Public Corruption and the Limits of Federal Fraud Statutes

Public Corruption and the Limits of Federal Fraud Statutes

Legal Sidebari

Public Corruption and the Limits of Federal
Fraud Statutes
August 21, 2023
Over time, Congress has shown consistent interest in policing public-sector corruption, enacting a number
of criminal provisions aimed at holding corrupt officials and those who entice them accountable for their
actions under federal law. Federal prosecutors’ most potent existing tools for combating such corruption
include the federal mail and wire fraud statutes and a provision defining those crimes as including so-
called “honest services” fraud. This Sidebar provides an overview of the federal mail and wire fraud
statutes and the development and codification of the “honest services” theory of fraud; surveys some of
the major Supreme Court decisions limiting the reach of those statutes; and explores some considerations
for Congress.
In summary, the mail and wire fraud statutes have been a source of contention between the courts and
Congress for years. While Congress has passed broadly worded legislation to cover the self-interested
actions of federal, state, and local officials, among others, the Supreme Court has repeatedly adopted
narrow interpretations of the statutes, at times signaling that broad constructions could raise constitutional
concerns about vagueness or federalism.
This trend continued in two cases the Supreme Court decided in May 2023—Ciminelli v. United States
and Percoco v. United States. In those cases, the Court reversed two wire-fraud convictions: Ciminelli
involved bid-rigging to obtain state-funded development projects, and Percoco involved bribery to assist
a real-estate development company in its dealings with a state agency. The Court in both cases rejected
statutory interpretations used by the lower courts that it viewed as “too vague” or as “vastly expand[ing]
federal jurisdiction” to “an almost limitless variety of deceptive actions traditionally left to state . . . law.”
Overview of Mail and Wire Fraud Statutes
18 U.S.C. § 1341 prohibits use of the mails (including the United States Postal Service and “any private
or commercial interstate carrier”) for the purpose of executing “any scheme or artifice to defraud, or for
obtaining money or property by means of false or fraudulent pretenses, representations, or promises.” 18
U.S.C. § 1343 likewise prohibits transmissions “by means of wire, radio, or television communication in
interstate or foreign commerce” for the purpose of executing such schemes or artifices. These federal
crimes, commonly known as “mail fraud” and “wire fraud,” encompass multiple forms of fraudulent
conduct using jurisdictional hooks that reach practically all forms of modern communication. Because the
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two statutes essentially mirror each other (save for the medium used in connection with the offense),
interpretations and analyses of one statute will typically apply to the other. As discussed in more detail
below, 18 U.S.C. § 1346 establishes that the phrase “scheme or artifice to defraud” as used in the two
statutes “includes a scheme or artifice to deprive another of the intangible right of honest services.”
To secure a mail or wire fraud conviction, the government must prove beyond a reasonable doubt the
following elements: (1) a scheme to defraud; (2) foreseeable use of the mail, a private commercial carrier,
or a wire or radio communication in furtherance of said scheme; and (3) intent to defraud another of
(4) money, property, or honest services. A scheme to defraud generally encompasses conduct reasonably
calculated to deceive. The Supreme Court has established that the deception contemplated by a scheme to
defraud must be “material,” meaning that the misrepresentation or concealment at issue must have “a
natural tendency to influence, or [be] capable of influencing,” the person “to [whom] it was addressed.”
The second element—foreseeable use of the mail or wire communication, among other things—covers
the use of most modern forms of remote communication when used “in furtherance of” the fraudulent
scheme, that is, as “part of the execution of the scheme as conceived by the perpetrator at the time.” The
government must also prove that the defendant in a mail or wire fraud prosecution had the intent to
defraud, described by one court as “the specific intent to deceive for the purpose of causing pecuniary loss
to another or bringing about some financial gain to himself.”
Finally, a scheme to defraud in violation of the mail or wire fraud statutes must have as its object money,
property, or “honest services.” These aspects of the statutes have been frequently litigated, and the subject
of several notable Supreme Court decisions, over the past 25 years.
Money or Property
Sections 1341 and 1343 speak of schemes “for obtaining money or property.” A straightforward example
of covered fraud is filing an insurance claim for a car accident that never happened in order to obtain a
payout from the insurance company. In addition to money and tangible property, the statutes also apply to
intangible interests, such as confidential business information, that have “long been recognized as
property.” If an interest lacks value in the hands of the ostensible victim, however, it is not protected by
the statutes as “property.” For instance, the Supreme Court held in Kelly v. United States that “the
regulatory rights of allocation, exclusion, and control” are not property interests of the government for
purposes of the wire fraud statute, as they implicate the government’s “role as sovereign wielding
traditional police powers—not its role as property holder.”
Honest Services
Although the text and legislative history of the mail and wire fraud statutes arguably suggest that
Congress initially contemplated only frauds involving money or property, lower federal courts up to 1987
interpreted the statutes also to cover deprivations of some intangible, nonproperty rights. “Most” of these
cases involved public officials who “made governmental decisions with the objective of benefitting
themselves or promoting their own interests, instead of fulfilling their legal commitment to provide the
citizens of the State or local government with their loyal service and honest government.” Regardless of
whether the betrayed party (the citizenry) was or would be financially harmed, under this theory, the
violation lay in the deprivation of that party’s intangible right to the official’s “honest services.” Some
courts also applied the statutes to deprivations of other intangible rights like the right to privacy and the
right to honest elections.
In 1987, in McNally v. United States, the Supreme Court halted these applications of the statutes,
concluding that the mail fraud statute was “limited in scope to the protection of property rights.” In the
Court’s view, a broader reading would “leave [the statute’s] outer boundaries ambiguous and involve[] the
Federal Government in setting standards of disclosure and good government for local and state officials.”

