By Jennifer S. Freel & Michael J. Murtha
The U.S. Supreme Court recently decided three cases against the United States, with the Court rejecting the government’s attempt to prosecute or penalize private citizens under what the Court deemed to be overly expansive interpretations of statutes or regulations. As the Court winds down its current term, we look for the lessons it provided in these three marquee cases.
- In Ciminelli v. United States, the Court rejected the government’s reliance on the expansive “right to control theory,” overturning a conviction predicated on that theory and holding that the “right to control theory” is not a viable theory of liability under the federal wire fraud statute.
- And in Percoco v. United States, the Court further narrowed the scope and ability of the government to prosecute under the honest-services fraud statute, overturning a conviction and holding that a private citizen with informal political influence could not be convicted under for honest services fraud.
- In Bittner v. United States, the Court declined to adopt the government’s interpretation of the Bank Secrecy Act and limited the number of penalties the government could impose against a citizen who failed to report his overseas bank accounts.
The Court’s holdings across these three cases signal to the government, attorneys, and individuals alike that the Court will not tolerate expansive interpretations of federal statutes and regulations. Individuals should have reasonable notice of what encompasses a federal offense and, if such notice is not apparent, the DOJ should limit its charging decisions accordingly.
Ciminelli v. United States, No. 21-1170
Status
Second Circuit reversed.
Issue
Whether the U.S. Court of Appeals for the Second Circuit’s “right to control” theory of fraud—which treats the deprivation of complete and accurate information bearing on a person’s economic decision as a species of property fraud—states a valid basis for liability under the federal wire fraud statute.
Commentary
The Supreme Court unanimously reversed the conviction of Louis Ciminelli, holding that the Second Circuit’s “right-to-control” theory does not describe a “valid basis for liability under the federal wire fraud statute,” 18 U.S.C. § 1343. Cimienlli’s conviction was predicated on the theory that Cimenilli’s company deprived Fort Schuyler Management Corporation—a company tasked with implementing then-New York Governor Andrew Cuomo’s “Buffalo Billion” plan—of “potentially valuable economic information that it would consider valuable in deciding how to use its assets.”
The Court rejected the “right-to-control” theory as a valid basis to support a § 1343 conviction, holding that the federal fraud statutes “do not vest a general power in ‘the Federal Government . . . to enforce (its view of integrity in broad swaths of state and local policymaking.’” Rather, the Court reiterated that under its holding in McNally v. United States, the federal fraud statutes are “limited in scope to the protection of [traditional] property rights,” which do not include the so-called “right to control.” In fact, the Court wrote, the government conceded in its briefing to the Court that the right-to-control theory risks “expanding the federal fraud statutes beyond property fraud as defined at common law and as Congress would have understood it.” The Court accordingly rejected this overly-expansive theory, reasoning that should it stand, the theory would “make[] a federal crime of an almost limitless variety of deceptive actions traditionally left to state contract and tort law.”
Takeaway
The Court’s rejection of the “right-to-control” sounds a warning against government overreach into actions “traditionally” left to state civil law. And, interestingly enough, it seems that the government signaled some hesitation itself over its role in regulating areas traditionally left to the states. Cimenilli could prove a useful precedent in defending against novel theories of liability that are not rooted in historical concepts of fraud.
Percoco v. United States, No. 21-1158
Status
Second Circuit reversed.
Issue
Whether a private citizen who holds no elected office or government employment, but has informal political or other influence over governmental decision-making, owes a fiduciary duty to the general public such that he can be convicted of honest-services fraud.
Commentary
In this case, the Court once again restricted the government’s authority to prosecute under the honest-services fraud statute, 18 U.S.C. § 1346. Joseph Percoco—a former executive aide to New York Governor Andrew Cuomo who allegedly accepted money from lobbyists post-employment to help a real estate developer navigate a state approval process—was convicted of honest-services fraud. The Court held that it was error to instruct a New York jury that Percoco could owe a duty of honest services to the public even if he did not have a formal employment relationship with the state, so long as he “dominated and controlled” government business.
The Second Circuit had affirmed that jury instruction based on its decision in United States v. Margiotta—which McNally v. United States reversed—reasoning that Margiotta was good law because Congress enacted § 1346 after McNally, thereby making it a crime to defraud the public of honest services. The Supreme Court was unconvinced.
In reversing, the Court looked to Skilling v. United States where it held that the “‘intangible right of honest services’ in § 1346 relates [only] to ‘fraudulent schemes to deprive another of honest services through bribes or kickbacks supplied by a third party who had not been deceived.’” Skilling, the Court continued, made it clear that post-McNally, § 1346 could not capture a private person’s conduct who merely had “clout.” Such an expansive reading of § 1346 predicated on Margiotta would violate the axiom that a crime must be defined “with sufficient definiteness that ordinary people can understand what conduct is prohibited.” Accordingly, the Court reversed the Second Circuit’s decision affirming the Margiotta–based jury instruction and overturned Percoco’s conviction.
Takeaway
The Court has routinely reined in prosecutions under the honest-services fraud statute and did so yet again. This decision makes it even more clear that the DOJ can only charge a § 1346 crime if it can point to a bribe or a kickback. Absent congressional intervention, attempts to expand honest-services fraud into a catchall statute may finally be put to rest.
