Supreme Court Overturns Two Government Contracting Fraud Convictions: Decisions Unlikely to Slow Federal Enforcement Efforts

Authors: Richard A. Powers, Alexander B. Ginsberg, Alex B. Miller

On May 11, 2023 the Supreme Court, in a pair of unanimous decisions, narrowed the scope of key federal fraud statutes that, among other things, compel state officials to provide “honest services” to the public.  Although these decisions blunt, to an extent, the tools prosecutors have under the federal fraud statutes, the decisions are unlikely to impact the administration’s emphasis on protecting public procurement processes.[1]  With the substantial increase in federal spending under the Infrastructure Investment and Jobs Act, the Inflation Reduction Act of 2022 and the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act of 2022, prosecutors will look for other tools to address the type of collusion at issue in these decisions.

1.  Ciminelli v. United States

In Ciminelli, the Supreme Court evaluated whether the Second Circuit’s “right to control” theory of fraud was a valid basis for liability under the federal wire fraud statute, 18 U.S.C §1343.[2]  Under this decades-old theory, defendants are guilty of wire fraud if they “deprive the victim of potentially valuable economic information necessary to make discretionary economic decisions.”[3]

The conduct at issue in this case involved former New York Governor Andrew Cuomo’s “Buffalo Billion” initiative, which aimed to invest $1 billion in development projects in upstate New York through the Fort Schuyler Management Corporation.[4]  Louis Ciminelli, the owner of a local construction firm, paid lobbyist Todd Howe to help Ciminelli’s firm obtain favorable treatment in connection with this initiative.[5]  Fort Schuyler board member Alain Kaloyeros, in turn, paid Howe with state funds to ensure that Governor Cuomo’s administration gave Kaloyeros a prominent role in project administration for the Buffalo Billion initiative.[6]  Ultimately, Ciminelli, Howe and Kaloyeros worked together to (1) create a process for selecting “preferred developers” that would be given the first opportunity to negotiate for specific projects and (2) develop a set of requests for proposal that treated qualities unique to Ciminelli’s firm as qualifications for preferred-developer status.[7]  LPCiminelli was, of course, selected as a preferred developer, which allowed it to secure a $750 million project.[8]

Using the right to control theory, Ciminelli was convicted of wire fraud for depriving Fort Schuyler of its right to control its assets.[9]  Specifically, the jury found that Fort Schuyler was “deprived of potentially valuable economic information that it would consider valuable in deciding how to use its assets.”[10]

The Supreme Court reversed the conviction, holding that the “right-to-control theory cannot be squared with the text of the federal fraud statutes, which are limited in scope to the protection of property rights.”[11]  According to the Supreme Court, the right-to-control theory is not a “traditionally recognized property interest” and therefore “cannot form the basis for a conviction under the federal fraud statutes.”[12]  Thus, any theory of fraud that is not based on “traditional property interests” cannot form the basis for a conviction under the federal wire fraud statutes.[13]

2.  Percoco v. United States

At issue in Percoco was at what point a private citizen owes a fiduciary duty to the public under the honest services fraud statutes.

In this case, Percoco served as the Governor’s Executive Deputy Secretary from 2011 to 2016, with a brief break from government service in 2014.[14]  During this break, he used his connections in government to influence a state agency to drop its requirement that a real estate company enter into a “Labor Peace Agreement” with local unions in order to receive state funding.[15]  Three days after calling a senior state official to cause the removal of this requirement, Percoco returned to his old job.[16]

The Department of Justice filed charges against Percoco for conspiring to commit honest services fraud, in violation of 18 U.S.C. §§1343, 1346 and 1349.[17]  At trial, the district court instructed the jury that Percoco could be found to have had a duty to provide honest services to the public during the time he was not in service 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.[18]  Using this standard, the jury convicted Percoco for honest services fraud.[19]

While the Court declined to adopt a per se rule that “a person nominally outside public employment can never have the necessary fiduciary duty to the public,” it nonetheless held that the district court’s jury instructions were incorrect.[20]  Crucial to the Court’s holding was its finding that the district court’s jury instructions created an ill-defined threshold for determining when a person’s influence goes from lawful to illegal, and could potentially sweep in conduct from well-connected lobbyists or political party officials who owe no fiduciary duty to the public.[21]  Accordingly, the jury instructions were not sufficiently concrete for ordinary people to understand what conduct is prohibited—uncertainty that could encourage arbitrary and discriminatory enforcement.[22]

3.  Conclusion

Through the Ciminelli and Percoco decisions, the Supreme Court curbed the power prosecutors have under the federal fraud statutes.  Government contractors, however, must not misinterpret these decisions as foreshadowing a decline in federal enforcement efforts in connection with public contracting.  On the contrary, prosecutors still will rely on a host of other criminal laws to prosecute collusion in public contracting at both the federal and state levels.  For example, prosecutors in the DOJ’s Procurement Collusion Strike Force used antitrust laws, which proscribe agreements between competitors to eliminate or reduce competition for bids, and bribery statutes to prosecute a contractor for rigging bids and bribing a California Department of Transportation official to win improvement and repair contracts.  He received a 78-month prison sentence.[23]  In another example, DOJ prosecuted a former employee of the U.S. Department of Energy’s Strategic Petroleum Reserve for conspiring to violate the Procurement Integrity Act, which punishes the pre-bid disclosure of confidential government bidding information.[24]  These recent examples underscore the array of prosecutorial tools available to the government in connection with public contracting, despite the Supreme Court’s recent rulings.  In addition, DOJ continues to employ the civil False Claims Act—and its treble (triple) damages provision—to obtain large dollar value settlements and judgments against contractors.  DOJ has reported that these settlements and judgments totaled $2.2 billion in 2022.[25]  In light of the arsenal of enforcement statutes that prosecutors have at their disposal and the government’s focus on investigating public procurement during a period of unprecedented government spending, companies and individuals involved with public contracting need to be on the alert.  All such companies and individuals should take special care to establish and maintain effective compliance programs, to stay abreast of important legal and regulatory developments and to ensure that their dealings with public officials avoid even the appearance of impropriety.