INSIGHT: Prosecutors Stretching Wire Fraud Statute Might Make It Snap

June 8, 2020, 8:01 AM

Bridgegate—what started as a political story in 2013 now returns as a legal story in 2020.

In Kelly v. United States, the U.S. Supreme Court reversed the convictions of two New Jersey political officials who helped orchestrate the 2013 “Bridgegate” scandal. The decision is notable not just because it arose from a high-profile scandal, but also because the court enforced limits to a federal statute that, in practice, can seem virtually unlimited: the statute defining wire fraud.

That statute is among the most widely charged in federal white-collar prosecutions, in part because it can be applied to so many circumstances. As one federal appeals court has observed, the wire fraud statute has “been invoked to impose criminal penalties upon a staggeringly broad swath of behavior, creating … challenges to due process and federalism.” United States v. Weimert, 819 F.3d 351, 356 (7th Cir. 2016)

But, as the court demonstrated in Kelly, even broad statutes have their limits.

To be guilty of wire fraud, a defendant must aim to deprive a victim of money or property. In other words, the government must prove “property fraud.” And Kelly’s core lesson is that property fraud is not nearly so broad a concept as the government contended—certainly not broad enough to include a political official’s decision to reallocate traffic lanes.

To hold otherwise, worried the Supreme Court, might contribute to the “ballooning of federal power” inherent in an expansive view of the federal wire fraud statute.

Accordingly, in Kelly, the court highlighted three important limits to the concept of property fraud and thus the crime of wire fraud:

  1. A fraudulent scheme that merely alters a government’s “regulatory choice” does not qualify as property fraud;
  2. A fraudulent scheme that merely deprives citizens of an “honest and impartial government” does not qualify as property fraud;and
  3. Depriving a victim of property must be the objective of the fraudulent scheme, not merely an incidental byproduct.

These limits have implications for future wire fraud prosecutions, both contemplated and charged. And they sharpen several arguments for defendants facing wire fraud charges.

The Supreme Court’s Decision

In Kelly, the Supreme Court held that the Bridgegate defendants’ convictions for wire fraud (among other charges) ran afoul of all three limits listed above. The defendants had used their positions in state government to enact a scheme to jam traffic in Fort Lee, New Jersey, by reducing the city’s traffic lanes leading to the George Washington Bridge from three down to one. And the defendants did so under the phony cover story that the lane restrictions were for a traffic study.

This, however, was not property fraud, the court said. The defendants had merely altered a “regulatory choice”—i.e., which lanes were reserved for Fort Lee drivers—and “a scheme to alter such a regulatory choice is not one to appropriate the government’s property.”

While the scheme was corrupt and dishonest, the court noted that federal fraud laws do not set standards for “disclosure and good government for local and state officials,” but instead protect a limited subset of property rights. And although the defendants had used public-employee labor for their sham traffic study, that was “the mere cost of implementing” the defendants’ true goal, which was to retaliate against Fort Lee’s mayor for refusing to support then-Gov. Chris Christie’s (R) re-election bid.

Because the public-labor cost was only a byproduct of the scheme—not the object—that labor cost did not transform the scheme into one of property fraud.

Implications for Future Cases

Following Kelly, the federal wire fraud statute feels slightly less elastic than before. Federal prosecutors will, of course, continue to charge wire fraud, but they might hesitate to do so in cases lacking a deprivation of property in a traditional or straightforward sense, like cases in which a victim lost money, chattels, or real property.

Federal prosecutors might also hesitate to invest federal resources in investigating or prosecuting state or local public-corruption cases. After all, the Supreme Court in Kelly reminded us that “federal fraud law leaves much public corruption to the States (or their electorates) to rectify.”

Considerations for Defendants

For defendants charged with wire fraud, on the other hand, Kelly sharpens several potential arguments. Defendants might want to consider looking for opportunities to frame their case in ways that place it within the three limits discussed above.

Where the alleged victim is a governmental entity, as is often the case in white-collar cases, defendants should consider whether the alleged fraudulent scheme, at its core, involves a government’s regulatory choice. Defendants might also look for ways to characterize their case as an improper attempt to federalize good-governance standards for state or local government.

More broadly, defendants should consider whether they can persuasively describe the goal of an alleged fraudulent scheme as something unrelated to money or property. Was the real goal a vendetta? A demonstration of loyalty? The desire for status? Avoiding other consequences?

At the very least, a non-property objective offers a potentially persuasive jury argument, and defendants might want to consider requesting a jury instruction distinguishing objects of an alleged fraudulent scheme from mere byproducts of the scheme.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Ivan Knauer is a partner at Snell & Wilmer LLP in their Washington, D.C., and Salt Lake City offices. He focuses his practice on securities litigation and enforcement

Matt Jarvey, an associate at Snell & Wilmer LLP in Phoenix, focuses his practice in white-collar criminal defense and complex commercial litigation.

To read more articles log in.

Learn more about a Bloomberg Law subscription.