SCOTUS Takes a Close Look at White-Collar Crime in two recent cases: Percoco and Ciminelli

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SCOTUS Takes a Close Look at White-Collar Crime in two recent cases: Percoco and Ciminelli

Lately, SCOTUS has taken an interest in white-collar criminal cases. Just last week, the Court heard oral arguments in two fraud cases: Percoco v. U.S. and Ciminelli v. U.S. The first addresses 18 U.S.C. §1346, the honest-services fraud statute, while the second interprets the wire fraud statute, 18 U.S.C. §1343. Though it will be several months before the Court rules on these two cases, it’s worth parsing the facts, underlying arguments, and constitutional issues presented by each. 

Percoco 

The issue in Percoco is whether a private citizen, who is not a government employee but who has informal governmental decision-making power, owes the public a fiduciary duty and can thus be convicted of honest-services fraud. The statute at issue is 18 USC §1346, dealing with a “scheme or artifice to defraud” someone of an “intangible right to honest services.” The question in Percoco is whether someone with informal governmental power can violate the statute.

The Facts

Mr. Percoco was the Executive Deputy Secretary under former New York Governor Andrew Cuomo from 2011-2016, except for an eight-month period in 2014 when he ran the Governor’s reelection campaign. Percoco ran into some financial issues in 2012 and solicited a favor from a lobbyist he knew, asking him to hire his wife. The lobbyist approached a client who owned an energy company that was seeking a Power Purchase Agreement (PPA). Percoco’s wife was offered a high-paying part-time job in exchange for Percoco’s help acquiring the PPA for the company. 

A co-defendant, Aiello, owned COR Development Company and sought funding from a state-run organization called Empire State Development. Aiello circumvented the required procedure, which involved obtaining a Labor Peace Agreement. Meanwhile, Aiello’s company transferred tens of thousands of dollars to Percoco’s wife. 

After running Cuomo’s reelection campaign in 2014 and before resuming his position as Executive Deputy Secretary, Percoco called an official with Empire State Development and pushed him to subvert the LPA requirement in funding Aiello’s company (so his wife could get more money from them). He wasn’t officially serving in his Executive Secretary position at the time but did make the calls from his office. The LPA requirement was indeed waived.

Percoco, Aiello, and another defendant (the man who originally hired Percoco’s wife to work for the energy company) were indicted and tried in 2018 in the U.S. District Court for the Southern District of New York. The jury found Percoco and Aiello guilty of honest services wire fraud pertaining to their dealings with COR. Percoco was also found guilty of wire fraud and soliciting bribes.

Percoco and Aiello appealed to the Second Circuit, claiming that the District Court erred in instructing the jury to find them guilty of violating the statute because Percoco didn’t work for the government at the time he allegedly committed fraud. The Second Circuit rejected this argument, holding that private citizens like Percoco who “in reality or effect ARE the government” owe a fiduciary duty to the public and thus can be convicted of honest services wire fraud (emphasis added). The case is now before SCOTUS.

Percoco’s Argument

In his brief and oral argument, Percoco argued that private citizens without formal governmental power cannot violate the statute because they have no fiduciary duty to the public and that including private citizens within the statute’s ambit would make the statute unconstitutionally vague, violate the First Amendment, and violate New York’s sovereignty as a state. To the first point, Percoco argued for the rule of lenity to apply, a rule that encourages enforcing the most restrictive interpretation of a statute that may be interpreted multiple ways. To the second point, Percoco argued that making private citizens criminally liable for honest services fraud would unreasonably restrict private speech. And finally, he argued enforcing the statute tramples upon New York’s sovereignty because states must decide for themselves who their public officials are, and under New York law, Percoco owed no fiduciary duty to the public.

In oral argument, Percoco cited precedent like McNally v. US, which overturned decisions that criminalized honest services fraud, and McDonnell v. US, which held that a bribery conviction requires an “official act:” leveraging formal and official power for personal gain.  

The Government’s Argument

The U.S. responded that private individuals can in fact commit honest-services fraud. Specifically, they argued that honest-services fraud includes bribery under 18 U.S.C. §201, which encompasses individuals selected for but not yet officially acting as public officials. When they are authorized to act for the government, they owe a duty to the public.

The government also cited Dixson v. U.S. in arguing that bribery applies to private individuals. Dixson held that bribery doesn’t require a formal governmental relationship with private citizens if someone holds a “position of public trust with official responsibilities.” So, though Percoco was not formally employed by the government at the time in question, he had functionally maintained his position as a public official and thus owed the public a fiduciary duty of trust. At its core, bribery means using one’s power to influence others, and this, the U.S. said, is what Percoco did when he pushed Empire State Development to avoid the LPA requirement.

