With unanimity comes clarity: In reversing Bridgegate convictions, a unanimous Supreme Court further narrows scope of federal fraud and corruption prosecutions

Many of the most recent high-profile criminal cases in this country involve the government’s reliance on attenuated theories of prosecution under the federal fraud statutes − for example, last year’s NCAA corruption trials, the ongoing Varsity Blues college-admissions cases, and the series of recent trials relating to alleged fraud in New York State’s Buffalo Billions construction development programs.  See, eg, United States v. James Gatto, et al., 19-783 (2d Cir.); United States v. David Sidoo, et al., 19-cr-10080-NMG (D. Mass.); United States v. Percoco, et al., 19-1272 (2d Cir.). 

In these and many other cases in recent years, prosecutors have sometimes relied on expansive theories of criminal liability under federal fraud statutes, prosecutions that pushed the boundaries of “fraudulent schemes” beyond the kind of core schemes to obtain “money or property” that these statutes seem, on their face, to target.  In a May 7, 2020, decision, a unanimous Supreme Court reminded prosecutors and the rest of us that in these kinds of cases the government “need[s] to prove property fraud.”  Kelly v United States, 18-1059, 2020 WL 2200833, at *4 (May 7, 2020).  In Kelly, the Supreme Court unanimously reversed the convictions of two former New Jersey public officials who infamously realigned lanes to the George Washington Bridge in an act of political revenge, in what became known as the Bridgegate scandal.  The Court held that while the defendants may have abused their power, they did not violate federal fraud statutes because their objectives were not to take money or property. 

The Court’s opinion, the effects of which are likely to reverberate for many years to come − not only in cases and courtrooms around the country, but also in the Department of Justice − puts prosecutors on notice that the federal fraud statutes criminalize only deception targeting money and property, not other forms of chicanery, no matter how unscrupulous they might be.

Kelly v. United States

During former New Jersey Governor Chris Christie’s 2013 reelection campaign, the mayor of Fort Lee refused to back the Governor’s campaign.  To punish the mayor, Bridget Ann Kelly, the Governor’s Deputy Chief of Staff, along with Port Authority Deputy Executive Director William Baroni, and another Port Authority official, David Wildstein, hatched a plan to cause havoc by reducing the number of lanes reserved for Fort Lee’s commuters on the George Washington Bridge.  The defendants, under the false pretense of conducting a traffic study, requested Port Authority traffic engineers to collect data regarding the effect of the changes and agreed to pay an extra toll collector overtime so that Fort Lee’s one remaining lane would not be shut down if the collector on duty needed a break.  The lane realignment ultimately caused four days of gridlock in Fort Lee and only ended when the Port Authority’s Executive Director learned of the scheme.  Kelly, 2020 WL 2200833, at *1.

The government charged the defendants under the federal statutes prohibiting wire fraud and fraud on a federally funded program or entity, both of which require that the object of the scheme be money or property.  See 18 U.S.C. §§ 1343, 666(a)(1)(A).  Wildstein pleaded guilty and agreed to testify against Kelly and Baroni, who were convicted at trial. The Court of Appeals for the Third Circuit upheld the convictions.  See United States v. Baroni, 909 F.3d 550, 560–79 (2018). 

In reversing the Third Circuit, the Supreme Court noted the “evidence the jury heard no doubt shows wrongdoing − deception, corruption, abuse of power[]” − but asserted that the “fraud statutes at issue do not criminalize all such conduct.”  Kelly, 2020 WL 2200833, at *2.  The Court asserted the statutes are “‘limited in scope to the protection of property rights,’” and “d[o] not authorize federal prosecutors to ‘set[] standards of disclosure and good government for local and state officials.’” Id. at *4 (quoting McNally v. United States, 483 U.S. 350, 360 (1987)).  Accordingly, under settled precedent, the officials could only violate the federal fraud statutes “if an object of their dishonesty was to obtain the Port Authority’s money or property.” Id. at *2.

The government had argued that the money or property element was satisfied in two ways:  (1) Baroni and Kelly sought to commandeer part of the bridge itself by taking control of its physical lanes; and (2) the defendants aimed to deprive the Port Authority of the costs of compensating the traffic engineers and back-up toll collectors. The Court rejected both theories.  Id. at *5–7.

First, the Court found that while defendants plotted to reduce Fort Lee’s lanes, “that realignment was a quintessential exercise of regulatory power.”  Id. at *5.  The Court cited its precedent in concluding that this type of scheme “to alter such a regulatory choice is not one to appropriate the government’s property.” Id. (citing Cleveland, 531 U.S. at 23). “Baroni and Kelly regulated use of the lanes, as officials responsible for roadways so often do—allocating lanes as between different groups of drivers.”  Id. at *5.