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Ultimately, the Court in McNally declined to adopt a reading of the mail fraud statute that would risk
these results absent a decision by Congress to “speak more clearly than it has.”
Within a short time, Congress had accepted the Court’s invitation to speak by passing legislation, now
codified at 18 U.S.C. § 1346, which clarified that “the term ‘scheme or artifice to defraud’ includes a
scheme or artifice to deprive another of the intangible right of honest services.” Following the enactment
of 18 U.S.C. § 1346, the lower federal courts continued to apply the mail and wire fraud statutes to a
range of fraudulent conduct on the part of both public officials and private parties implicating the
deprivation of an intangible right of honest services. Typical cases involved “either bribery . . . or [the]
failure to disclose a conflict of interest, resulting in personal gain.”
Once again, however, the Supreme Court stepped in to limit the scope of the mail and wire fraud statutes
based on concerns about vagueness. In United States v. Skilling, the Court held that honest services mail
or wire fraud must involve “offenders who, in violation of a fiduciary duty, participate[] in bribery or
kickback schemes.” The Court expressly rejected applications of the wire fraud statute to broader forms
of dishonest conduct like undisclosed self-dealing, which the Court worried would “encounter a
vagueness shoal.”
Following Skilling, caselaw developments regarding honest services fraud have primarily centered on
fleshing out the scope of the terms “bribery” and “kickbacks,” as well as the source and scope of requisite
fiduciary duties. For instance, the Supreme Court in a 2016 case applied a narrow definition of bribery
requiring some “formal exercise of governmental power” in exchange for remuneration. Additionally, in
response to the Court’s limiting constructions, some federal prosecutors have appeared to reframe cases
that might previously have been brought on an honest services theory as traditional “money or property”
wire fraud, aided by lower-court decisions recognizing intangible property interests based on things like a
right to control one’s assets.
Ciminelli and Percoco
On May 11, 2023, the Supreme Court issued two opinions stemming from federal corruption prosecutions
in New York State. One of the cases—Ciminelli v. United States—involved the wire fraud conviction of a
developer named Louis Ciminelli in connection with a $750 million state-funded project in Buffalo.
Ciminelli’s company had obtained the contract through a bid process rigged to “effectively guarant[ee]”
that it would have “priority status to negotiate for specific projects.” Two associates of the then-Governor
of New York engineered the process. One of them had been paid by Ciminelli’s company to help it obtain
state-funded projects. The other served on the board of directors of the nonprofit tasked with negotiating
with developers for the Buffalo project. Federal prosecutors charged Ciminelli with wire fraud and relied
on the Second Circuit's “right to control” theory, under which “the Government can establish wire fraud
by showing that the defendant schemed to deprive a victim of potentially valuable economic information
necessary to make discretionary economic decisions.” Prosecutors argued that Ciminelli was guilty of
wire fraud if the scheme he participated in deprived the nonprofit of information relevant to its selection
of contractors for the projects it administered for the state. A jury convicted Ciminelli.
Ciminelli challenged the right to control theory on appeal. In a unanimous opinion authored by Justice
Thomas, the Supreme Court rejected the “right to control” theory as irreconcilable with the text of the
wire and mail fraud statutes. According to the Court, those statutes are limited to “traditional property
interests” and the “so-called ‘right to control’” is not one of them. The Court held that “[b]ecause
‘potentially valuable economic information’ ‘necessary to make discretionary economic decisions’ is not
a traditional property interest . . . the right-to-control theory is not a valid basis” for wire fraud liability.
The Ciminelli Court further emphasized that a broad reading of the wire fraud statute encompassing a
right to control as a protected property interest could criminalize “almost any deceptive act,” and would
“criminalize[] traditionally civil matters and federalize[] traditionally state matters.”

