SCOTUS Scales Back Fraud Statutes’ Reach, but Ambiguity Persists

The breadth of federal fraud statutes makes them powerful tools for prosecuting corruption, but recent Supreme Court rulings have consistently narrowed their scope.

Over the past 15 years, the court has issued a steady string of decisions, from Skilling to McDonnell to Kelly, and now Percoco and Ciminelli, that reject aggressive interpretations of those laws, Murad Hussain, a white collar defense attorney with Arnold & Porter Kaye Scholer LLP, said.

A concern explicitly articulated by the court is that prosecutors might use the laws “to dictate federal ethical standards for state and local governments,” Hussain said.

Percoco v. United States limits the circumstances under which a private citizen might have a fiduciary duty to the public for purposes of “honest services” fraud, while Ciminelli v. United States rejected the Second Circuit’s longstanding “right-to-control” theory of wire fraud. Both were decided May 11.

Those decisions should curb the government’s desire to prosecute conduct not clearly covered by the laws, Jackie Jacobson, a white collar defense attorney with Monico & Spevack, said.

She said she thinks the cases are an important step toward limiting prosecutorial overreach. “I hope they affect charging decisions,” she said.

Even with the new opinions, a high degree of uncertainty remains about potential applications of the fraud statutes.

Narrowing

Skilling v. United States, decided in 2010, limited the honest services wire fraud statute to bribery and kickback schemes. McDonnell v. United States, decided in 2016, narrowed the definition of an “official act” subject to the law.

In 2020’s Kelly v. United States, the court held that convictions for wire and federal program fraud couldn’t stand, because the alleged scheme to reduce toll lanes for commuters as political retribution didn’t target money or property.

Percoco picked up the trend, vacating a conviction for conspiracy to commit honest services wire fraud. The court decided the jury was improperly instructed that the statute extends to anyone with a “special relationship” with the government who “dominated and controlled” government business.

However, the court didn’t entirely reject the idea that a person “nominally outside of public employment” may have a fiduciary duty to the public.

Congress?

In a Percoco concurrence, Justice Neil M. Gorsuch said the ambiguity over when a duty of honest services arises leaves “prosecutors and lower courts in a bind.”

Congress “must do more than invoke an aspirational phrase and leave it to prosecutors and judges to make things up as they go along,” Gorsuch said.

Congress didn’t define “honest services” when it enacted 18 U.S.C. §1346. Nor did it respond to the court narrowing the statute’s reach after Skilling.

Fraudsters “are always coming up with new ways to defraud individuals, institutions, and the government,” Sharon Fairley, a University of Chicago law professor and former prosecutor, said.

The high court seems to be “taking responsibility for making sure the government does not take advantage of the statute’s broad reach,” she said.

Ciminelli and Property

In Ciminelli, the court held that “potentially valuable economic information” needed to make “discretionary economic decisions” isn’t a traditional property interest, rejecting the right to control theory as a valid basis for a conviction under the wire fraud statute.

The government conceded that “if the right to make informed decisions about the disposition of one’s assets, without more, were treated as the sort of ‘property’ giving rise to wire fraud, it would risk expanding the federal fraud statutes beyond property fraud as defined at common law and as Congress would have understood it.”

“If you allow the idea that property includes the right to control the property, you’re essentially saying that any deception that’s going to affect the way you use your property is a property fraud, and that erases the distinction that the Supreme Court has been drawing, really since the early 1900s, and in the modern era, since McNally,” Lisa Mathewson, a Philadelphia-based white-collar defense attorney, said.

McNally v. United States, decided in 1987, invalidated the government’s “honest services” fraud theory under the mail fraud statute, on the grounds that the law only covers traditional property interests. Congress responded the following year by explicitly recognizing “honest services” as an intangible right protected under federal law.

The fact that Congress was silent about other intangible interests “forecloses the expansion of the wire fraud statutes to cover the intangible right to control,” the court said.

Open Questions

The Supreme Court’s winnowing, though consistent, has been incremental, and key questions about the scope of the federal fraud statutes remain unclear.

Percoco was highly fact-specific. And aside from striking down the right-to-control theory, Ciminelli did little to advance the ball with respect to defining a traditional property interest, according to Elisha Kobre, a partner at Bradley Arant Boult Cummings LLP and former prosecutor.

The court said what a property interest isn’t, but not what it is. It was sort of “a let down,” he said.

A key issue, undecided in Ciminelli, “is do you need intent to inflict financial harm, or is it enough to defraud to obtain property without inflicting economic loss?” Kobre said.

What constitutes a property interest is being actively litigated in the lower courts. The same week that Ciminelli was decided, the First Circuit vacated two convictions in the Varsity Blues scandal, holding that the jury was incorrectly instructed that admissions slots constitute “property” under the government’s arguments.

It also rejected the government’s honest services theory.

As long as the parameters of the fraud statutes are unclear, and prosecutors attempt to innovate around them, the laws will raise separation of powers concerns. But it’s also about “core concepts of due process and vagueness,” Mathewson said.

“We have to be sure that courts are applying criminal statues in a way that every ordinary person would have notice in advance about what is actually prohibited,” she said.