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Wire Fraud Victims Have New Reporting Factors After Ciminelli

November 2, 2023 Articles
Bloomberg Law

Originally published by Bloomberg Law.

Courts around the country have seen an influx of challenges to indictments and convictions since the US Supreme Court’s unanimous decision in Ciminelli v. United States last May. The decision invalidated the US Court of Appeals for the Second Circuit’s “right to control” theory of harm for wire fraud cases.

Although few of these challenges have succeeded, the courts’ decisions shed light on what companies and individuals who believe they’re victims of fraud should consider when reporting fraud to government authorities and protecting their interests.

The Case

Ciminelli involved a conspiracy to rig the bidding process for publicly funded “Buffalo Billions” development projects in New York. Construction company owner Louis Ciminelli was accused of conspiring with two program insiders to make his company a preferred developer, and to include criteria in the requests for proposals that uniquely enhanced his company’s ability to win bids, securing a $750 million project as a result.

Ciminelli was convicted on wire fraud charges under 18 U.S.C. § 1343, after the government relied on the Second Circuit’s “right to control” theory of harm. It stated that “property,” as used in Section 1343, includes “intangible interests such as the right to control the use of one’s assets,” which could be harmed by depriving the victim of “potentially valuable economic information.”

Ciminelli appealed the conviction up to the Supreme Court. In May, Justice Clarence Thomas, writing for the unanimous majority, struck down the “right to control” theory. Thomas wrote that “the ‘right-to-control theory’ vastly expand[ed] federal jurisdiction without statutory authorization” and made “almost any deceptive act” criminal by treating mere information as a protected interest.

Under the court’s holding, “the wire fraud statute reaches only traditional property interests,” and no longer includes “the right to valuable economic information needed to make discretionary economic decisions.”

The court’s decision in Ciminelli doesn’t change the state of the law in the Ninth Circuit, which in 1992 rejected the “right to control” theory as an improper predicate for federal fraud prosecutions in United States v. Bruchhausen.

The Ninth Circuit also rejected criminal fraud liability based on withholding “economically valuable information,” at least in the absence of a fiduciary relationship, as held in United States v. Shields in 2015.

Challenges

Defendants have had scant success invoking Ciminelli to challenge their wire fraud indictments and convictions: Of the 12 challenges brought, only two brought in the US District Court for the Eastern District of New York have succeeded.

In United States v. Full Play Group, the district court held that Section 1346 doesn’t encompass foreign commercial bribery following the Ciminelli decision, and overturned the defendants’ convictions on those grounds.

In United States v. Nordlicht, the district court held the defendants’ failure to disclose their secret control of voting bonds to non-insider bondholders couldn’t serve as a basis for a wire fraud conviction in light of Ciminelli, and that no reasonable jury could find the defendants intended to defraud the bondholders of any actual money or property.

The remaining Ciminelli challenges have all failed because the courts have found a sufficient link between the defendants’ schemes and an effort to obtain “money or property.”

Some examples follow.

  • United States v. Jesenik: Making material misrepresentations to obtain money from investors
  • United States v. Porat: Submitting false data to US News & World Report to artificially increase business school’s ranking, causing students to part with tuition money
  • United States v. Pasternak: Fraudulently obtaining “rebuilt” titles for salvaged vehicles to sell for “cold hard cash”
  • United States v. Shih: Falsifying documents to obtain access to confidential information

These decisions show Section 1346 still has a great deal of reach as long as victims part with property (and especially, money) as a result of the defendant’s scheme.

Reporting Considerations

Victims of fraud should consider the following when reporting to the government and considering their options:

Was the victim deprived of mere information or did the scheme cause the victim to lose “cold hard cash”?This question likely will be at the top of prosecutors’ minds when evaluating whether to bring criminal charges against an alleged fraudster.

How strong is the link between the scheme and the financial loss? As illustrated best in Porat, this link is critical. The defendant’s wire fraud conviction was upheld because, while the fraud aimed at bolstering the school’s stature among its peers, it actually led to students parting with tuition money.

Are there other forms of property that the company or individual lost, such as wrongfully obtained confidential information? Pure economic loss isn’t the only hook for wire fraud prosecutions; the statute still reaches other forms of “property,” which can take many forms, including wrongfully obtained confidential information, as illustrated in Shih.

What are the implications of reporting the fraud to the authorities versus pursuing a remedy in civil court? This is a complex question that requires advice from experienced counsel.

The fact an individual’s actions may not support a criminal prosecution doesn’t necessarily mean that filing a civil case would be fruitless, as the legal standards that apply differ. A victim of fraud may consider pursuing either or both options depending on the facts of the case and what they seek to accomplish.

The case is Ciminelli v. United States598 U.S. 306, 143 S. Ct. 1121, 215 L. Ed. 2d 294 (2023).

Reproduced with permission from Copyright 2023 The Bureau of National Affairs, Inc. (800-372-1033) www.bloombergindustry.com.

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