As to the constitutional issues, the government argued that applying the statute to de facto officials is not unconstitutionally vague. The rule of lenity only applies when the alternative interpretations are supported by precedent, and the U.S. argued they are not. They also rejected Percoco’s argument that enforcement would stymie his First Amendment rights because when he chose to become a public official, he accepted that private lobbyists are not beholden to his requests: what he asked of them was not an official command that must be obeyed. The U.S. further claimed there is no sovereignty issue because Pecoco would also be convicted under New York law, which is enforced separately from federal law.

Ciminelli 

The issue in Ciminelli is whether the “right to control” theory of fraud is a valid basis for property fraud liability. The right to control (RTC) theory means a person can be convicted of fraud if there is a showing that the defendant deprived someone of potentially valuable economic information by withholding information or by providing inaccurate information.

The statute at issue is 18 USC §1343, which deals with the transmission of “false promises or schemes to defraud of obtaining money or property by false pretenses” through the use of wire, radio, or television communications in interstate or foreign commerce.

The Facts

In 2012, Governor Cuomo launched an initiative called the “Buffalo Billion” to develop the Buffalo area with one billion taxpayer dollars. Kaloyeros, the head of the College of Nanoscale Science and Engineering (CNSE), hired Todd Howe, a consultant and lobbyist with connections to the Cuomo Administration. Through Howe, Kaloyeros became in charge of developing proposals for projects under the Buffalo Billion.

Howe had two construction clients: Ciminelli’s company, and COR Development Company (owned by Aiello). In 2013, Kaloyeros and Howe began to collude to give the Buffalo Billion contracts to Howe’s clients. But there was another company that was in charge of project selection and a set RFP process for selecting contracts. Kaloyeros and Howe dodged the process, communicated privately during periods deemed only for public discussion, and ultimately awarded COR two contracts worth multiple million each.

In 2017, Kaloyeros, Aiello, Ciminelli, and another co-conspirator were indicted for conspiracy to commit wire fraud. Ciminelli was found guilty of conspiracy to commit wire fraud through a scheme to circumvent the bidding process. Ciminelli appealed to the Second Circuit, alleging insufficient evidence to convict under the RTC theory.

Ciminelli’s Argument

Before SCOTUS, Ciminelli argued that the RTC doctrine could overexpand potential criminal liability for wire fraud. He also claimed the RTC theory was not presented to the jury at trial, and so should not have been used on appeal. The wire fraud statute only protects the traditional common law concept of property rights, he argued. This includes the right to exclude, use, and dispose of property as one pleases. He argued the RTC theory doesn’t exist in common law property rights because a property owner can still exercise common law rights despite lacking complete information about property. 

Ciminelli further argued that Congress, in enacting the statute, purposely recognized one intangible right: the right to honest services. SCOTUS has previously ruled that the honest services statute is limited to bribery and kickbacks and does not extend to things like “undisclosed self-dealing.” He further argued that the RTC theory would allow prosecutors to improperly punish conduct that SCOTUS did not include within the statute’s ambit.

The Government’s Argument

The government countered that RTC does indeed involve a common law property interest because RTC is encompassed in property rights that SCOTUS precedent acknowledges. They conceded that the RTC doctrine could expand property rights and thus potential criminal liability. However, they argued that the Second Circuit already mitigated the concern because it required litigants to prove a risk of tangible economic harm: an extra element that would prevent the scope of the statute from being too broadly applied. 

The U.S. also disagreed with Ciminelli’s analysis of SCOTUS precedent, claiming that SCOTUS never prohibited bribery and kickback cases from being prosecuted under a property theory of fraud (like the wire fraud statute). They also argued that the evidence at trial clearly showed that the defendants engaged in a scheme to obtain a massive contract, made material misrepresentations to get a contract, and had the intent to defraud.

Your Criminal Defense Attorney Should Closely Follow SCOTUS Cases

It’s important that your attorney stays abreast of major developments in case law, especially when it comes to new cases that could overturn precedent or set a new standard in your jurisdiction. Elizabeth Franklin-Best handles federal criminal appeals, including white-collar cases, and closely follows new developments in the courts that could affect your case. 

For more information about our practice or to schedule a consultation, you may contact us at (803) 445-1333 or send us an email.

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