Ask any fraud prosecutor what their bread-and-butter criminal statute is, and you’ll surely hear about mail fraud or wire fraud. Taken together, they account for a significant percentage of fraud prosecutions at the federal level. Both statutes are broad and malleable, requiring a fraudulent scheme to obtain money or property; a criminal intention to defraud someone; and either a mailing or interstate wire transmission. And, properly drafted, just about every type of economic crime can be cabined into a charge of mail or wire fraud.
Give prosecutors a broad tool, and you’ll surely have instances where the statute is pushed to its limits. In most cases, the object of any fraud scheme is money, making it a natural fit for the mail and wire fraud statutes. The challenge comes when the defendants are not after money but “property.” Sometimes that’s simple: if I lie to you to get the deed to your house, that’s property fraud. But defining the limits of “property” has always proved troublesome. Creative prosecutors have deployed the statutes in a variety of scenarios, often in the context of public corruption cases, and usually with success. That breadth, however, has always given the Supreme Court some level of pause.
The Supreme Court is revisiting the scope of property rights protected under the mail and wire fraud statutes this term in Ciminelli v. United States (No. 21-1271) , a case arising from a public-works project in New York. There, the defendants rigged the bidding process to favor their companies on projects worth $750 million. A jury convicted the defendants of federal wire fraud, and the Second Circuit affirmed the conviction under the “right to control” theory of fraud. This theory holds that the mail and wire fraud statutes protect “intangible” property rights, such as the right to “information that could impact on economic decisions [such that it] deprived some person or entity of potentially valuable economic information.” The Supreme Court heard argument on November 28.
The Supreme Court Narrows the Statute
To understand how the Court may approach Ciminelli, one must look back in time to the Court’s efforts to narrow the scope of the mail and wire fraud statutes. For years, “property” was interpreted broadly to include an intangible right to honest and fair dealing. In 1987, the Supreme Court rejected that theory in McNally v. United States, a case involving a state official who accepted kickbacks in exchange for selecting a company as the state’s insurance agent. The Court declined to interpret the meaning of “property” as broad enough to encompass intangible property rights, such as the right to honest services, in part because such a broad interpretation would authorize federal prosecutors to “set[] standards of disclosure and good government for local officials” and leave the conduct prohibited by the statute ambiguous. McNally v. United States, 483 U.S. 350, 360 (1987).
Congress responded to the Court’s limitation of the meaning of property in McNally by amending the fraud statutes to explicitly include an “intangible right of honest services” as a protected property interest. See 18 U.S.C. § 1346. A few years later, the Court held in Cleveland v. United States that a scheme involving false statements on applications for state licenses for video-poker machines was not covered by the statutes because the licenses held no monetary value to the state—the state had only a regulatory interest in the licenses, but not a property interest—and explained that the “intangible rights of allocation, exclusion, and control” do not qualify as a property interest. 531 U.S. 12, 23 (2000). In Skilling v. United States, the Court tightened the statutes even further, limiting the right of honest services to cases that involve bribery and kickbacks and specifically rejected its application to undisclosed conflicts of interest. 561 U.S. 358, 368 (2010).
The Court again rejected a broad reading of the statutes in 2020, focusing on the meaning of “obtaining money or property” in the context of the Bridgegate fiasco in New Jersey. In Kelly v. United States, the defendants schemed to cause traffic gridlock on the bridge to retaliate against a government official who did not endorse their campaign. The government’s theory was that the time and labor of the employees who were deployed to change the lanes on the bridge constituted government property. The Court reasoned that although the government’s right to its employees’ time and labor is a legitimate property interest, the statute requires that the property be “obtained” by the fraud, not merely an instrument to effectuate the scheme. In other words, where the property underlying the fraudulent scheme is only an “incidental byproduct,” and not the object of the fraud, the conduct is beyond the scope of the statute. Kelly v. United States, 140 S. Ct. 1565, 1571 (2020).
Although these cases addressed distinct facets of the fraud statutes, the common theme is that the Court is unlikely to interpret the statutes in a manner that would provide federal prosecutors with a tool that would lead to “a sweeping expansion of federal criminal jurisdiction” by broadening the reach of the mail and wire fraud statutes. Cleveland, 531 U.S. at 24.