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In the other decision, Percoco v. United States, the Supreme Court examined “whether a private citizen
with influence over government decision-making” can be convicted of wire fraud on an honest-services
theory. The defendant in the case, Joseph Percoco, was a high-ranking gubernatorial aide except for a
brief period when he resigned his official position to manage the Governor’s reelection campaign. During
that hiatus, Percoco accepted payments from a real-estate company to use his influence with state officials
to help it avoid a labor requirement imposed by a state agency. The agency dropped the requirement soon
after one of its senior officials received a call from Percoco “mere days” before he was scheduled to
return to his job in the Governor’s office. Relying on Second Circuit precedent, the trial judge instructed
the jury that during his time as a private citizen, Percoco still “owed a duty of honest services to the
public if (1) he ‘dominated and controlled any governmental business’ and (2) ‘people working in the
government actually relied on him because of a special relationship he had with the government.’” The
jury convicted Percoco.
In an opinion authored by Justice Alito, the Court rejected this standard for honest-services fraud on
vagueness grounds, expressing concern that it could be used to “charge particularly well-connected and
effective lobbyists.” According to the Court, the Second Circuit standard would have implied a public
right to “‘disinterested service’ from lobbyists and political party officials . . . whenever such persons’
clout exceeds some ill-defined threshold.” Nevertheless, the Court recognized that individuals
“nominally outside public employment” may sometimes owe a duty of honest services to the public—
particularly if they “enter into agreements that make them actual agents of the government.” In a
concurring opinion, Justice Gorsuch (joined by Justice Thomas) argued that no jury instructions could
have resolved the vagueness issue, writing that “to this day, no one knows what ‘honest-services fraud’
encompasses.” Justice Gorsuch called on Congress to clarify the honest-services statute’s scope.
Considerations for Congress
Some commentators have lamented what they view as the Supreme Court’s blunting of a previously sharp
weapon to combat public corruption, arguing that the Court’s decisions have placed too little weight on
“the interests of citizens in honest government” and urging Congress to find a legislative fix. Other
observers, however, have suggested that the deleterious impact of the decisions is overstated, pointing out
that federal prosecutors still have multiple legal means to combat corruption in the public sphere. In any
event, should Congress revisit and reconsider the scope of mail and wire fraud, understanding the
vagueness and federalism concerns that have animated the Supreme Court’s repeated limiting
constructions of the statutes may help prevent further judicial limitations. One place to start could be the
questions that the Skilling Court identified as relevant to “the enterprise of criminalizing undisclosed self-
dealing.” These questions include (1) how “direct or significant” a conflicting financial interest must be;
(2) the extent to which an “official” act or action must further the conflicting financial interest in order to
constitute fraud; and (3) to whom a disclosure must be made, and what information it must contain, for a
conflicted official to avoid criminal liability.

Author Information

Peter G. Berris
Michael A. Foster
Legislative Attorney
Section Research Manager

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