line’ in the negotiation process. If the Supreme Court continues its trend of narrowing the scope of federal fraud criminalization, it can do so by eliminating the ‘right to control’ theory of fraud.”

Lou has completed his sentence, while Joe is on home confinement. A Supreme Court win won’t give them back the time they served, but their names could be cleared.

Wall Street Journal, The Supreme Court gets a Fraud Test (November 25, 2022)

SCOTUSBlog, A sharp business deal or a federal crime? Justices will review what counts as fraud in government contracting (November 25, 2022)

SCOTUSBlog, Former aide to Andrew Cuomo wants court to narrow scope of federal bribery law (November 27, 2022)

– Thomas L. Root