By KBK Attorney Michael J. McCarthy
This time last year, KBK Partner Robert E. Dugdale predicted a number of new initiatives we would see under President Biden’s Department of Justice, including a special emphasis on white collar crime and corruption. Mr. Dugdale was prescient in his forecasts regarding the DOJ’s focus, but two decisions from the high court this term may very well weaken some of the favored tools in a federal prosecutor’s toolbelt. In Ciminelli v. United States, No. 21-1170, and Percoco v. United States, No. 21-1158, both of which arise from a New York state legislative project dubbed “Buffalo Billion” by former New York governor Andrew Cuomo, the legal issues presented deal with related federal statutes: in Ciminelli, 18 USC § 1343 (wire fraud); and in Percoco, 18 USC § 1346 (honest-services fraud). The Court heard arguments in both on November 28. From the initial reactions of the Justices on both sides of the spectrum, it appears that the two cases will add to a series of decisions over the last decade which has revealed the Court’s disapproval of expansive legal theories employed to combat corruption.
Federal prosecutors utilize multiple federal statutes when seeking indictments for allegations of public corruption, including bribery, 18 U.S.C. § 201; the federal program integrity statute, 18 U.S.C. § 666; the Travel Act, 18 U.S.C. § 1952; the mail and wire fraud statutes, 18 U.S.C. §§ 1341, 1343; and the related honest-services fraud statute, 18 U.S.C. § 1346. It is the last two groups that have especially been the focus of recent events. A conviction under sections 1341 and 1343 requires the Government to prove that, pursuant to a scheme or artifice to defraud, the defendant deprived the victim of “money or property” (by means of mail or wire communications, respectively). Section 1346 augments these two statutes by making it a crime to deprive another of their right to “honest services” provided there is an existing fiduciary duty. As prosecutors struggle to articulate legal theories targeting public corruption that pass constitutional muster, they have alternatively cabined allegations into the one group or the other. Prior to turning to the issues presented in Ciminelli and Percoco, a review of important decisions in this area would be helpful.
In United States v. Margiotta, decided in 1982, the Second Circuit upheld a mail fraud conviction against a longtime political leader, who had not held office or any government position, for a scheme to distribute insurance commissions on municipal properties because he had exercised de facto control and dominance of the processes of government. The majority noted concerns that a laxer test would allow those who only exercised “mere influence” to be swept into the statute’s reaches. However, the political leader had been sufficiently influential; in the words of an associate, “everything went through his hands.”[i] Five years later, the United States Supreme Court held in McNally v. United States that the mail fraud statute could not apply to conduct which deprived citizens of the intangible right to honest services, but only money or property.[ii] A year after McNally, Congress enacted section 1346, making the deprivation of honest services a criminal violation in a development known as the “McNally fix.” The 28-word-statute has caused chaos and confusion in its application throughout the circuits ever since, and its broad application by prosecutors has invited repeated scrutiny from the Supreme Court, especially in the last twelve years.[iii]
From 2010 to 2020, the Court reviewed several high-profile convictions involving acts of corruption prosecuted under the honest services statute. First, on a vagueness challenge to the statute in Skilling v. United States, the Court held that only schemes involving a bribe or kickback were covered by looking to pre-McNally caselaw to define the core of honest-services fraud.[iv][v] Six years later, former Virginia Governor Bob McDonnell’s convictions for bribery and honest-services fraud were vacated after the Court held in McDonnell v. United States that an official action performed in return for a bribe was limited to “a decision or action on a ‘question, matter, cause, suit, proceeding or controversy’” involving a “formal exercise of government power.”[vi] McDonnell had been found guilty for arranging meetings and hosting events in exchange for payment, but the Court unanimously held that this conduct did not constitute an official act under the bribery statute. The McDonnell decision caused tidal waves throughout many other high-profile prosecutions, including those of New Jersey Senator Bob Menendez and New York State Assembly Speaker Sheldon Silver.
What, if any, impact did these decisions (and the Court’s apparent desire to limit the honest-services fraud statute) have on federal prosecutors? Many went back to the drawing board and returned with the creative idea of conceptualizing more allegations of public corruption not as the deprivation of honest services – and therefore, requiring a bribe or kickback under section 1346 – but as deprivation of “property” under the traditional mail and wire fraud statutes. This conception of what property could entail soon took a hit in Kelly v. United States.[vii] There, the Supreme Court rejected the Government’s argument that wire fraud convictions against two former New Jersey public officials for shutting down most Manhattan-bound lanes on the George Washington Bridge (in what has famously become known as “Bridgegate”) could be upheld on the theory that these public officials had deprived the Port Authority of its property – the bridge – in order to obtain political retribution against the Mayor of Fort Lee. The Court held the conduct was a “run-of-the-mine exercise of regulatory power [that] cannot count as the taking of property,” and the cost of employee overtime required was not the “object of the fraud” but an “incidental byproduct.”[viii]
With this background, the Court’s grant of certiorari to Ciminelli and Percoco was not a surprise to many observers.
In Ciminelli, the petitioner was a CEO convicted of wire fraud for working with state insiders to obtain development contracts in and around Buffalo, NY totaling hundreds of millions of dollars. The Government’s theory, known as the “right to control,” was that the property deprived from the state of New York was the information that the executive did not disclose: that he worked with state insiders to receive preferential status. Within the Second Circuit, a scheme can violate the wire/mail fraud statutes when the victim is deprived of “potentially valuable economic information” that is “necessary to make discretionary economic decisions.”[ix] The doctrine has been accepted by the Eighth and Tenth Circuits but rejected by the Sixth and Ninth Circuits.