Bittner v. United States, No. 21-1195
Status
Fifth Circuit reversed.
Issue
Whether the Bank Secrecy Act’s penalty for non-willful violations of the foreign financial agency reporting requirements, which requires a citizen to file an annual Report of Foreign Bank and Financial Accounts, or “FBAR,” detailing his or her foreign accounts, is calculated on a per-account or per-report basis. If the penalty applied per account, Bittner faced a $2.72 million penalty; if it applied per report, he faced a $50,000 penalty.
Commentary
The Supreme Court decided in a fractured opinion that the Bank Secrecy Act’s maximum penalty for a non-willful violation of the requirement to report foreign financial accounts by filing an FBAR is $10,000 per report, not $10,000 per account. The Court first turned to two relevant statutes to ascertain whether penalties accrued on a per report or per account basis: 31 U.S.C. § 5314, which outlines reporting requirements; and 31 U.S.C. § 5321(a)(5)(A) and (B), which authorizes the Secretary of the Treasury to penalize non-willful “violations” of those reporting requirements.
Section 5314, the Court reasoned, consistently refers to “records,” it does not speak of “accounts.” Further, § 5314’s reporting requirement is binary: “Either one files a report ‘in the way and to the extent the Secretary prescribes,’ or one does not.” If an individual falls in the latter camp and does not file a report, § 5321 comes into play. That statute “still does not speak of accounts or their number.” And although the Secretary of the Treasury may impose a per-account penalty for some willful violations, the Court held that the government’s attempt to read that authorization into non-willful violations would violate a traditional rule of statutory construction; namely, “[w]hen Congress includes particular language in one section of a statute but omits it from a neighbor, we normally understand that difference in language to convey a difference in meaning[.]”
The Court then cited a number of “contextual clues” that “press[ed] against the government’s theory.” Specifically, the government’s prior representations to the public that a failure to file a report equates to a single violation and Congress’s decision to not extend per-account penalties to non-willful violations as seen by the legislative history surrounding amendments to the Bank Secrecy Act.
Finally, Justice Gorsuch, writing for himself and Justice Jackson, wrote that if there was any doubt about how to construe the Bank Secrecy Act’s penalty provisions, the rule of lenity counseled against the government’s interpretation. The rule of lenity, Justice Gorsuch continued, was particularly appropriate in Bittner because the government’s theory of the case posed a “serious fair-notice problem.”
Justice Barrett dissented and was joined by Justices Thomas, Sotomayor, and Kagan. The four Justices disagreed with the majority, arguing that penalties should be levied on a per-account basis under the plain meaning of the text.
Takeaway
Bittner shows that where ambiguity in the text of a statute or regulation exists, reasonable minds can differ, and that difference can lead to opposite conclusions. Indeed, Bittner’s statutory construction analysis crossed traditional lines of judicial philosophy. The issue before the Court split the “conservative” Justices and the “liberal” Justices and resulted in a narrow victory for a naturalized American citizen caught in a labyrinth of vague statutes and regulations. Bittner demonstrates all too well how necessary it is to have proper counsel and thoughtful legal advice when working in highly regulated areas.
The opinions expressed are those of the authors and do not necessarily reflect the views of the firm, its clients, or any of its or their respective affiliates. This article is for informational purposes only and does not constitute legal advice. For questions related to these cases, please contact Jennifer Freel, Michael Murtha, or a member of the Investigations & White Collar Defense practice.
Meet Jennifer
Meet JenniferJennifer S. Freel is a partner in the Investigations & White Collar Defense practice of Jackson Walker’s Austin office. A former federal prosecutor, Jennifer advises businesses and individuals under investigation by the government and conducts internal investigations for companies seeking an independent party. She also represents clients in civil disputes at the pre-trial, trial, and appellate levels in state and federal court. She is an elected Fellow of the Texas Bar Foundation, a member of the Texas Supreme Court Historical Society’s Board of Trustees, a past chair of the Criminal Law Section of the Federal Bar Association, and a past president of the Austin Chapter of the Federal Bar Association. She has been ranked among the top Texas attorneys for Litigation: White-Collar Crime & Government Investigations by Chambers USA: America’s Leading Lawyers for Business since 2021, and has been named among The Best Lawyers in America for Criminal Defense: White Collar (Austin) since 2022.
Meet Michael
Meet MichaelMichael J. Murtha is an attorney in the Trial & Appellate Litigation and Investigations & White Collar Defense practices of Jackson Walker’s Dallas office. A former federal clerk, Michael is experienced in legal drafting, courtroom hearings, complex commercial litigation, and white collar defense. Prior to Jackson Walker, Michael served as a judicial law clerk to the Honorable Edith Brown Clement of the U.S. Court of Appeals for the Fifth Circuit and to the Honorable Amos L. Mazzant, III of the U.S. District Court for the Eastern District of Texas. He also previously served as a law clerk in the Texas Office of the Solicitor General and advised Texas Senator John Cornyn’s office during the confirmation of Justice Amy Coney Barrett.
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