The “Right to Control” Theory of Property
In Ciminelli, the Court will examine the “right to control” theory. Ciminelli argues (1) that this theory is an improperly broad application of the fraud statutes that does not require the government to prove that the fraud affected any kind of traditional property interest, as required by the statute; (2) the right to control theory also fails to satisfy the “obtaining” requirement of the statute as stated in Kelly because a defendant who withholds economically material information does not “obtain” the right to control assets; and (3) that the right-to-control theory “circumvents and defeats” the limitation of the statutes to bribes and kickbacks articulated in Skilling because the right to control theory would allow the government to prosecute undisclosed conflicts of interest as property fraud.
The United States argues that the right to control theory is a valid basis for a conviction under the mail and wire fraud statutes as interpreted by the Supreme Court, and that this theory has been appropriately limited by the Second Circuit’s requirement that the government prove the scheme caused or could have caused tangible economic harm. The government argues that here, Ciminelli intended to make misrepresentations in the bid process to win the bids, and thus, deprived the public works agency of economic information that affected the right to control its funds in deciding to award the contracts to the defendants. The object of the fraud was obtaining the public works agency’s money, and the risk of tangible economic harm to the agency was that the agency may have obtained better or lower-cost services for the public-works project.
Several circuits, including the Fifth, have affirmed convictions under similar theories of prosecution for wire or mail fraud. These courts recognize that depriving a person or entity of the right to control one’s property is encompassed by the statutes. In United States v. Matt, 838 F.2d 1356, 1358 (5th Cir. 1988), the Fifth Circuit held that misrepresentations or denial of “economically material information” that would affect one’s decisions about a business transaction is a deprivation of a tangible property right in violation of the fraud statutes. Similarly, the Tenth Circuit, in United States v. Welch, 327 F.3d 1081, 1107 (10th Cir. 2003), affirmed the convictions of defendants who manipulated the bidding process for the 2002 Olympic games. And the Eighth Circuit, in United States v. Shyres, 898 F.2d 647, 651 (8th Cir. 1990), concluded that a scheme to deprive the victim of the right to exercise control over how their money is spent is a legitimate basis for a mail fraud conviction.
Federal Prosecutors’ Use of the Mail and Wire Fraud Statutes in Texas
Federal prosecutors in Texas have not been shy about deploying the mail and fraud statutes in high-profile prosecutions over the last few years, albeit with mixed success.
First, in United States v. Forkner (NDTX), the government charged a Boeing executive with a scheme to defraud potential buyers of the 737 Max airplane. The theory, at least as the government tried to prove, was that Forkner knew of problems with the 737 Max and made material misrepresentations to government officials about it, so that Boeing could sell the planes. The crux of the wire fraud was invoices electronically sent, not by the defendant, but by Boeing generally to the customers for payment.
Forkner moved to dismiss the indictment, contending that there was no connection between the alleged scheme and Boeing “obtaining money or property.” The government contended that the indictment sufficiently alleged that the purpose of the scheme was to both obtain money (payment for the 737 Max airplane) and obtain property (depriving the buyers of their property right to control their money). On the latter theory, the government invoked the Second Circuit’s “right to control” theory, noting that the indictment alleged that Forkner’s scheme involved depriving the buyers of economically material information in the decision to purchase a 737 Max.
At the pleading stage, where the court must take the factual allegations in the indictment as true, Forkner’s arguments failed. The victory was short-lived, as the jury acquitted the defendant.
Second, in United States v. Kruse (WDTX), the government charged the CEO of Blue Bell with covering up the listeria crisis. Instead of bringing misdemeanor charges relating to food safety, the government charged him with multiple counts of wire fraud. Each count focused on an email sent to a Blue Bell customer that, in the government’s mind, failed to accurately disclose the situation and Blue Bell’s corporate knowledge regarding the outbreak.