Justice Kagan remarked that she was surprised that the prosecution had gone down this route, rather than seeking a conviction based on the more traditional argument that the defendant had deprived the state of its contract moneys. Justice Barrett noted a concern that the act of deceiving the state had been conflated with the alleged property deprived, the information. Ultimately, Justice Gorsuch summed up the bench’s feelings toward the prosecution theory by noting “radical agreement” amongst the Justices. It appears the doctrine is ripe to be tossed out in favor of the traditional property approach, which might not be a surprise to at least one person, the S.D.N.Y. district court judge who commented while presiding over the petitioner’s trial: “When you get to the Supreme Court, they may say, ‘There is no right of control theory, this is cockamamie.’” Of course, honest-services fraud was not a viable option for the prosecution because, as counsel for the petitioner noted, Skilling had cut off that route.
In Percoco, the issue is not what was deprived, but under section 1346, who was depriving the public of its right to honest services. By all accounts, the petitioner was an influential member of Governor Andrew Cuomo’s staff,[x] serving as the Executive Deputy Secretary between 2012 and mid-2014 and again in 2015. He was found after trial in the Southern District of New York to have accepted a bribe in 2014 in order to influence a state agency decision in favor of a contractor. At the time of his conduct, the petitioner was no longer on the Governor’s staff but was serving as campaign manager to Cuomo’s first reelection effort. He returned to the state payroll shortly after the events at issue and resumed work as a top aide to Cuomo. Section 1346, as applied to public corruption cases, has traditionally been applied to only those who are in government employment or hold elected office, since it requires the existence of a fiduciary duty to the public. The question posed by Percoco essentially boils down to whether Margiotta’s expansive application to those who may be sufficiently influential to government, but are not serving in government, survived McNally and the recent narrowing of anti-corruption statutes.
The practical reality of upholding the conviction was a topic of focus during arguments, including Justices Thomas and Kagan’s example of a government official who leaves office one afternoon and commits fraud only to return shortly thereafter. On the other hand, the Justices recognized that any definition which includes individuals not in government but who exercise great influence would potentially ensnare lobbyists. Justice Gorsuch observed that “[Washington] is full of such persons. And presidents have had kitchen cabinets since the beginning of time.” The implication was that allowing the honest-services fraud statute to reach sufficiently influential private individuals would allow for far too much ambiguity – the very thing that concerned the Court in Skilling. Likewise, the Government’s proposed “functional government employee” test failed to gain any traction and would require, in Justice Gorsuch’s words, “a very long trial to figure out what [that] answer is.” Justice Kagan was blunt in her assessment: “I don’t think you can give me that test without making it look like the guy is just a really, really good lobbyist.”
Honest-services fraud remains a valuable tool for prosecutors in allegations that not only involve public corruption but other circumstances as well. It is often charged in conjunction with other crimes, such as bribery, and provides both flexibility during plea bargaining and also the opportunity for a greater sentence upon conviction. More than 30 of those prosecuted as part of the “Varsity Blues” operations were indicted on section 1346, under the theory that as a result of bribes, university employees breached their fiduciary duty to their employers by offering admission to certain candidates.
It is likely that 2023 will spell a further narrowing of these statutes’ applications. Between the two potential adverse rulings for prosecutors, it is more likely that Ciminelli will have the immediate impact. Ambitious prosecutors seeking to target what they view as corruption in the political arena will likely have to spell out exactly how the target’s scheme deprived the government of its property and/or money. Certain circumstances, such as bid rigging, may be difficult where there is no obvious economic harm because the contractual relationship between the accused and government resulted in a contractually fair exchange. Regardless of the cases’ outcomes, it is unlikely the desire of U.S. Attorneys’ Offices nationwide to prosecute state-level corruption will wane, especially in the Second Circuit. And the reason is obvious: many of the allegations leveled against prominent individuals in these recent cases have sounded alarm bells of impropriety to many, including to jurists on both ends of the spectrum. Yet, the message of the Supreme Court’s jurisprudence in this area over the last 13 years has become clearer with each decision: “not every corrupt act . . . is a federal crime.”[xi]
[ii] 483 U.S. 350, 359 (1987). Though the statute is written in the disjunctive – describing schemes or artifices “to defraud” or “for obtaining money or property by means of false or fraudulent pretenses, representation, or promises” – the Court read the latter phrase to clarify and limit the former based on Congressional intent, and that any harsher reading would have required Congress to speak in “clear and definite language.” Id. at 358-60.
[iii] On the potential applications of the statute, the late-Justice Scalia once commented that, as interpreted by the Government, it could even be read to include “a mayor’s attempt to use the prestige of his office to obtain a restaurant table without a reservation.” Sorich v. United States, 555 U.S. 1204, 1204 (2009) (Scalia, J., dissenting).
[v] In an attempt to apparently fix the “McNally fix,” then-Senator Pat Leahy introduced the Honest Services Restoration Act (S. 3854) immediately after the Skilling decision to expand the honest-services fraud statute to include self-dealing. It failed to reach the Senate floor.
[vi] 579 U.S. 550, 574 (2016). The prosecution had tied its theory of honest-services fraud in McDonnell’s prosecution to the conduct underlying the bribery charge and thus, reversal of the latter required the same outcome for the former.
[x] Cuomo once even remarked that Percoco was “[his] father’s third son” at the late-Governor Mario Cuomo’s funeral. Transcript: Gov. Andrew Cuomo’s Eulogy for His Father Mario Cuomo, Wall St. J., https://www.wsj.com/articles/BL-METROB-22293 (Jan. 6, 2015, 4:30 PM).
[xi] Kelly, 140 S.Ct. at 1574; see also McDonnell, 579 U.S. at 576 (“None of this, of course, is to suggest that the facts of this case typify normal political interaction between public officials and their constituents. Far from it.”)