“A sweeping expansion of federal criminal jurisdiction”: the US Supreme Court’s recent review of federal fraud prosecutions

September 2023 | SPOTLIGHT | FRAUD & CORRUPTION

Financier Worldwide Magazine

September 2023 Issue

For years, white-collar practitioners have grumbled about what they characterise as the seemingly limitless use of the federal fraud statutes by the US Department of Justice (DOJ) to pursue a wide array of conduct ranging from insider trading to private contracting to college admissions.

This grumbling has only become more robust in the wake of a series of recent decisions by the US Supreme Court. In these cases, the Supreme Court has articulated a narrower interpretation of various federal fraud statutes, suggesting that fraud prosecutions based on intangible or speculative property interests and broad statutory applications may not survive.

Although it remains to be seen how the Supreme Court’s decisions will impact the DOJ’s decision making, the court has repeatedly expressed its view that not every deception or falsehood is a “federal crime”. And it is possible that any vacuum with respect to federal prosecutions may increasingly be filled by state authorities and private plaintiffs with a greater ability to seek redress for conduct that the court views as regulated by state law.

Beginning with its unanimous 2016 reversal of the conviction of Bob McDonnell, former governor of Virginia, because McDonnell’s conduct was not an “official act” within the federal bribery statutes, the court has taken a strict approach to matters involving wire fraud and honest services fraud (which criminalises a public official accepting bribes or kickbacks as depriving the public of such official’s “honest services”), reversing convictions that it considers legally infirm. Several of these cases stand out, including the court’s unanimous decision in United States v. Kelly (2020), to overturn the convictions of two associates of Chris Christie, then governor of New Jersey.

‘Bridgegate’, as the scandal was called, involved the defendants realigning two lanes of the George Washington Bridge, the world’s busiest motor vehicle bridge, which is owned by the Port Authority of New York and New Jersey and spans New York City and Fort Lee, New Jersey. The defendants did so in retaliation for the mayor of Fort Lee’s refusal to support Mr Christie’s re-election campaign. The decision, as one defendant stated in an email, to cause “some traffic problems in Fort Lee” resulted in the defendants shutting down two of the three bridge lanes designated for motor vehicles coming from Fort Lee for three days. The defendants claimed that the changes were made to conduct a “traffic study”, but never reviewed any of the information obtained as part of the “study”.

In overturning the convictions, the Supreme Court acknowledged that while the DOJ had established “wrongdoing, deception, corruption, [and] abuse of power”, it had not established fraud because the object of the defendants’ scheme was not to obtain property or money. Although the DOJ argued that the defendants had, in fact, taken the Port Authority’s property by commandeering the bridge lanes, the court rejected this argument, because “[t]he realignment of the toll lanes was an exercise of regulatory power – something that this court has already held fails to meet the statutes’ property requirement”.

Nor, the court found, was the deprivation of money alleged by the DOJ – the costs of compensating bridge employees who performed work during the realignment – actionable because that deprivation was not the specific object of the defendants’ fraud. The court held that “an incidental (even if foreseen) byproduct” of the scheme could not establish fraud if it is not the defendant’s specific intent. Echoing concerns stated in its prior decisions about “a sweeping expansion of federal criminal jurisdiction”, the court claimed that permitting the convictions to stand would allow the government to “use the criminal law to enforce (its view) of integrity in broad swaths of state and local policymaking. The property fraud statutes do not countenance that outcome”.

The Supreme Court’s recent decisions in Ciminelli v. United States (2023) and United States v. Percoco (2023) are in the same vein. As in Kelly, the court overturned both defendants’ convictions and found that the fraud-based prosecutions were predicated on a flawed legal theory. Interestingly, in both matters the DOJ conceded error as to the specific issue before the Supreme Court but argued that the convictions should stand for other reasons. In Ciminelli, the government alleged that Louis Ciminelli, the owner of a construction firm, had rigged a real estate bid process being administered by New York state by conspiring with others to ensure that all bids included certain prerequisites – prerequisites that only Mr Ciminelli’s company could meet. He was prosecuted and convicted of wire fraud and conspiracy based on the ‘right to control’ theory of property.