Kruse challenged the indictment prior to trial. Instead of focusing on “money or property,” Kruse argued that the indictment alleged two schemes—one focused on affirmative misrepresentations; the other focused on material omissions. He contended that the latter was only cognizable under the wire fraud statute if there was a duty to disclose. The government and the Court disagreed, finding that the scheme alleged in the indictment was broad enough to encapsulate both affirmative misstatements and material omissions.
Kruse’s trial ended in a hung jury, and is set to be retried in April 2023. Like the public-works agency in Ciminelli, look for the government to argue that Blue Bell’s customers were deprived of economically valuable information when deciding whether to purchase the product. Or, put another way, the customers were deprived of the “right to control” how to spend their money.
Third, in United States v. Greenlaw et al. (NDTX), the government convicted four executives with United Development Funding (“UDF”), real-estate investment fund, with defrauding investors. Unlike Forkner or Kruse, this was a simple “obtaining money” case—the defendants misrepresented various investment products to get people to buy them. That’s a cut-and-dried wire fraud case: lies for money.
On appeal, the defendants attempted to recast the government’s case as one where UDF, if anything, deprived the investors of their right to accurate information. It’s hard to see how that argument helps them at all. The crux of every fraud case is a false or misleading statement—one that deprives the recipient of some piece of information—and so long as it is material, that’ll do the job every time.
Finally, in United States v. Garza (NDTX), the government charged a tax attorney and several related parties who promoted a shelter that allowed wealthy individuals to pay much less in taxes to the IRS with tax fraud. In addition to tax counts, the government also brought wire fraud charges. There, the government alleges that the scheme allowed the taxpayers to “obtain” money by simply keeping it and not paying it over as taxes due the United States. The plain meaning of “obtain,” however, suggests that the benefactor of the scheme get something, rather than simply keep something he already has. Garza was indicted in October 2022 and preliminary set for trial in December, although continuances are likely.
Takeaways
- In some sense, the debate over the scope of the mail and wire fraud statute is just an encapsulation of the debate over the proper role of the prosecutor. Some have suggested that Ciminelli represents prosecutorial overreach, but the “right to control” theory has been repeatedly blessed by the Second Circuit, and several other circuits have affirmed convictions under similar theories. And so, no surprise, prosecutors used it. The mail and wire fraud statutes are malleable, but for good reason: Congress cannot simply define separate statutes for the myriad ways bad actors can lie, cheat, and steal to their advantage. And “overreach” or not, most commentators forget that whatever the object of the scheme, the government still bears the burden to prove criminal intent beyond a reasonable doubt.
- Ciminelli may turn out to be a case about how to properly draft an indictment, rather than a referendum on the scope of the statute. It’s not readily apparent why the government resorted to the “right to control” theory at all. Much as with the UDF matter, the Ciminelli defendants lied during the bid process to get a $750M contract. That’s a scheme to “obtain money” and prosecuting it under the “right to control” theory seems unnecessary. The government has advanced this argument in its merits briefing at the Supreme Court, although the Court was skeptical that it could affirm on that basis given how the government charged the case.
- Relatedly, the fears of Ciminelli may be significantly overblown and may be a matter of semantics. Every person or entity has a “right to control” where its money goes, and in Ciminelli the defendants lied to get at the public works funds. UDF (and Kruse) is no different—the investors who purchased UDF products did so based on allegedly false representations from the defendants. Of course those investors (or customers) have the “right to control” the use of their funds. Any effort to interfere with an individual’s use of his money (or property) is cognizable under the wire and mail fraud statutes, so long as the remaining elements are also met.
- There’s a lot of room in the joints of the statutes where savvy defense attorneys can find limits on its scope. The definition of “property” is just one example. Two others include what it means to “obtain” money or property and whether doing so is “by means of” the alleged scheme. Savvy defense counsel did so in Forkner and Kruse, putting the court on notice of significant limitations on the mail and wire fraud statutes.
Look for a decision sometime in the spring.
J. Nicholas Bunch is a partner in Haynes and Boone’s white collar and government investigations practices. He is a former assistant U.S. attorney for the Northern District of Texas.
Ashley Koos is a litigation associate at Haynes and Boone focusing on government investigations and white collar defense.