Second, the Court agreed that a scheme to usurp “a public employee’s paid time is one to take the government’s property,” but held that the defendants’ plan “never had this as an object.”  Id. at *6.  Rather, the “use of Port Authority employees was incidental to − the mere cost of implementing − the sought-after regulation of the Bridge’s toll lanes.”  Id. at *5.  “And while a government’s right to its employees’ time and labor is a property interest, the prosecution must also show that it is an ‘object of the fraud.’” Id. at *1 (quoting Pasquantino v. United States, 544 U.S. 349, 355 (2005)). Here, the Port Authority employees’ labor was merely “an incidental (even if foreseen) byproduct of [the defendants’] regulatory object. Neither defendant sought to obtain the services that the employees provided.” Id. at *6.

Takeaways

Kelly is the latest in a long line of rulings in which the Supreme Court has pruned prosecutors’ sprawling use of federal fraud laws.  For many years, prosecutors have used federal mail, wire, and “honest services” fraud statutes to criminally prosecute a wide spectrum of deceit, including public corruption related to state and local government entities as well as non-government entities, such as colleges and the NCAA, by taking an expansive view of the statutory elements. Beginning in approximately 2000, however, the Supreme Court began significantly paring back what it sees as prosecutorial overreach that improperly ensnares people and conduct that these criminal statutes do not reach.  McNally, 483 U.S. at 355. In notable cases like Skilling v. United States, the Court has distinguished between conduct that constitutes a federal crime and conduct that may be dishonest, inappropriate, or amount to self-dealing, but is beyond the reach of federal prosecution. Skilling v. United States, 561 U.S. 358, 405, 410 (2010) (confining “honest services” fraud to schemes involving bribes or kickbacks.).

The May 7 decision tethers the federal fraud statutes to their intended purpose:  “the protection of property rights.”  This ruling will have profound implications moving forward.  While courts have interpreted the mail and wire fraud statutes to protect both tangible as well as intangible property, today’s decision emphasizes that the object of any fraudulent scheme must be a non-regulatory property interest and one that is not merely incidental in nature to the ultimate objective of the scheme.  What this will mean precisely for various pending and ongoing matters may be unclear, but it calls into question prosecutions based on the alleged deprivation of intangible interests, like a college admissions slot, for example. 

Also arguably in jeopardy are theories of fraud aimed at depriving an entity of accurate information or of its “right to control” its decision-making processes.  See, eg, United States v. Percoco, 19-1272 (2d Cir.). Courts have interpreted the mail and wire fraud statutes to protect both tangible and intangible property, and among “the array of intangible property rights protected” by the wire fraud statute is the “interest of a victim in controlling his or her own assets.”  United States v. Finazzo, 2014 WL 184134 (E.D.N.Y. Jan. 14, 2014), aff'd, 850 F.3d 94 (2d Cir. 2017) (quoting United States v. Carlo, 507 F.3d 799, 802 (2d Cir. 2007)).  The “right to control” theory of wire fraud “is predicated on a showing that some person or entity has been deprived of potentially valuable economic information,” the withholding or inaccurate reporting of which, “could impact [] economic decisions.”  United States v. Wallach, 935 F.2d 445, 463 (2d Cir. 1991). 

The right to control theory can cause mayhem for putative defendants beyond the issues presented on a traditional fraud theory. See, eg, United States v. Davis, 13-CR-923 (LAP), 2017 WL 3328240, at *29 (S.D.N.Y. Aug. 3, 2017) (“Here, whether it is viewed as a constructive amendment or as a prejudicial variance, the Government’s ever-shifting theory on a crucial element of the case—the intent to defraud—requires that the convictions be vacated.”).  As a threshold matter, it can sometimes be difficult to ascertain whether the prosecution is asserting a right to control theory.  Next, it can be hard to determine what the alleged “valuable economic information” is or which “economic decisions” are impacted.  Finally, a defendant proceeding to trial in such a case faces a more attenuated theory of harm, which can be harder to explain and more confusing to a jury.  After the Supreme Court’s decision in Kelly, whether or not a victim’s property interests are merely incidental to the ultimate object of the scheme will now undoubtedly be a focal point for defense counsel.  Similarly, certain right to control investigations will undoubtedly be reevaluated to consider whether intangible information or decision-making processes amount to the mere exercise of regulatory power as compared to traditional property interests.

Kelly, of course, does not stand for the proposition that what the defendants did in creating traffic mayhem in Fort Lee was moral or right.  But in reminding us that federal fraud statutes “leave[] much public corruption to the States (or their electorates) to rectify,” it warns prosecutors that the criminal statutes have limits and that they cannot simply hammer a square peg into a round hole.  Kelly, 2020 WL 2200833, at *4.  Many existing and future cases will no doubt be fundamentally affected by this ruling.

To learn more about the implications of Kelly, please contact any of the authors.