The ‘right to control’ theory provides that a defendant can be found guilty of fraud where it deprives a victim of potentially valuable economic information necessary to make discretionary economic decisions – in Mr Ciminelli’s case, he had not informed the non-profit board tasked with awarding the contract that he had rigged the process. In overturning Mr Ciminelli’s conviction, the court unanimously held that fraud statutes do not encompass the intangible ‘right to control’ because it is not a traditional property interest. In other words, the fraud statutes do not reach a person’s right to economic information even if it is valuable. The court noted that, because the “theory treats mere information as the protected interest, almost any deceptive act could be criminal”, resulting in federal prosecution of “an almost limitless variety of deceptive actions traditionally left to state contract and tort law”.

In the Percoco decision handed down on the same day as Ciminelli, the court unanimously reversed the conviction of Joseph Percoco, a former adviser to Andrew Cuomo, then governor of New York. The court found that the trial jury instruction stating that Mr Percoco could be found guilty if he had a “special relationship” with the government or if he “dominated or controlled any government business” was impermissibly vague. Under that instruction, lobbyists and political party officials – individuals that indisputably may influence political officials – could similarly be convicted. Although the court did not articulate the precise bounds of honest services fraud, the scope of the statute, particularly when there is not a clear quid pro quo or bribery scheme, may be subject to future challenge.

Finally, in United States v. Dubin (2023), the Supreme Court unanimously vacated the defendant’s conviction under the aggravated identity theft statute, substantially narrowing its scope and making clear that such conduct must be per se fraudulent and deceptive. Aggravated identity theft, which carries a mandatory consecutive two-year term of imprisonment, occurs when a person “transfers, possesses, or uses, without lawful authority, a means of identification of another person during and in relation to another offense”.

A typical fact pattern is that in which the use of identifying information facilitates the predicate offence, such as stealing another person’s credit card information to perpetrate a fraud. Because conviction for aggravated identity theft results in a mandatory two-year sentence which is added to the length of any sentence for the underlying offence, certain defendants charged with the offence may seek a plea offer rather than risk going to trial and facing an enhanced sentence.

In Dubin, the defendant was convicted of healthcare fraud and aggravated identity theft after overbilling Medicaid for psychological testing using the patient’s Medicaid reimbursement number, a means of identification. Vacating David Dubin’s conviction, the court held that the use of another person’s means of information “in relation” to another offence must be at the “crux” of the predicate offence rather than “an ancillary feature” of the billing system involved in the alleged fraud.

Relying on easily understandable examples – at least for white-collar practitioners – the Supreme Court rejected “the staggering breadth” of the DOJ’s interpretation of the statute, claiming it could subject to federal prosecution and a mandatory two-year sentence situations in which “a lawyer rounds up her hours from 2.9 to 3 and bills her client using his name ... [or a] waiter who substitutes one cut of meat for another; we might say the filet mignon’s identity was stolen, perhaps, but not the diner’s”.

These decisions appear to be animated by the Supreme Court’s concern with the potential overreach and overuse of the federal fraud statutes. And the fact that each decision is unanimous, during a period of heightened public discourse about the court’s ‘politicisation’, is telling. A consistent theme from Kelly to Ciminelli is that ‘ballooning of federal power’ is unwarranted and that certain matters are more appropriately left to other entities, including state authorities, and private causes of action, such as tort and contract.

Finally, we expect that white-collar practitioners will use this line of cases to argue that even in instances where the challenged conduct is plainly immoral or unethical, nevertheless it may not be appropriate for a federal prosecution in light of the accompanying significant (and sometimes existential) collateral consequences.

Kamil Shields is a partner and Tracy Nelson Wirth is an associate at Sullivan & Cromwell LLP. Ms Shields can be contacted on +1 (202) 956 7040 or by email: shieldsk@sullcrom.com. Ms Wirth can be contacted on +1 (202) 956 6948 or by email: wirtht@sullcrom.com.

Kamil Shields and Tracy Nelson Wirth

Sullivan & Cromwell LLP